Cost reduction is the process used by organisations aiming to reduce their costs and increase their profits, or to accommodate reduced income. Depending on a company’s services or products, the strategies can vary. Every decision in the product development process affects cost: design is typically considered to account for 70–80% of the final cost of a project such as an engineering project[1] or the construction of a building.[2] In the public sector, cost reduction programs can be used where income is reduced or to reduce debt levels.[3]
Companies typically launch a new product without focusing too much on cost. Cost becomes more important when competition increases and price becomes a differentiator in the market. The importance of cost reduction in relation to other strategic business goals is often debated.[4]
In a public sector spending review, an overall target for reduction in expenditure may be identified: for example, in the United Kingdom, the 2010 spending review anticipated a reduction of £81bn in public expenditure over the four year budget planning period.[7] In order to meet the challenges of a significant reduction in expenditure, government departments are expected to look at how they can "take cost out of the business" rather than simply cut services.[8] One of the main principles expected of government departments in order to reduce costs is a "data-driven approach", i.e. ensuring that staff within the department have "a good understanding of the distribution and profile of costs in their business".[8]
Centralisation of procurement activity has been hightlighted as a beneficial public sector strategy.[8]: 6