Winter, July 2014

Lynch's 13 rules for creating a cost-conscious culture

The Faculty Quarterly asked legendary cost-cutter, Chris Lynch, the Finance Director at Rio Tinto and 30 year veteran of the mining and metals industry, to share his insights on reducing costs and developing a cost-conscious culture.

“Making the decision to reduce costs is easy, but taking costs out takes a lot of discipline and perseverance.

“With cost transformation, you never actually reach the destination, you’re always on the journey.

“You will always have your nay-sayers.  But you need to stay the course and not be dissuaded,” he said.

In his time leading cost transformation programs across different companies, geographies and industries, Chris has distilled his cost management philosophy into thirteen key tenets:-

1.  Anything you spend should be either compulsory like producing the accounts, which should be done for maximum efficiency and lower cost, or things you choose to do to add measurable value.

2.  Break your spend into four groups – global, regional, national and local - and see where historic biases drive suboptimal outcomes.  Attack each area with a specific game plan.

3.  Disaggregate deals and tackle discrete cost components e.g. original factory cost, delivery, service, cost of spares, inventory, cost of deviation from standard.

4.  Get your organization on board.  Motivate your people and challenge them to excel. Force things through your best process. If you have experts in central procurement, give them more of the spend.  Enhance the professionalism of your procurement people and systems.

5. “Take no prisoners”. Remove redundancy of processes and systems.  Remove the “old way” of doing things and get people onto the “best” way.

6.  Set targets that stretch and Measure! Measure! Measure!

7.  Reward good performance and show poor performers how to improve.

8.  Publish outcomes internally to create competitive tension.

9.  Bring your suppliers on the journey. Let them know their role in your joint success. Measure their performance and restrict and reward with volume, where applicable to reinforce appropriate behaviour.

10.  Recognise that this is a way of life, not an episode. The best way to restrict costs is to not let them increase in the first place.  Staying in control is much better than having to regain control of your costs.

11.  Keep the faith. Stay resolute because you will be confronted with all sorts of excuses.  Some people within your organization will want to “duck under the wave” hoping that they can avoid the challenge.

12.  Stay impatient for speed of delivery. Today is better than later.

13.  Lock in the gains and make sure they are sustainable.

The team at Rio Tinto is currently focussed on sustainable cost reduction and continuous improvement – an initiative that shareholders have responded to positively.

The Rio leadership team has asked all employees to act as owners and to let that mindset guide their decision-making.

“We are focused on ‘doing what we say we will.’

Creating this kind of ‘cost-conscious’ culture is a key focus for The Faculty who has recently published a series of six-scenarios on the subject.

For The Faculty, ‘cost-consciousness’ means: Creating an enduring corporate culture focused on strong and sustainable cost discipline requiring universal and tireless efforts to engage and motivate the entire organization to deliver on the vision.

“Meaningful changes to your business’ financial performance requires more than a cursory fine tuning of your cost base,” says Andrew Hooke, The Faculty’s Commercial Director.

“We recognised a long time ago that just giving directives from head office will never deliver real cultural change, let alone long-term shareholder value,” confirms Andrew.  “That’s why we work alongside employees to drive real behavioural change at every level of the business.”

Blending ‘the science with the soft skills’ is at the core of all our projects, says Andrew: “It’s imperative to equip your people with the right blend of technical and commercial leadership skills to manage the complex cost decisions necessary to deliver your vision.”

On being cost-conscious, Chris believes: “It applies to everybody; whether you’re responsible for product coming out of the ground, or in a corporate role, you have to think innovatively about how you can contribute.” 

Whatever the change, Chris believes there are two critical factors to a successful cost transformation:  “Stay strong, resolute and measure for success.”

If you would like to receive a copy of The Faculty’s Creating Cost-Conscious Cultures publication, please submit a request here