Managing costs and quality: Strategic cost assessment at Fitness First
Managing costs and quality within business is the focus of Chapter 16 in the ninth edition of Management Accounting by Langfield-Smith et al. Specifically, it focuses on strategic cost reduction through activity-based management (ABM). ABM involves finding non-value adding business activities and costs, identifying root causes, developing activities to reduce costs and measure performance, then building those activities into process improvement. This is really the end goal – ‘the incremental and continuous improvement of process’.
The chapter also describes other approaches to controlling and reducing costs, including business process re-engineering (BPR), life cycle management and target costing. ‘The aim of BPR is to totally reorganise the way in which work is done by identifying and enhancing the value-adding activities and addressing all the non-value-adding activities for a process.’ An example is the way businesses have made fundamental changes to their processes due to COVID-19, such as manufacturers of unrelated products moving into the PPE market, or the numerous distilleries adding hand sanitiser to their product range.
The text uses a continuing case of Mason & Cox, as well as number of new ‘Real Life’ local case examples to illustrate each approach to managing costs and quality. To give you a taste of what to expect and to illustrate the ABM approach, we’ve included the ‘Real Life’ case study supplied by leading advisory and investment firm, KordaMentha: Strategic cost assessment at Fitness First.
After two decades of growth that saw it establish facilities across the globe, by 2012 Fitness First was facing significant competition from low-cost operators and carried a high level of debt. The Australian operations, comprising around 100 sites, 5 000 staff and 300 000 members, were being impacted by declining membership and falling profitability.
As part of a global restructure, advisory and investment firm KordaMentha was retained by Fitness First’s owner to undertake a strategic cost assessment and develop and implement a cost reduction program for the Australian operations. The process involved:
- Detailed analysis of the future strategy of the business, including core customers and markets
- Identification of key cost drivers impacting both labour costs (shared services and gyms) and non-labour costs (head office and other rent)
- Line-by-line review of the management accounts with expense/revenue items scrutinised to identify non-value-adding activities or business units.
The strategic cost assessment highlighted several root causes of inefficiencies and non-value-adding costs as well as associated opportunities for cost reduction:
- Extensive gym portfolio requiring significant head office overhead and regional management support. Closing unprofitable gyms would enable cost reduction (especially non-value-adding shared services costs) and improve overall profitability
- Weak recruitment controls. Strengthened staff recruitment would ensure only critical or value-adding positions were employed
- Complex pricing structures. Simplifying membership price structures and offers would reduce billing errors, improve customer satisfaction and require lower marketing and administration costs
- Inefficient staffing models. Optimising in-club staff structures based on club and member characteristics would allow individual performance to be benchmarked, driving consistency and efficiency at each operation.
Following the review, a plan to rationalise unprofitable sites was implemented. In total, 24 of the gyms were shut, sold, sub-let or had more favourable lease terms negotiated. As the size of the portfolio was a key cost driver for shared services costs, this allowed Finance, IT, HR and other support functions to be streamlined.
In addition, efficiencies and cost savings were achieved by consolidating and simplifying regional management structures, tightening recruitment processes and reducing pricing complexity.
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