Structuring Costs

Hi,

As a candidate, I've struggled a lot with cost reduction cases since most of the case books don't have them, while you can face these cases on the case interviews. This is especially relevant for McKinsey interviews.

Based on my experience most of the candidates end up by segmenting into fixed and variable costs. Obviously, this structure is quite poor.

My recommendation is to use the process approach which is similar to what consultants usually use on a real project:

1. Cost segmentation and prioritization - here you basically try to understand what is the cost structure and what are the biggest cost buckets
2. Internal and External Benchmarking and understanding the potential - you compare your costs with competitors, industry benchmarks or internally (Imagine one of your entities having 1 accountant per 100 employees and another 5 accountants per 100 employees)
3. Process improvements - in order to cut the costs you need to identify the best processes and scale them across the organization. You should take into account that there are "major process steps" like production, contributing to the output and "supporting process steps" like cleaning. The former are usually optimized with technology or best practices, the latter are usually cut 
4. Costs & benefits - here you calculate the total impact and the rollout plan

One great advantage - it is really hard to argue with that approach since it's based on real consulting projects.

Best,

I would go for Direct (related to production/service the company is selling) and Indirect (everything else) costs, as an alternative.

But applying the right structure highly depends on what's the case study you are analyzing, thus what's the focus of the case and what you can obtain from the categorization you are applying.

Cost could also be broken down by, for example:

• Geographical locations (if client company runs at several different countries)
• Product lines (if client company has >1 major product line)
• Upfront vs. on-going (if client is thinking about investing in something)

As Giulia mentioned above, it very much depends on the case. The way you break down the cost should best help you find the underlying problem and solve the case. Also, the cliche "fix vs. variable" breakdown actually applies in a lot of situations, so don't be afraid of using it :)