Market uncertainties and complexities caused by volatility in macro-economic factors such as crude oil prices, inflation and the unprecedented impact of the global COVID 19 pandemic are having a major impact on the financial performance and growth of businesses. This has created a situation in which business executives are struggling with the hard task of “thriving in uncertainty,”- a situation in which many companies are simultaneously pursuing seemingly conflicting goals of growth and cost improvement.
In a bid to keep up with the expectations of stakeholders on profitability and growth, one of the things businesses need is effective cost management programmes to maximize returns. However, many companies make the mistake of leaping into action using tactical initiatives to pursue aggressive cost targets without due consideration for strategy and business model. No wonder most companies indicate that their cost programs did not meet the required objectives.
RETHINKING STRATEGY AND COST
A key to cost program success is choosing a cost management strategy that aligns with your company’s needs and is capable of delivering the required level of savings. To achieve a more informed, systematic and sustainable approach to strategic cost reduction, business executives need to adopt the following steps:
Step one: Start with strategy
The starting point is a clear understanding of your strategy, your operating model and the risk-adjusted returns from these operations and ensure it is consistently understood across the organization.
It’s not only important to look at the returns and costs on a block of business now, but how viable this will be in five years’ time in the face of new technology, changing customer expectations, competition from new entrants and other disruptors.
It’s also important to understand the interactions between business units/ areas and the cost this generates, rather than simply using market-wide benchmarks to judge whether costs are justifiable. For example, high costs within the back office may actually stem from overly complex front office operations in areas ranging from rigid divisional siloes to a tangled knot of managing general agent arrangements.
Step two: Align costs to strategy
Differentiate the strategically-critical good costs from the non-essential bad costs. Identify the differentiated capabilities needed to get closer to customers and meet their expectations and then compare what you have with what you need.
You can then target investment at winning capabilities and draw up plans for minimising the bad costs. some costs can be eliminated altogether, either because the real returns are so low (e.g. poorly performing business lines) or customers don’t value what’s being offered (e.g. high cost investment management when some customer segments would be happy with a lower fee tracker fund). Some expenses are still necessary to ‘keep the lights on’ in areas such as leases and property, but there is significant room for savings. You can use the end-to-end cost analysis to see what activities are being carried out, what value they deliver and how they could be changed.
Step three: Aim high- Be bold, be brave and be creative
The real differential is the strategic ambition to set the bar higher and explore all possibilities, rather than settling for marginal gains. Being bold means the courage to withdraw from markets or streamlining product lines so that resources can be better focused – cutting back redundant parts of the organisation so it can thrive. Being brave means cutting the costs that have seemed too difficult to tackle.
Being creative means looking beyond what’s always been done, and asking why and what are the alternatives. Crucially, it also includes real insights into what customers value and are prepared to pay for.
Step four: Set direction and show leadership- Deliver cost optimisation as a strategic, business transformation programme
Strategic cost reduction can’t be delivered in a piecemeal way or by people working on it part-time. It needs to be run as a strategic initiative with the same board sponsorship, direction and accountability as any other strategically critical initiative, such as an acquisition, market entry or broader business model change.
It is important to ensure central governance, secure senior management agreement and buy-in, engage the workforce at all levels and develop ways to encourage personal ownership and organisational collaboration.
Step five: Create a culture of cost optimisation
Ensure you embed a culture of ownership and incentivise continuous improvement. Strategic cost reduction priorities should be regularly reviewed and updated in the same way as your business assesses the relevance of its strategy and the opportunities ahead. Reward and incentivize staff to continuously look for improvement opportunities – build a culture of good versus bad costs.
CONCLUSION
The survival and success of your business depends on a transformation in your competitive capabilities and underlying cost base. The transformation starts by aligning cost to strategy – investing in differentiated areas and cutting back the rest. It’s important to understand what really adds value in your organization in order to turn cost from a competitive challenge to a source of clear-cut advantage.
HOW MAC ADEBOWALE CAN HELP
Our Strategy and Innovation service can assist management to identify gaps and opportunities for cost reduction through an end-to-end value and cost assessment and developing detailed implementation plans for cost management programmes. In addition to creating a plan, we can also assist you launch test pilots for your cost management programme.
