Tuesday 7 December 2021

Optimization of project costs

In modern management, the processes and functions of management include a fairly extensive list of issues. However, in the context of an economic downturn, new requirements come to the fore, taking into account which managers are forced to organize their activities:

  • the requirement for a comprehensive assessment of the business, assessment of the viability of the enterprise (the field of risk management);
  • assessment of the feasibility of activities (including issues of increasing business capitalization, increasing the liquidity of working capital);
  • the need for detailed justifications (in the mode of comparative analysis) for making management decisions on attracting, using, distributing resources;
  • purposeful change management, introduction of innovations and mechanisms for optimizing project costs, finding ways to maintain market positions and move to a qualitatively new level of development.

Management actions carried out in the context of an economic downturn should be as close as possible to approaches; characteristic of crisis management, strategic management, project management and risk management at the same time. Let's consider ways to optimize project costs.

Start all optimization processes with yourself

The business owner should carry out any optimization actions, starting with himself, and put an equal sign between the reputation of the company and the personal reputation of the business owner.

Executors (employees of the company, outsources) for errors and shortcomings can be punished with a ruble (fined, recovered a penalty, compensated for damages, etc.). But for the mistakes of the business owner, you will have to pay for him himself: the owners in any case are responsible for their business.

As an applied toolkit for optimizing costs and expenses arising from the mistakes of project managers, we can recommend:

the classical method of calculating the costs, which allows you to estimate the cost of erroneous actions in real terms;

One of the ways to calculate extensive resources (ER), where ER is the value of unconditional losses due to the fault of the manager, multiplied by the actual resource output.


In the event of unfavorable conditions, owners need to pay increased attention to business processes

It is known that the average period of solving the problem by hired managers is several times higher than the time spent by the owners of enterprises to solve the same problems.

Two owners find it much easier to find points of intersection of interests than the owner and the hired manager. This approach significantly saves time and money, allows you to make a long-term picture of cooperation and is based on greater trust. 

Therefore, entrepreneurs try to "go to the most important thing" and discuss the details of cooperation directly with the "master of the business", especially when solving such problems and the onset of such conditions as:

  • establishment of business contacts in the organization of new business;
  • project implementation;
  • addressing important and urgent issues;

The occurrence of unfavorable operating conditions for one of the parties to the agreement;
interaction with partners and key clients in crisis conditions.


See your business "through" and provide management of end-to-end processes

There are eight key, end-to-end business processes:

  • customer relationship management;
  • consumer service management;
  • demand management;
  • order fulfillment;
  • material flow management;
  • procurement management;
  • product development, value creation;
  • management of return material flows.

Unlike conventional budgeting, crisis management involves the management of end-to-end processes, which gives not only a complete picture of the state of affairs, but also an idea of the dynamics of changes in key parameters. 

This is what allows you to make quick optimization decisions in the process, and not at the end of the activity. This is what is called the ability to "keep your finger on the pulse."

Adhere to a realistic view of the organization of work and the state of affairs, as well as objectively assess the business qualities of employees and partners

Russian entrepreneurs, when establishing business contacts and making decisions, are often guided by personal likes and dislikes. According to one of the directors of the company: "If there is an employee in the organization with whom it is pleasant to work, then you can deal with the organization. There is no such person – there is no desire to cooperate."

However, building relationships on such a basis does not give any special guarantees, especially in the event of unfavorable conditions. Moreover, interaction with partners is often complicated due to the desire of entrepreneurs to conclude various "gentleman's agreements".

Managing enterprises and projects in an economic downturn requires the ability to not take wishful thinking, to establish contacts guided by the interests of the company, and not personal sympathies, to determine goals reasonably and evaluate results.

First diagnosis – then treatment

Responding quickly doesn't always mean taking the right action. In an effort to fight on all fronts, leaders often disperse their energy, lose time, delay the solution of some issues and at the same time show inappropriate haste in solving other problems.

Setting the task of optimizing costs, it is necessary to assess the structure of the processes occurring at the enterprise for their compliance with time-tested approaches, methods and disciplines, including:

  • analysis of the economic activity of the enterprise;
  • marketing analysis;
  • working capital management (including inventory management).


Ensure management not only of the cash-flow, but also of working capital

Unfortunately, the incompetence of managers in matters of working capital management in the activities of many Russian companies leads to chaotic or ill-conceived, unsubscribed distribution of funds and resources.

Working capital management is a set of tasks that ensure the process of transition (transfer strategy) of the company from the current state to the planned one.

The main indicators of the effectiveness of the use of current assets are: the value of current assets and own funds, the structure of working capital, the turnover of individual elements of working capital, the duration of the financial cycle, the profitability of own working capital before taxation.

Increase resource efficiency.

There is a certain dependence of the amount of working capital and profit. Experienced managers constantly monitor the dynamics of changes in profits depending on the amount of working capital, thereby being able to make a timely decision on the launch of new projects and make appropriate investments.

The main ways to "get rid of ballast" include:

  • the need to assess reserves of an extensive nature, when the amount of additional attraction or the amount of unconditional loss of resources is known;
  • analysis of logistic value. Conducting this analysis gives an idea of what the content (storage, accounting, etc.) of the ballast costs the company;
  • stock structuring;
  • Inventory optimization. Illiquid goods can be used as a "loss-making leader", i.e. goods sold at a loss to attract buyers;

Assessment of core and non-core parts of the business. Focusing on the centrality of the business and outsourcing peripheral aspects to subcontractors increases rationality and efficiency, allowing both management and workers to deal with the most important elements and not to waste effort and experience on less important aspects.


The simpler the better

Organize your business in the form of business units ( separate active business structures. A business unit is wholly or partially economically separate and is responsible for a specific type of activity. 

It can have the authority to start a process, control the execution of a process, and perform a certain function of the process. Compare the cost of each business unit with a similar market offering.

What costs you more than a similar offer in the outsourcing market is likely to be a weak link.

Know profitability and control the dynamics of its change

As the level of profitability required by the firm, one can consider the level of profitability required by the investor, the co-owner of the firm's own capital. 

This level depends on the level of profitability of competing investments and the ratios of risky investments in the firm's own projects and alternative goods of the stock market.

Obviously, with frequently changing prices, rates, quotations, etc., it is necessary to ensure constant monitoring of profits and track the dynamics of changes in profitability, for example, tracking such indicators as:

  • profitability of current assets;
  • return on net worth;
  • total profitability of the enterprise (before taxation).


Control the price structure


Obviously, inadequate pricing for the market in the conditions of an economic downturn can lead to partial or complete "paralysis" of the enterprise. Pricing strategies and methods are one of the most important and voluminous areas of management. But, unfortunately, a verified approach to the formation of the price of the product in the practice of Russian companies is still a rarity.

Possess key information about value chains and supply chains

It is typical for the Russian reality that the management of supply chains is carried out either by the owner himself or by a person authorized by him, or no one is engaged.

A clear knowledge of the operations taking place along the entire length of the logistics chain, and the definition of the relationships between them, allows managers to focus not only on planning upcoming expenses and optimizing them, but also on increasing revenues and increasing market share.

Know your customers and partners

Employees of the sales department are obliged to know not only the basics, but also the subtleties of communication with customers. Employees of large companies use in their work standard marketing descriptions, the so-called consumer profiles. 


In medium-sized companies, sales managers actually "dose" the company's profits, filtering out customers for their subjective considerations. Ignorance of customers in the face of uncertainty of environmental factors is comparable to fishing at night during a storm.

Deal with rollbacks

The way to reduce some of the costs, reduce accounts by an average of 5-15% (in some cases up to 30%) is the direct contact of the owner of the company with the owner of the enterprise providing certain services. During such a meeting, the size of those kickbacks or agency rewards is excluded from the price.


Evaluate integration opportunities


Think of those who offered simple solutions. About those who saw you as part of their success and themselves as part of your success. 


These are the systemic friends of your enterprise. It is with such partners that it is necessary to discuss risks and opportunities, as well as to develop joint solutions to overcome difficulties and neutralize systemic enemies. 


This approach will allow not to bend over and not to be under pressure from third parties, but to successfully use the coincidence of interests in the work, turning it into a profit generation center.

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