Cost management in the age of digital disruption

MarginPLUS™ uncovers opportunities to reinvest savings

Key global insights

Cost targets are up. Globally, more than two-thirds of respondents (68 percent) are targeting total cost reductions of 10 percent or higher—up from 55 percent of respondents in 2017. Nearly one-third of this year’s global respondents (31 percent) have cost targets above 20 percent.

Failure rates are also up. Globally, 81 percent of respondents were unable to fully meet their cost-reduction targets (18 percentage points worse than in 2017). Nearly two-thirds (65 percent) of the companies that failed to meet their cost targets fell short by 25 percent or more, achieving less than 75 percent of their targeted cost savings. Only four percent of global respondents exceeded their cost targets.

Digital risks top the list of external risks. In 2017, macroeconomic concerns were the No. 1 external risk. However, that risk has now been surpassed by two digital-related risks: Cybersecurity and digital disruption. Digital disruption was barely on the radar in 2017, except in the United States; however, it is now recognized as a top external risk in all regions except LATAM.

Information systems are the top internal risk. Reliability and functionality of information systems is the top internal risk globally, particularly in the United States and Europe. That risk is followed closely by recruitment, development, and retention of talent; and by lack of controls, processes, and systems to ensure business continuity.

Growth expectations remain very positive. Globally, 86 percent of respondents saw their revenues increase over the past 24 months, and the same number expect their revenues to increase over the next 24 months.

Save-to-grow is evolving into save-to-transform. Sales growth, product profitability, and technology implementation remain in a virtual three-way tie as the top strategic priorities globally over the next 24 months. The increasing emphasis on technology implementation—along with digital enablement—reflects a new transformation mindset for cost management.

Growth and competition remain the primary drivers. Over the next 24 months, the top three drivers for cost management globally are expected to be: Required investment in growth areas, intensified competition among peer group, and increased international growth opportunities.

Technology capabilities are the primary development focus. In developing their capabilities, surveyed companies have primarily been focusing on cognitive and artificial intelligence (AI), ERP infrastructure, and especially automation. This focus on technology is consistent with a save-to-transform mindset, with companies investing more time, money, and effort in capabilities that contribute to digital enablement and digital transformation.

Top cost reduction actions have been mostly tactical, but strategic actions are expected to gain ground. The most common cost reduction action over the past 24 months was streamlined business processes, followed by streamlined organization structure and improved policy compliance. However, strategic cost actions are expected to gain ground over the next 24 months, to a point that the mix of tactical and strategic actions will be more closely balanced.

Barriers and lessons learned. Implementation challenges remain the top barrier to successful cost reduction initiatives, followed by lack of effective ERP systems and infeasible targets. The top lessons learned are: invest in technology improvements to enable data availability, reliability, and decision making; design a solid tracking and reporting process; and assess, validate, and adjust targets to fit the realities of implementation.

Cost management maturity levels have room to grow. Roughly two-thirds of companies globally (65 percent) do not have highly mature cost management practices. The United States leads the way, with 50 percent of US respondents reporting a high level of maturity where cost policies and procedures are continually reviewed and examined to ensure best practices around efficiency and cost management.

Impact of a new CEO on cost reduction efforts. Despite a common belief that appointment of a new CEO makes cost reduction more likely, our global survey results show it only increases the likelihood of cost reduction by one percent; however, the results vary widely by region.

Impact of M&A activity on cost reduction efforts. Similar to new CEOs, there is a common belief that merger and acquisition (M&A) activity increases the likelihood of cost reduction as companies pursue efficiencies and savings from a merger. However, the global survey results indicate M&A only increases the likelihood of cost reduction by seven percent.

A Fortune Global 100 biopharma company was a best-in-class leader in many areas—operational efficiency, staffing efficiency, cost structure, and compliance/control performance. However, after a decade of extensive cost reduction using traditional efficiency levers—and facing continued cost pressures—the company wanted to explore the next frontier of digital cost solutions.

Aligned with the overall organizational transformation the company was going through, the key objective of the new cost reduction effort was "save to transform," further improving margins while maintaining best-in-class leadership. The margin improvement strategy included the transformation of the overall operating model, enabled by digital.

The strategy consisted of the following elements:

● Develop a practical global digital strategy touching both the front office and back office—starting from Finance and expanding to R&D (e.g., clinical development activities).
● Establish a scalable enterprise governance model.
● Develop and execute an ambitious transformation roadmap.
● Build an enterprise hub (AI/Cognitive center of excellence) to translate business owners' use cases into prototypes and production-ready solutions.

As a part of the solution, 300+ senior leaders were educated on all aspects of digital—realities, myths and everything in between. Currently, the team is executing one of the largest digital finance programs in the world, featuring 300+ automations with 100+ automations already in production. The company also executed successful pilots for blockchain, cognitive, predictive analytics and other emerging solutions to understand their functionality, maturity, and relevance, and potentially build them into a future transformation roadmap for the company.

To achieve and sustain a large-scale digital transformation, the company built and scaled a functional center of excellence (CoE) within Finance, as well as a broader enterprise-wide AI / Cognitive CoE in IT.

Overall impact
● Real margin improvement—transformational OpEx and tax savings; 10-15 percent savings on baseline cost; realization on track
● RPA at a global scale—300+ RPA automation in-flight, with 100+ automation in production today
● Emerging solutions incubated—successful pilots completed for emerging digital solutions (e.g., natural language generation, blockchain)
● Capability building—developed the company's internal capabilities, including CoEs for Robotics and AI/Cognitive, both jointly operated with Deloitte
● Controls and compliance—developed a framework to assess the impact of RPA on existing controls and internal/external audit
● Digital integration—infused digital into day-to-day operations through "future of work" activities, which included increasing adoption of digital in the workplace and defining innovative acquisition and development programs for digital talent
● Digital M&A—integrating digital into all future M&A transactions

Key lessons learned
● Large-scale RPA deployment is different than other operating model transformation work. In particular, there is considerable complexity surrounding the degree of standardization required to deliver RPA effectively at scale, which in turn requires significant resources and longer timelines to execute.
● Results are generated through scale. There are no "home runs" but a lot of "singles" that collectively drive impact.
● Enterprise automation solutions are not just a cost efficiency play; they enable efficiency and effectiveness and improved controls.
● Successful deployment of automation requires close partnership and shared ownership between business, IT, and compliance in order to manage risks, resolve issues quickly and align expectations.

Enterprise automation solutions are transformational to talent models. New skillsets and capabilities will be required in addition to “traditional” business skillsets.

Spotlight: Digital and technology solutions applied to cost management

Reasons for implementing various technologies and the results