Over the last few months, I have been speaking to a lot of executives about how to strengthen the value chain, optimise cost and also take a fresh look at the entire operating model to match changing market conditions.
Overall two views seem to emerge from these conversations: On one hand, many executives seem to be optimistic about their company’s robustness and adaptability, even the macro-economic outlook. Some have actually seen increases in demand, followed new business opportunities or gone full steam ahead on digital initiatives that were already underway.
At the other end of the spectrum, as everyone knows, a lot of heavily affected companies had to completely pause large parts of their activities and reallocate resources and associated costs to other parts of their business – typically with government support to help dampen the shock. For these companies, the sleepless night are far from over. Many people still fear that the crisis will worsen, financial buffers will deplete and customer demand will not return to pre-crisis levels even in 2021.
This is the overall picture. However, digging into the matter, the notion of adaptability is far deeper than just the simple question of ‘who made it through?’ and ´who’s still in the marshland?’ In my recent interactions with Danish and Nordic executives, I have observed that companies have followed a number of different paths as they have dealt with the significant disruption and pressure on costs following the outbreak of COVID-19. Here is what I see so far:
The vast majority of Danish and Nordic companies, if not all, have successfully implemented rapid cost reduction, including eliminating variable cost items like discretionary spend, temporary/contract workers, recruitment and non-performing/non-core projects. The majority executed this in March, April and May.
A significant portion of companies have also announced or initiated structural cost transformations. For those that have, cost interventions were often long overdue, e.g. following prolonged growth, uncontrolled cost and complexity increases.
A small portion of the companies have decided that their business will not return to normal and are acting accordingly, but these examples are typically limited to very specific industries or in the context of underlying business adversity.
Very few companies, unfortunately, have yet applied a truly transformative perspective on cost reduction, which is desperately needed to future-proof the business model and emerge stronger from the crisis. In my view, seeing that some crisis strategies already seem outdated, this is somewhat concerning.
Now should definitely be the opportunity to re-think the entire cost base in preparation for financial soundness and future growth.
Moving from rapid to transformative cost reduction
When embarking on a cost reduction or cost transformation project, in my view, it is important to distinguish between what is short-term fat-cutting and what is long-term reconfiguration for profitability and growth.
Here is how I would define rapid cost reduction as opposed to strategic cost transformation:
When planning this kind of strategic transformation, my advice to clients is always to not neglect the classic, yet highly effective levers of rapid cost reduction, but also take the opportunity to reduce costs more intelligently, more strategically and with the help of new technology:
Wherever you are on your cost journey and your transformational strategies, now is the time to really embrace the lessons learned from the lockdown period about how business can be done more efficiently and effectively.
Use this time to tackle difficult decisions and to truly transform for the future. Be willing to make the bold and fundamental decisions that are now necessary. If you do, you’ll see your organisation thriving, not just surviving.
As a part of the Strategy & Operations practice Tore has worked with analysis, development and implementation of operational strategies. Tore has deep experience with aligning business models to changing market demands through optimisation of business processes and aligning systems, organisation and governance accordingly. He has industry experience from manufacturing, transportation, consumer products and energy. His main focus is on on the operational core processes but he also covers administrative support processes. As a program manager Tore has been leading transformation projects for international clients heading multiple parallel projects and reporting directly to executive committee members. His responsibilities cover everything from initiating assessments, identifying opportunities for improvement to building business cases and following up by designing solutions and driving teams through implementation.