Double Your Profits - 78 Ways to Cut Costs, Increase Sales and Dramatically Improve Your Bottom Line in 6 Months or Less
Robert Fifer
Published 1993

Featured Chapter: Step 7 - Strategic vs. Non Strategic Costs

Let's get a little more specific. In my company, and in other superbly run, very profitable companies I've seen (large and small), all costs are divided into two categories:

1. Strategic costs are defined as all those things that clearly "bring in business" and improve the bottom line. Typical items in this category are the cost of salespeople (but not sales managers), advertising (if it's working), and commercializable R&D.
   
   
2. Non strategic costs are all other costs, i.e. the costs necessary to run the business, but which don't clearly bring in more business. Administrative costs of all kinds fall in this category: managers, clerical support, rent or real estate cost, consultants, lawyers, accountants, computers, office supplies, and so forth. Often, this category also includes the costs of your manufacturing or service operations.

At my company, all cost reports (of which, by the way, there are very few cost accounting can become just another "process" if you let it) are split into two categories: strategic and non strategic costs. Whenever managers at my company have a meeting to discuss a new direction, a new investment, or how to enhance the bottom line, we automatically categorize each expenditure as strategic or non strategic.

The reason is simple, and very powerful. My (or your) role as leader is to ensure that:

1. We will outspend our competition for strategic costs, and spend this money in good times as well as bad.
   
   
2. We will ruthlessly cut non strategic costs to the bone.

This simple concept, applied with commitment and unwavering resolve, is more powerfully profit maximizing than the most complex and detailed business treatise or process ever conceived. It is common sense, yet the very fact that ninety five percent of businesses and managers don't practice it creates an enormous competitive opportunity for those of us who do.

Outspending your competitors on strategic costs requires intelligence and judgment: You must distinguish those selling, marketing, and R&D expenditures that truly enhance the top and bottom lines from those which are wasteful and unlikely to pay off. There is no "formula" that anyone can give you to make that judgment. Excellent management is eighty percent art and only twenty percent science. Applying that intelligence and judgment on an ongoing basis distinguishing the truly worthwhile strategic expenditures from non strategic costs - is what makes your job challenging and fun. In the end, however, you must be able to identify enough worthwhile strategic expenditures to ensure that you are outspending your competition for strategic costs by a considerable margin, as a percentage of revenues if not in absolute dollars. By spending more on truly strategic costs, you build your business.

"Ruthlessly cutting non strategic costs to the bone" requires an unwavering suspicion of every single non strategic cost. Assume it can be eliminated unless proven otherwise. I truly believe that the average Fortune 500 company has three managers for every one it needs (the average government agency has ten for one). The average Fortune 500 company generates ten reports for every one it needs. (One manager I know implements the following system whenever he takes over a new business. He orders the immediate cancellation of all regular written or computer generated reports. All the paper generation and paper moving is made to stop at once. Then people who are no longer receiving critical reports scream, and he reinstates those reports. At the end of two months, when all the screaming has stopped, only 40% of the original reports are ever requested and reinstated.) The average company has two square feet of office space for every one square foot it needs. It has at least three times the computer power it needs. (Have you ever calculated the capacity utilization of your investment in computers? Be prepared for a shock.)

Every fiber of me truly believes these things. Sometimes I go into a company and I discover that one or more of these beliefs is wrong at that company. However, in order to profit maximize, in order to cut non strategic costs as much as possible, you must start with these beliefs and cynicism, and place the burden of proof on justifying costs, not eliminating them.

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