In the last three years, I've managed and been part of three significant expense management initiatives with different Nolan clients. (For a point of reference, I'll define "significant" as $60–100 million of expense reduction on budgets ranging from $750 million to $1.2 billion.) In each case, the timeframe for implementation ranged from three to five years and the project was under a corporate strategic initiative that forecasts administrative expense levels for planned business. You might say, "So what? We're only dealing with reductions of about 10 percent." What the strategy folks projecting the numbers fail to understand is that typically, only 60–70 percent of the budget is variable and subject to necessary reductions. That increases the reduction to the 13–15 percent range. With people costs being roughly 60 percent of the operating budget, headcount reduction can sneak up to 20 percent. Now that is significant.

So when these expense management initiatives are started, it is no secret why front-line managers struggle to meet their objectives. Everyone starts pointing to other areas that need to be reduced. Operations pushes the reductions to staff areas, and staff areas say IT is the culprit. It is a familiar story and not a pleasant environment to work in. At the Nolan Company, we have applied some core strengths to help companies implement "active" expense management programs, tying clients to a strategic plan that typically operates at 30,000 feet. This can be a high-wire act initially, but with proper senior leadership the process can be helpful to many, enlightening to some, and challenging to others. There are a few guiding principles that help organizations "get after it" when it comes to real expense reduction.

1. Rely on your financial brethren to provide sound and accurate expense numbers that correlate directly to the short-term strategic targets for revenue growth (two-year to three-year projections are best; anything further out is too speculative). This is where you set the target so that the corporation has a single focus on the impact of its expense management activities.
2. Establish an "everyone plays" mentality. The actuarial area gets a review that's similar to the reviews performed on claims, contact centers, new business, and the other operations areas. Because so often processes are cross-functional and staff areas impact operations, it is critical to open up all potential avenues for improvement. These reviews become the foundation for a number of independent studies conducted every year, such as those on technology and systems investments, outsourcing opportunities, and product profitability.
3. Create a participative environment, fully engaging front-line personnel during the evaluation process, development of recommendations, and projections for potential savings. These group efforts expose front- line people to new tools and techniques, leverage their expertise, and create ownership of the potential changes by the area management team.

Is it easy? No! Is it a necessary process? I'm certainly biased, but implemented effectively, this kind of initiative opens so many doors to new ideas and management development. All of these ideas are linked directly to corporate success. This is not your granddaddy's old cost reduction program—it's a fully integrated expense management effort linked directly to your corporate strategic plan.

So is expense management a necessary process? Given the uncertainties of the current market, the answer might be yes.