CFOs' Top 3 Lessons of 2012

2.Don't make quick cuts; make strategic, sustainable cuts. Beaumont Health System president and CEO Gene Michalski understands sustainable cost reduction, that point was clear to me when I interviewed him this year.

"We've had a long history of pruning the tree, but about every three years or so cost creep occurs, so getting perpetual cost-saving involved pruning the tree frequently," he said. Michalski wasn't interested in making the same cuts repeatedly. He decided it was time to change BHS's approach.

"For us that [pruning process] evolved into share-of-saving and value management," said Michalski. To solve the problem, BHS undertook a patient-focused process improvement effort across its three, south Michigan hospitals.

Doing so led BHS to reduce and maintain an average patient care cost reduction of 11% over four years from 2007 to 2010, according to Hospital Compare data.

Achieving this magnitude of savings wasn't the hard part. The hard part was structuring changes in a sustainable way, according to Michalski. Sustainable cost reduction requires organizations to shed the reactive, tactical approach that has been the norm for years, and instead make deliberate, strategic changes that permanently reduce costs.