If optimization measures have been successfully implemented but the financial impact fails to materialize, this leads to frustration among management and stakeholders. But how can companies ensure that their measures actually have a measurable and sustainable impact on P&L?

The industry is under increasing pressure to reduce its costs and increase its competitiveness. As a result, numerous measures to increase efficiency are being developed and implemented, which are often associated with high expectations.

However, there is often a problem in practice: the calculated savings do not reach the P&L level. Although the optimization measures have been successfully implemented, the expected financial impact does not materialize, which leads to dissatisfaction at management and stakeholder level. There are many reasons for this: savings are offset by rising costs in other areas, freed-up capacities are not consistently reduced or inefficiently redistributed.

But how can companies ensure that their measures actually have a measurable and sustainable impact on P&L?

“In our projects, we attach great importance to a profit & loss (P&L) relevant increase in efficiency, which is a central aspect of business optimization.”

Dr. Gerhard Nowak, Managing Partner at ifp consulting

Adjustment of structural costs

The adjustment of structural costs is necessary to ensure that the operational results are also effective at P&L level. One of the main drivers of structural costs is employee costs, which should be given particular importance.

Adjusting the headcount is crucial because efficiency increases only have an impact on P&L if they actually lead to a reduction in costs or more productive use of existing resources. If efficiency measures are implemented without reducing the capacity that is freed up or deploying it sensibly in other ways, the financial effect simply does not materialize.

Without targeted workforce management, it can happen that savings only exist in operational key figures and therefore only on paper, while in practice these are not consistently adapted to the improved framework conditions. As a result, companies continue to operate with high structural costs despite efficiency measures.

At the same time, it is important not to blindly reduce the headcount, but to manage it strategically – for example through natural fluctuation or by reallocating employees to growth areas. This is the only way to sustainably anchor efficiency gains in the P&L.

At ifp consulting, we rely on a structured process within the framework of efficiency enhancement programs in order to map the measures in a P&L-effective manner:

  • The associated headcount adjustments are also calculated as part of the development of measures and the expected optimization potential.

  • These are consolidated for all measures in an overarching headcount development curve over time. This results in the headcount target curve.

  • This in turn can reflect opposing effects, such as planned volume growth.

  • Once the measures have been implemented, the freed-up resources must be strategically reduced.

A key aspect here is to involve the HR department in the discussion at an early stage in order to develop a clear HR strategy for optimization projects and to evaluate at an early stage where and to what extent capacities can be reduced sensibly and as socially acceptable as possible. This may also be necessary in the case of opposing effects if the resources required for this have a different qualification profile than the existing employees. Appropriate solutions must be developed at an early stage via qualification or recruiting programs.

Case Study

A key challenge in the implementation of efficiency measures is the issue of staff reduction. Individual managers responsible for measures rarely have the authority to reduce headcounts independently. This requires an aggregated view at management level. ifp consulting has developed a three-stage process to ensure that the measures are implemented effectively, that the impact on personnel requirements is assessed without any conflict of interest and that it is mapped in an overarching big picture. This ultimately leads to the desired profit & loss (P&L) effects.

ifp consulting has developed a 3-step process for P&L relevant optimization

Measures:

  • Analysis of existing processes to identify optimization potential.

  • Development and implementation of efficiency measures that address both cost reductions and productivity increases.

  • Ensuring that measures actually take effect in operational practice and are sustainable in the long term.

Headcount detailing:

  • Evaluation of the impact of the measures on personnel requirements, broken down by product and functional area.

  • Consolidation of the measures and the associated optimization potential in an overarching headcount target curve for the plant. Ideally, this should also be mapped in detail for the functional areas.

Implementation by the management:

  • Aggregated view at management level to derive strategic personnel decisions.

  • Determining whether the headcount will be reduced or whether efficiency gains will be used for growth.

  • Transfer to a transparent management model that makes the financial impact on P&L measurable.

Learnings from practice

  • 1. efficiency measures must be coupled with clear measures to adjust the headcount.

  • 2. a clear separation of responsibilities between the implementation of the measure, headcount planning and the final implementation is essential.

  • 3. savings should either lead to direct cost reductions or be offset by corresponding volume growth.

  • 4. early involvement of the HR department in order to prepare and implement adequate measures for reduction, qualification or recruiting.

  • 5. stringent and regular performance reviews are crucial to make the P&L effect visible.

Outlook for the future

Increasing cost pressure and stronger international competition are forcing companies to implement their efficiency measures even more consistently. However, the implemented optimizations will only have their full financial impact if they are specifically linked to strategic personnel management.

We at ifp consulting are happy to support you on this path. Get in touch with us!

 

If, in addition to production, you would also like to include indirect areas and administration in efficiency improvements, we have developed our program for integrated cost reduction throughout the company, iCOP, together with the experts from Siventus. More information: