The subprime-driven credit crisis, oil prices, and a few more nasty economic challenges have more economists using that "R" word that we all dread—recession. I won't attempt here to expound on whether the country is or is not in a recession. I always liked a quote by Paul Samuelson, the Nobel-Prize-winning economist: "The stock market has forecast nine of the last five recessions." I will forecast, however, that whatever it is and no matter how bad it gets or how long it lasts, financial services companies are taking a hard look at their 2008 budgets and plans and are starting to think about how to react.

In these challenging times, organizations need to take steps to not only get through the tough times, but also to be poised to triumph in what will likely be a more competitive marketplace on the other side. To do that, an organization has to start early, before sales and profits turn down, and have an effective way to think about enterprise cost reduction. The approach requires a surgeon's touch, versus a blunt X percent reduction in all budgets, because some parts of the business may require additional investments. For the organizations that manage to emerge from these challenging times better and stronger than they are now, we think that what will win the day is a value improvement approach. A value-driven approach to cost reduction has these fundamental elements:

• Create a framework that your organization may not be used to looking at. Budget and departmental structures may be right in some cases. But more often, a cross-functional framework around end-to-end processes that cut across functions is the richer approach. For example, a focus on value building across your business acquisition process is more likely to unlock greater cost savings and value improvement than focusing exclusively, once again, on the underwriting department.

• Break it down. Once you've chosen a framework, decompose it into its logical parts. Start by defining its essential purpose and parse that into components. Ask, "How do we currently achieve that essential purpose?" Then, list the ways. Next, take each of those and ask how we achieve them. In most cases, this second level of analysis will give you a viable framework for building value initiatives.

• Focus on the customer. For each element of the framework described above, get clarity around two things: How important is the element to your customers, and how reliably do you perform it?

• Know where the costs are. Departmental budgets are a wonderful thing, but they often mask where you are spending money in relation to what is important to your customers and what you do reliably. In most cases, this does not have to be a massive cost-accounting effort. You are looking for directionally reliable information, not perfect accounting. The goal is to know basically what each element of the framework costs. You want to be able to separate elements with low importance, low reliability, and high costs from ones with high importance and low reliability. To build value, reduce costs in the former group, invest in the latter.

• Build value and lower costs. At this point, you are ready to go for the improvements. Should your life be blessed, you find a not-very-important element with low reliability and a massive expense and you eliminate it. Good luck! In all our years of doing this, obvious candidates have been rare. The hard work is separating each element and creatively finding improvement opportunities based on where it lies in the customer importance, reliability, and cost mix.

Challenging your organization to both improve the value proposition and reduce costs will create some interesting conversations. One you can count on is the question, "So which one is more important—value or costs?" Demanding both with a solid approach to do so will position your organization to build value in these challenging times, and you will be ready to compete effectively in the upturn.

This can be done. We have helped many of our clients over the past 35 years achieve measurable and durable results in building value while lowering costs. Let me know if you would like to receive case studies of our successes with this approach.