Strategic Cost Transformation  

How to thrive and grow in today’s disruptive and uncertain business environment?

Businesses today face extraordinary, prolonged uncertainty and disruption: high inflation, rising interest rates, softening demand, geopolitical conflicts, supply shortages, currency volatility, new regulations, and changes in tax policies, to name a few. In addition, the effects of the global pandemic are continuing to be felt in some countries even as others have returned to business as usual. Meanwhile exciting developments in new technologies and intelligent automation are allowing organisations to harness new capabilities and insights through data to make better, informed and rapid choices on their ways of working, service delivery model and organisational setup.

All around the world the current macroeconomic and technological challenges — combined with ongoing difficulties such as talent shortages and technology disruption — are making it hard for companies to achieve their growth and earnings targets. Advanced economies are expected to see a pronounced growth slowdown, with all industries and sectors feeling the impact. The world’s leading companies are not immune, with many finding themselves facing widespread hiring freezes and lay-offs.

Even in this disruptive and uncertain business environment, companies are still expected to grow. Achieving the simultaneous goals of sales growth while reducing costs requires a balance of old and new: applying and refining proven cost-saving methods using the latest digital technology while at the same time investing in new markets, new products, and new technologies.

Many companies fail to achieve their cost reduction and transformation goals because they approach the effort as a portfolio of disconnected initiatives without the necessary sponsorship, coordination, discipline, and investment. They fail to establish the required governance, neglect to define success in a consistent manner, and fall short when managing change.

Ultimately a successful optimisation and reduction of costs requires more than an isolated view on corporate costs. A rigorous, end-to-end analysis of the company’s costs is needed and, our experience shows, a fundamental rethinking of the business, the usage and leverage of data insights as well as technologies, and the incorporation of agile ways of working. These steps are key to creating a successful future business. This paper analyses the cost-related challenges companies currently face and shows the scenarios that trigger a cost transformation programme – and how Deloitte can help you reshape your organisation to achieve sustainable cost structures.

A recent Deloitte Survey of nearly 300 senior business executives from leading global companies across different industries found that rising inflation, talent shortages and supply chain constraints are the triggers for 90% of cost transformation programmes at global firms. The survey shows that more than half of the companies aimed for cost reductions of a minimum of 10% (Figure 1). However, 72% of surveyed companies still missed their programmed cost reduction targets, mostly due to a combination of external barriers and internal constraints, infrastructure / system-related challenges and disjointed transformation efforts without the necessary governance and coordination.

Top factors driving success in cost reduction programmes

To address internal and external challenges, our advice is to clearly define how an organisation can achieve a competitive and sustainable cost structure and set up the right capabilities and technologies to run and grow efficiently.
The companies surveyed in the above-mentioned survey cite several key success factors and lessons learned that can help them achieve their cost transformation targets. These include solid tracking and reporting (72%), a clear business case (65%), effective change management (64%), investment in technology improvements (62%), realistic cost targets (58%), and dedicated leadership (46%). Senior executives recognise the need to shift away from small-scale, isolated initiatives, and to embrace all-encompassing transformation efforts using all available options — not only standard cost levers, such as procurement and organisational restructuring, but also technology-driven cost levers and analysis tools, such as process reengineering through process and task mining (see our articles on Process Mining), intelligent automation, data and artificial intelligence strategies, and adoption of cloud architecture solutions (Figure 2).

While different outcomes (cost refinement, efficiency, and transformation) result from pulling specific levers in response to the five different Strategic Cost Transformation drivers illustrated in Figure 3, it is best, in our opinion, not to consider a strategy in isolation. Leading organisations with successful cost transformation programmes look to pull multiple levers simultaneously, building on quick wins while implementing continuous improvement measures with a medium to long-term view on cost efficiency.

Deloitte’s experience across multiple sectors indicates that double digit savings on the existing cost base can be unlocked over the course of a Strategic Cost Transformation programme resulting in double digit EBITDA improvements, but only when taking an unconstrained view of the business, adapted to the current market landscape and ambition, and the organisation’s maturity.

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