Despite being well into the post-Covid era, we are continuing to see unprecedented levels of uncertainty as businesses weather economic challenges and global instability. Most analysts predict that conditions will remain challenging under the cloud of record high interest rates, increasing energy costs and cost of living, supply chain disruptions and low consumer confidence. Margin pressures are expected to remain with revenue and costs both being focal areas.
Organisations may be tempted to turn to standard downturn defences, such as implementing cost reduction programmes to protect margins and shore up reserves. While these can be a valid response, they are not without risk and in our experience rarely achieve their full potential.
WHEN COST REDUCTION GOES WRONG
We typically see three scenarios play out with standard cost reduction programmes.
1. Done… and undone later
Faced with mounting pressure to cut costs, organisations quickly turn to blunt cost reduction tools that prioritise short-term impacts (e.g. across the border layoffs, organisational redesign and cancelling major programmes). Without a multi-year strategic plan, capacity and critical capability can be lost, which can then be expensive or slow to build back later when market conditions improve.
For example, many airlines slashed workforces and cancelled major investments when the Covid-19 pandemic decimated the industry. During the consumer rush to get back on planes once restrictions were lifted, most were chronically under-staffed and unable to service the surge in demand.
2. Treacle then termination
A cost reduction programme commences but quickly becomes mired in complexity and execution lethargy. The programme is slow to coordinate implementation across business units or geographies (who all make strong cases as to why they are different) and work ends up getting pushed around the units without the controls needed or handoffs managed. Very few true efficiencies are created and eventually the programme fails.
For example, a client embarked on a widespread organisational redesign and voluntary redundancy programme to address a financial deficit. Major flaws in the programme set-up included siloed decision making, ineffective measurement and tracking, and poor communications and change management. Uptake of the voluntary redundancy programme was low and a ‘talent-drain’ occurred in critical parts of the business that were previously high-performing.
3. Unsustainable and non-transformational
More consideration is given to delivering one-off savings than sustaining cost performance year-on-year. Short-term targets are not balanced with long-term sustainability that is connected to the organisational strategy and core value proposition. This includes both the mechanisms used to reduce costs as well as the change required to realise benefits sustainably.
For example, balancing the procurement ‘seesaw’ between a rationalised, consolidated set of large framework agreements and a distributed, widespread network of smaller suppliers. Managing the trade-offs between cost efficiency of the supplier base with getting the best value and service is a constant juggle for supply chain leaders.
THINK OPTIMISATION, NOT REDUCTION
Gate One approaches any cost reduction requirement with a transformation mindset. Our cost optimisation methodology identifies strategic cost levers and provides an execution framework to ensure benefits are realised and sustained, while also focusing on value creation in parallel. A critical element of this approach is rethinking the operating model – the underlying capabilities, processes and structures that enable a company to create and deliver value for its customers.
We understand that balancing cost reduction with value creation can be challenging at times, because they can sometimes compete with each other. There can be a tension between the need to deliver results through cost savings, versus investing in longer-term transformation initiatives that may not deliver immediate benefits.
The key to getting cost optimisation right is clearly understanding what your starting point is and the level of ambition for the future. The overarching focus and set of levers to be applied will vary depending on the situation.
|Situation||Market is depressed, performance unstable and organisation in high degree of financial distress.||Organisation in good financial health in a stable and growing industry.|
|Ambition||Stabilise and shore up finances to survive.||Invest in transformation to sustain and grow.|
|Management focus||Identifying areas to reduce costs; cutting initiatives; managing working capital.||Redesigning the operating model to enable growth; exploring new market opportunities; investing ahead of the curve.|
|Typical levers to apply||
A ROBUST PROGRAMME SETS YOU UP FOR SUCCESS
Based on our experience in supporting clients to execute enterprise-wide and functional cost transformations, we have developed a repeatable approach and methodology, structured around three phases:
- sizing the prize;
- structuring solutions and designing the roadmap;
- driving execution and realising benefits.
1. Sizing the prize
This first phase is about developing a clear view of your cost base, analysing the key drivers of your costs and identifying major savings opportunities. We seek to implement any tactical cost levers that free up cash, as well as creating an initial view of medium to long-term cost transformation opportunities (considering structural cost levers such as operating model re-design).
Key takeaway: Delivering quick and early wins propagates wider buy-in from management and staff and energises the company to move forward with the programme.
2. Structuring solutions and designing the roadmap
Structural cost optimisation levers are used to identify and validate the cost transformation initiatives, as well as to assess their full upside potential. While assessing these structural levers, medium to long-term functional or enterprise-wide transformation opportunities are identified and prioritised against the company’s strategic priorities.
Key takeaway: A value creation strategy and roadmap is created together with an execution plan that can deliver on both your cost and transformation goals.
3. Driving execution and realising benefits
The final phase focuses on driving execution and ensuring that realised cost benefits are sustained into the future. This involves setting up a programme management structure and related governance to drive and track execution, while also establishing a change management plan with a strong focus on leadership enablement, stakeholder engagement, communications and risk mitigation. A self-sustaining cost-focused culture is co-created to ensure benefits are sustained into the future.
Key takeaway: Without effective execution and proper change management, cost savings can diminish and will erode over time. Senior executives need to lead from the front and the organisation needs to nurture a cost culture to support long-term high performance.
THRIVING, NOT JUST SURVIVING
Traditional approaches to cost reduction are no longer sustainable and we continue to see mixed results from these types of programmes.
What separates winners from survivors is how they carefully orchestrate their approach to think about transformation, while being able to reduce costs and maximise value every step of the journey. They champion ‘value creation’ over ‘savings’, ‘sustainable’ over ‘short-term’ and ‘cost culture’ over ‘programmes’. Getting a head start means taking fast actions and making bold decisions in identifying where you lean and how you transform – together.