Cost drivers: what really moves your operating costs

Key takeaways

Cost drivers are the factors that cause a cost to rise or fall. In routine business work there are five: volume, variation, errors, waiting and who does the work. Budgets show what was spent. Cost drivers show why, and only the why can be changed. Most small businesses can name their costs but not their drivers.

• 5 drivers: volume, variation, errors, waiting and who does the work.
• Budgets show what was spent, drivers show why.
• Variation and errors are usually cheaper to fix than volume.
• Pick one driver per process and measure it weekly.

What is a cost driver?

A cost driver is any factor that causes the cost of an activity to change. If the cost of customer service rises when order numbers rise, order volume is a driver. If it rises when the website is unclear, confusion is a driver. Identifying the driver tells you which action will lower the cost.

• How BPO can help businesses reduce operational costs
• Activity based costing for small businesses

What are the five drivers of operating cost?

The five drivers of routine operating cost are volume, variation, errors, waiting and who does the work. Volume is how many items arrive. Variation is how many different ways they have to be handled. Errors create work twice. Waiting adds chasing and delay. And the same task costs more when a senior person does it.

• Volume: orders, enquiries, invoices, bookings.
• Variation: special cases, options, formats and exceptions.
• Errors: corrections, credits, repeat contacts.
• Waiting: approvals, missing information, handovers.
• Who does it: the loaded hourly cost of the person.

• The cost of complexity: when variety eats your margin
• Exception handling: the few cases that drive most cost
• Process handoffs: why every extra handover adds cost

How do you find the driver behind a cost?

Find the driver by asking what would have to change for the cost to halve. Then test the answer against data. Log two weeks of items for one process and record, for each, how long it took, whether it was standard, whether it was right first time, and who handled it.

• 1. Pick one process and count items for two weeks.
• 2. Record time, type, corrections and handler for each.
• 3. Sort by time taken and look at the slowest tenth.
• 4. Name what the slow items have in common.

• Cost baseline: measure today's cost before you change it
• Run a time audit to find what to outsource

What does that look like in numbers?

Take an illustrative firm processing 400 orders a month. Standard orders take 6 minutes each. One in five is non-standard and takes 20 minutes. The 320 standard orders use 32 hours and the 80 non-standard ones use about 27 hours. A fifth of the volume consumes nearly half the time.

Here the driver is variation, not volume. Hiring another person to cope with volume would treat the wrong cause. Reducing the non-standard share from 20% to 10% would save more than 9 hours a month.

• Work out your cost per task before you outsource
• Process standardisation: one best way, lower cost per task

Which drivers can BPO change?

BPO directly changes who does the work, and indirectly reduces errors and variation because the process has to be documented before handover. It does not change volume, and it can only reduce waiting if approvals and information reach the team on time. A provider handed a messy process will run the mess more cheaply, which is a smaller saving than fixing it.

• The cost lever scorecard: find savings process by process
• Document your processes before you outsource

When is the driver outside operations?

Sometimes the driver sits in sales, pricing or product. A sales team that promises bespoke terms creates exceptions for everyone downstream. A confusing invoice creates calls. In those cases the operational cost is real but the fix belongs elsewhere, and cutting the operations budget only moves the problem.

• Failure demand: the customer contacts you pay for twice
• Cost-cutting mistakes that end up costing a business more

What does this look like in practice?

A pattern we see in growing firms: the support inbox is described as overwhelmed, and the request is for more people. A week of tagging shows a large share of messages asking the same two questions, both about delivery dates that the confirmation email never mentions. One sentence added to that email does more than an extra hire would.

• See client work
• BPO Solutions for UK businesses

Cost driver checklist

Work through these for your most expensive routine process.

• Count the items handled in two weeks.
• Tag each as standard or non-standard.
• Record which needed correcting.
• Record which waited for someone else.
• Note who handled each and their loaded rate.
• Name the single biggest driver and one action against it.

• Cost reduction KPIs: the numbers that prove savings are real
• How to improve operational efficiency in a small business

Next step

Tell us which process costs you most and how many items it handles a month. We will help you work out which driver is doing the damage and what would change it.