When embarking upon an Overhead Cost Effectiveness (OCE) project, it is best to adopt a pragmatic approach to determine the range of costs to be embraced. As a rule the more items that can be encompassed the greater is the scope for improvement. However it will be necessary to exclude some items of cost that are traditionally seen as overheads. A good example is depreciation which is simply an accounting treatment of a cost already incurred. Another may be advertising where the benefit of expenditure may be difficult, if not impossible, to judge.

The aim of most organisations embarking upon an OCE project is to achieve a significant reduction in overhead cost without endangering the long-term viability of the business.

Traditional Approaches to Cost Reduction
To reduce overhead costs, managers tend to adopt a simplistic approach. One common method is to cut overheads in every department by, say 10%. Variations on this theme may involve cutting certain types of expenditure e.g. travelling costs, or cutting the costs of specified departments. All suffer from the same weaknesses.

There is no rational to the approach and it penalises the most efficient managers. The manager who is already operating a cost efficient department is expected to make the same cuts as someone carrying surplus staff. Since the most efficient managers are likely to be the brightest managers they will have learned that it pays to carry some fat and once the immediate pressure is off they will act accordingly by increasing their staff numbers. Consequently the effect of adopting the arbitrary approach is likely to be a short-term reduction in cost followed by a gradual upward drift.

The other major weakness of the approach is that it is concerned only with cutting cost and allows for no consideration of the potential dangers stemming from the cost reductions. This could result in making cuts in areas which subsequently affect the development of the business.

Having long recognised the problems of controlling overhead costs, in the late '70s most of the major international consultancy firms began to develop new approaches in this area. Whilst differing in detail, all these approaches followed similar lines and were related closely to Activity Based Cost Management.

CRISP Approach
The CRISP (Cost Reduction for Improved Service and Performance) approach has been applied in both public and private sector organisations, both large and small, encompassing a wide range of industries. In all cases, the savings have represented a significant percentage of the total costs reviewed and of course, an even bigger percentage of the bottom line. However, the detailed methodology has been modified to suit particular circumstances and the level of savings achieved has varied widely.

In the CRISP approach, any attempt to improve OCE must differentiate between Input Costs (e.g. salaries, insurances, etc.) and Output Costs (e.g. cost of recruiting staff, cost of issuing a monthly Trading Statement, etc.). Whilst most organisations produce regular and detailed reports covering Input Costs, few have any information on Output Costs. However, Input Costs are of little value to managers in making value for money judgements, whilst Output Costs are essential.

A CRISP project identifies the Outputs produced in every overhead department and assesses the costs of each Output. It then provides senior management with a range of ideas for reducing overhead costs. The ideas are not presented as recommendations but simply as Options, leaving a team of Senior Managers to decide the Options to be implemented.

Stages of a CRISP Project
There are nine stages to a CRISP project and it is essential that one person assumes responsibility for the day-to-day management of the project. This person could be an external consultant or someone senior in the organisation who can devote most of his time to the project.

In most organisations, employment costs form the major part of the total overhead. For this reason, a CRISP project will usually concentrate upon identifying opportunities for reducing staffing levels. However, some of the options identified should involve non-staff costs.

Stage 1: Preliminary Survey
The Preliminary Survey will determine whether or not a CRISP project can be justified. It is impossible at this stage to evaluate the potential savings precisely and therefore a conservative view must be taken. It is advisable to over-estimate the time and resources required to ensure that there is no subsequent over-run. Only if the estimated savings exceed the estimated cost by a substantial margin should the project proceed.

Stage 2: Preparation
The principal tasks involved are:

1. Establishing a Steering Committee comprising the Senior Manager on site, plus three to four other senior managers and the Project Manager. The Project Manager will report to the Steering Committee which will be responsible for:
   • Agreeing the scope of the exercise
   • Assessing the personnel implications of cost reductions
   • Approving all communications concerning the project
   • Agreeing and monitoring the programme
   • Receiving and selecting Options for improvement
   • Agreeing the implementation programme
2. Determining Communications: deciding the format and scope of all communication concerning the aims, scope and progress of the CRISP project.
3. Identifying a "Link-man" who will be responsible for providing financial data and advice on "political' sensitivities.
4. Determining Project Areas In most organisations the total range of costs and activities to be reviewed is extensive. It is customary to break down this total into a number of discreet areas, each of which will become the responsibility of a different project team.
5. Appointing project teams: a project team will normally comprise two people.
6. Providing training: the project team members will require training in the general approach and specific techniques involved in a CRISP project.

• Identify the objectives of every department included in the project
• Identify the outputs produced to meet those objectives
• Evaluate the cost of individual outputs
• Analyse results to highlight savings opportunities

The first step is to collect data on current input costs i.e. the expenditure incurred by each department, analysed by account heading. The next step is to agree with each Departmental manager the Objectives of his/her department. Having defined the "Objectives", then identify the "Outputs” produced in order to meet each objective. An Output may be tangible (e.g. a report, invoice, etc) or intangible (e.g. recruit staff).

The final step is to obtain an estimate of the time spent by every member of the department on each Output. Estimates are expressed in percentage terms using 5% bands. The percentage allocations are converted to monetary terms using the appropriate composite averages and a cost of every output is obtained.

Stage 4: Generating "Options”
It is important to set a high savings target for the Project Teams when they start generating the Options. A customary approach is to identify Options which will result in the total overhead expenditure being reduced by 40%. Rarely is this target achieved but in striving towards it, far more ideas are generated than might otherwise be expected.

Stage 5: Evaluating the Options
Every Option generated must be evaluated in four different aspects such as potential financial benefits, risk involved, once-off costs required and implementation issues. In order to evaluate risk a simple matrix is used, with the vertical axis showing Probability (of something going wrong if the option is accepted) and the horizontal axis showing Severity (of consequence if something does go wrong). Assuming 3 degrees of probability and 4 degrees of Severity, each of the resulting 12 squares in the matrix is accorded one of three Risk Factors (High, Moderate, Low).

Stage 6: The Challenge Process
The Challenge Process ensures that the managers within an organisation have the opportunity of commenting upon every Option which will have an impact upon their work. They are invited to comment upon:

cThe validity of the proposed change

The desirability of effecting the change

The acceptability of the proposal

Stage 7: Presenting the Options
It is quite possible that there will be over one hundred Options to be presented to the Steering Committee. The Committee members will have to understand the key features of each Option in sufficient depth to enable them to decide which to implement and which to shelve.

Stage 8: Making the Selection
In selecting the Options, the Steering Committee will be influenced largely by the range of Options available and the urgency to reduce overhead costs. In most cases, they will have a figure that they would like to achieve and will tend to give priority to Options which are low risk, can be implemented quickly and require little or no investment.

Stage 9: Implementation
It is normally the responsibility of the consultant or facilitator to prepare a detailed implementation plan once the Steering Committee has made its selection.

The initial CRISP programme is directed at making a significant reduction in overhead costs whilst improving the level of service provided to customers, both external and internal. Once a new and lower cost base is established, a variation of the CRISP methodology can be used to control future cost increases.