Sunday, February 22, 2009

Cost Base Variabilisation

Sorry for not posting on the weekend as I enjoyed one of those rare treats for a consultant - leaving the laptop home on the weekend. Admittedly, it should be possible to not work on the weekend - see this post at Killer Consultant - but most weekends I take it home just in case. This time it was fine because I was on the beach.

We had our monthly office meeting on Friday, and it was very doom and gloom. The global CEO was here, and he gave us a very depressing rundown on how bad things are getting in the global economy as a whole. He also punctured the "Australian Immunity Thesis". Here in Oz, we have been somewhat insulated from the worst of the problems - but its only a temporary and illusory protection. 

After the big boss, the regional MD talked to us about how badly we are going against plan. The picture wasn't fantastic, with belt tightening definitely necessary. Luckily, there are no plans for redundancies in the area I work in, but they are looking to variabilise the cost base - the ostensible subject of this post. 

I have used this term countless times on projects. It refers to situation where a company has a high proportion of fixed costs (costs that don't depend on the amount of business you do), and would like to convert them to variable ones. Fixed costs are not too bad in a rising market - the more revenue you generate, the more profit you make (simplistically). In a falling market that fixed cost base, e.g. salaries, starts to look a whole lot like a massive anchor on your results. So we tend to tell clients to try and variabilise the costs. You can do this by making a higher percentage of compensation at risk (i.e. bonuses), or by offering greater flexibility in working arrangements, or by having a higher percentage of work done by contractors. 

In our case, we are looking to increase flexibility. To that end, and for my own reasons also, I am looking to go on secondment. I want to do it so I have time to apply to business school, and also to give myself a taste of something different to consulting, which I have been doing my entire career. In any event, I will let you all know how it goes. Does anyone have any perspectives on doing an industry secondment?

Stay tuned for the next post, where I begin blogging my road to getting into business school. 

1 comment:

  1. Thanks for the link, Insider!

    Personally, I think it's a healthy thing that those who are often proposing "cost base variabilisation" now see the effects of such actions first hand. Not that it is pleasent - but as we always act in the advising role, it is really easy to get detached from the real implications our analyses and slidedecks have on people.
    Also, of course, it seems like you found the perfect timing for taking a secondment and getting ready to enter business school. Good luck with that, and keep us posted!