Today's environment more competitive than ever. Competition is globalized and transparency is more and more important both in business as in government. In this changing environment cost management has become a critical survival skill for many organisations. Simple cost reduction is not sufficient anymore; instead, costs must be managed strategically. Strategic cost management is the application of cost management techniques so that they simultaneously improve the strategic position of a firm and reduce costs. Strategic cost management can be applied in service and manufacturing settings and in not-for-profit environments.

Strategic Cost Management projects can be defined along 2 axes. One axis is the traditional cost reduction axis, the second is the value that the project brings to the strategy.

Strategic Cost Management projects are those projects that add value to the organisation's strategy while at the same time reducing the (unit) cost of products, processes or services. An example could be a bank that sets up a low-cost online banking channel.

A traditional cost management project would focus on cost reduction only, without making a change to strategic factors. A typical example would be a hospital restructuring it's invoicing process aimed at the reduction of manual activities in the process. It reduces the cost but leaves the strategic position essentially untouched.

A risky project category is the kind of project that focuses on cost reduction only, allowing for strategic disadvantages to happen. A typical project is a bank changing it's account management process from a personal account manager towards a central call centre. Although there could be a cost reduction, the strategic position towards it's customers changes in a negative way, possibly followed by a large loss in customer base.

Strategic decisions based on Cost Management
Many decisions are based on an organisation's Strategic Cost Management system. At the core are the profitability analysis on the following bases:

• product-by-product
  Analysis of product profitability, making it possible to make product portfolio decisions, introduce new products and terminate loss-making products

• customer-by-customer
  The cost-to-serve may vary greatly per customer. Customer Profitability Analysis allows for the usage of different activities per customer. The analysis shows a broad range from very profitable customers to very profitable customers

Customer Profitability Management
In the blizzard of advice to managers about balanced scorecards, key performance indicators, budgeting and target-setting, it is striking that perhaps the most important measure of all is omitted: net margin.

Gross margin is easy to calculate: revenue minus direct costs. For many businesses, this is a lethally irrelevant measure. It’s what erodes gross margin that matters. Which products and services attract the highest overheads?

More importantly, which customers impose the highest overhead costs? These questions are important because even in manufacturing companies, direct materials and labour typically account for less than 60 per cent of total costs. In the service sectors, around three quarters of costs are what we describe as ‘overheads’ or ‘indirect’. It is vital that companies understand how these costs are driven, in order to determine which products, services and customers are truly profitable and which are not. Experience shows that often the results are surprising to management and in contradiction with their expectations on profitability.

Knowing the true picture on product and customer profitability opens the door to substantial profit improvement.

CostPerform is the right tool to assign the indirect and overhead cost as well as direct cost and have an integral view on cost and revenue on a product and customer level.

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