Insurance: Not Just “Set It and Forget It"
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Cost-cutting and cost-containment tactics and techniques are common to any business. And, when tied to the budget, they're a necessity. Although it's often confused with those first two terms, "cost management" is another issue entirely.
"Cost cutting and cost containment do not incorporate strategy. Think of cost management as part of a long-run strategy and cost cutting as a short-run tactical method," explains Michael Maher, Professor of Management and Accounting at University of California at Davis and co-author of the Handbook of Cost Management. "Generally, cost cutting occurs because costs look greater than the budget, so you have to cut. Cost containment typically means that you don't want the costs to exceed the budget, so you find ways to keep them below the budget. Cost containment can be part of cost management, but cost management implies a longer-term, strategic approach—not a short-term tactical approach to cost control."
As a fundamental concept, strategic cost management means getting the most out of your resources as part of an overall strategy. Maher points to Southwest Airlines as a classic example of a company that uses resources wisely; it manages costs by having planes in the air as often as possible and by cross training personnel so that everyone pitches in to provide good service at low cost.
"In developing a cost-management strategy, it helps to start by thinking about how you can get the most value out of the resources you use to achieve the organization's goals," counsels Maher. "For example, if quality is important, don't start with the idea that quality means high costs. Start with the idea that quality is important, and ask how to best spend resources to achieve high quality. This will probably indicate that spending more resources at the front end of the supply chain will save money in the long run."
Strategic cost management seems like a big concept, but implementing it isn't as difficult as you might think. Essentially, it's about thinking of the long-term impacts inherent in the cost side of the business and making them more manageable when you can. There are probably several tactics you already employ; but, when taken together, they can represent a true strategic approach. Examples of techniques that might compose a cost-management strategy could include:
Source: "Cost Management as a Strategy," Trendline
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