John Symons, a former senior executive at BP Australasia, reflected on his experiences at the petroleum giant in managing costs without compromising customer value (Evans, 2013). He stated that a key priority in reducing costs at BP was to reduce discretionary expenditures.

One way of achieving this was to stop delegating to managers the authority to approve substantial expenditures on items such as consultants and travel. Symons noted that, at one stage, this led to a reduction in BP’s travel bill from about $6 million to $1 million, which was achieved, in part, by requiring staff to obtain the approval of state managers for domestic travel and of the managing director for international travel.

Another mechanism that BP used to reduce costs was to flatten the organisational structure as part of a series of global restructuring initiatives. By reducing the layers of management, fewer managers were required, leading to substantial salary cost savings for BP. However, restructuring led to other benefits: ‘When I reduced my team by half, we kept a pile of the reports we had stopped producing – they’d often taken hours to compile and were possibly never read. It was like looking into a mirror and realising how much weight you’ve lost’, Symons said.

A survey of chief financial officers of large Australian companies by Resources Global Professionals found that cost cutting and improving internal processes continue to be a priority for many organisations (Phillips, 2012). Respondents to the survey were from Australian organisations employing in excess of 200 staff in the manufacturing, retail, mining/resources and financial services sectors. Ninety-two per cent of respondents had undertaken process improvements in the previous 12 months. Cost cutting initiatives (60 per cent) and restructuring (52 per cent) were also popular. The survey also sought chief financial officers’ opinions about which initiatives would be important for their organisations in 2013.

The results indicated that process improvement initiatives (92 per cent) and cost cutting (56 per cent) would continue to be widely implemented, while there would be a decreased focus on restricting (32 per cent) and staff redundancies (32 per cent).

Source: Based on Evans (2013); Phillips (2012)

REVIEW QUESTIONS

3.5 The second ‘Real life’ in the section ‘Cost drivers’, titled ‘Managing costs in challenging times’ describes some of the steps that BP took to reduce costs. Describe four root cause cost drivers that a petroleum company like BP might identify to help them reduce costs.

REALLIFE

3.6 Explain the impact of a decrease in the level of activity (cost driver) on:

a) total variable cost

b) variable cost per unit of activity.