Posted: 09 Oct. 2020 4 min.

From rapid to strategic cost transformation

Topic: Supply Chain

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:

  • With rapid cost reduction the horizon is short-term, needless to say, emphasizing liquidity, continuity and value preservation. Activities could include measures such as eliminating discretionary spend, reducing contractor spend, freezing recruitment, re-negotiating vendor contracts, eliminating low-value activities as well as pausing non-essential projects and programmes. Here, companies typically prioritise speed over elegance, and so they should. They also aim high on the ‘big tickets’, meaning that they aim to overshoot the target to provide options and allow for buffers. It is essential to only address ‘bad costs’ without cutting into critical capabilities and critical activities.
  • Strategic cost transformation, on the other hand, allows for a long-term horizon and with focus on the broader business options in line with market developments. Here, it is necessary to take the time to design and plan for structural impact, while also creating strong and visible leadership for a marathon, not a sprint. At the same time, focusing on making the change and making it stick is pivotal as results will only show when initiatives are well-designed and well-implemented through the entire value chain. This is where you really configure the company to thrive in the post-pandemic world in order to come out stronger and outperform the competition.

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:

  • For example: the smart use of analytics enables much faster opportunity identification and more precision about where and how to cut costs. Artificial intelligence-driven spend analysis tools can enhance spending visibility and provide actionable insights quicker and cheaper than traditional analysis. Talk to one of our core systems and cloud experts for just five minutes and you will be amazed what these tools can do.
  • Another example: Robotic Process Automation (RPA) or Robotic Cognitive Automation (RCA) to insourced processes can reduce costs as well as increase quality and control over previously outsourced and offshored processes.
  • Other digital solutions can also enable new and more innovative business models. As companies are now setting up their core business solutions and processes for long-term success rather than immediate survival, it has become evident that the notion of a clean, robust core with cloud-native satellites around it is now THE way to develop intelligent solutions in order to increase competitiveness and reduce operational costs. 
  • And don’t forget the human angle: Organising for adaptability enables resilience and prepares for thriving in a complex world of uncertainty. With agile ways of working, relentless customer focus and flexible networks of teams, large-scale organisations can increase flexibility in costs and operating model.

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. 

More about the author

Tore Christian Jensen

Tore Christian Jensen

Partner

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.