How reducing costs through a sustainable cost transformation can set you up for long-term business success

Business leaders always have a lot on their minds–but especially today. Between the threat of disruption, the need for constant innovation, and economic concerns, such as inflation and recession, an increasing number of companies are trying to figure out how best to keep growing and stay resilient in the face of many mounting pressures.

Adapting to an always-evolving business environment naturally involves coming up with innovative ideas or finding new ways to boost revenues. But it also requires companies to improve their bottom line by managing costs. However, when executives talk about reducing expenses, discussions are all too often around slashing headcount or eliminating costs in other dramatic ways. While cutting costs may save a company from an acute situation, it is by definition a short-term fix. It doesn’t allow businesses to transform their operations in the ways they need to thrive.

What should they do instead? Consider a sustainable cost transformation.

Reducing costs responsibly

A sustainable cost transformation (SCT) is exactly what it sounds like: carefully planning ways to reduce expenses that allow you to maintain market share and improve your business. The goal is to help your company become more cost-competitive while also giving you the internal mechanisms to continue growing, no matter the socio-economic and business environment.

Companies typically undergo an SCT for one of three reasons: their business survival is at risk (a product might be at the end of its life cycle, for instance); they have a stable and profitable business but they want to grow by 20%; or they want to pivot into a new market or product line, or to integrate modern business technologies (such as artificial intelligence) or orientation (such as environmental, social, and governance matters).

In each case, the company needs to transform or reinvent itself in some way. It must also reimagine its cost structure and operating model, partly to free up cash to reinvest in its operations but also to help it become nimbler in the years and decades ahead.

The problem? Business leaders often don’t understand their cost structure: who spends what, where, when, why, and how spending gets planned, reported, and controlled. Many need help making sense of what they’re spending, while others know their expenses are too high but aren’t sure how to lower them. They must understand, though, that an SCT is not a slash-and-dash exercise. It’s a journey that can leave your business looking quite different than it does now, but also put you in a much better position to achieve sustainable growth. Lowering the cost base requires reaching a higher level of visibility, skills, capabilities, and accountability. It pushes an organization to be clear about how its operating model supports its business model.

One of the main goals during the transformation process is to protect profitability, which means protecting your position in the market and developing a business model that can react effectively to market dynamics. That includes withstanding various types of pressures: inflationary and low-growth scenarios, for instance, and disruptions due to extreme weather events or pandemics.

How can you protect profitability? By better connecting the top line and bottom line, the business model to the operating model. If market dynamics impact your top line and you simply cut costs, you’re still losing market share because those revenues are still shrinking. An SCT will allow you to set your business up to withstand challenges that are not necessarily in your control. With a sustainable and cost-competitive operating model and enhanced business execution capabilities, you’ll create a more resilient organization.