Hi Lorenzo,

in order to structure a cost case I would proceed as follows:

Step 1: Clarify the goal. Ask which is the absolute amount you should reach and which time frame you have to do so

Step 2: Identify the problem. You can proceed through the following steps:

1. Segment by profitability/revenue channels. Ask the interviewer how many business units they have – or any other segmentation that may be present. The segmentations depend by the type of business and should be provided by the interviewer (although he/she may ask your point of view on that)
2. Identify which channel is the priority. Ask how costs changed for each channel. Then start from the one with the biggest increase in costs.
3. Identify the cost components in the selected channel. You may brainstorm costs using fix or variable costs, or dividing through the value chain
4. Identify the component that is underperforming. You can do so comparing the client performance with its past performance, or benchmarking competitors on that area.
5. Identify the reason for the cost increase. The final point in this step is to analyse why costs went up. Usual areas to consider are:

• External
  • Supplier issues (eg increasing prices)
  • Competitors issues (eg lobbying strikes/ regulations against us)
  • Client issues (specific customization that increased labour cost)
• Internal
  • Client issues (eg wrong process development/budgeting)

Step 3: Propose a solution. In general, there are two main things you can do to cut costs for the specific cost component you have identified:

• Decrease the cost of each unit; typical strategies include
  • Decrease quality of units bought
  • Negotiate with suppliers
  • Find another supplier
• Decrease the number of units of cost; typical strategies include
  • Increase efficiency of units
  • Substitute input units with other units

Step 4: Risks. As potential issues and next steps, you should take into account possible negative effects on revenues and how to avoid them.

For the specific question on how to reduce the cost components, you can focus on Step 3 above, thus dividing in ways to decrease the cost per unit or the number of units of a specific cost area.

Hope this helps,
Francesco