The goal of strategy is sustained profitable growth, and that means earning returns above your cost of capital or what economists call “Economic Profit” (EP). Companies seeking profitable growth, therefore, face two interdependent tasks: grow the top line and manage the costs and financial efficiency of their customer-acquisition efforts. While sales growth contains the “sizzle,” continuous cost-productivity improvements are the “steak” that feeds the bottom line.
But these tasks are often disconnected in companies. Employees then view cost-reduction initiatives as “what Finance does” (if Finance does them) in a series of one-time initiatives, not an ongoing process. Conversely, the top line is Sales’ domain and Finance does after-the-fact scorekeeping of revenues and margins. The results of that silo’d approach are not good. An analysis of nearly 3,000 nonfinancial companies from 2007–2011 found that the top quintile of firms accounted for 90% of all the EP measured, while the bottom two quintiles destroyed more than $450 billion in EP during this period.
CFOs can change these results by providing leadership and shining light on key links between sales activities, cost management, and profitable growth. To play that role, a CFO must set clear goals. Cost management requires training, preparation, and hours of execution, so pick your shots, not try to manage too many categories too quickly. Prioritize the important areas (usually those with the greatest saving opportunity) and establish the right metrics for measuring effectiveness on an ongoing basis.