Cost management in the age of digital disruption
Deloitte's first biennial global cost survey report
Cost management used to be something businesses only thought about when they were struggling. In recent years, however, it has become a standard operating practice that receives constant attention—in good times and in bad. But cost reduction failure rates are high, even while cost reduction targets remain low.
Global insights from regional cost surveys
With the emergence of disruptive innovations such as robotic process automation, analytics, and cognitive technology, cost management is morphing into a strategic enabler with the power to disrupt entire industries and fundamentally change how business is done. However, cost management remains challenging.
Based on surveys of more than 1,000 senior executives in four major regions–US, Latin America, Europe, and Asia Pacific—we found:
- Cost reduction is a global imperative. Cost reduction has become a standard business practice in every region, with 86 percent of global respondents saying their companies are likely to undertake cost reduction initiatives over the next 24 months.
- Low targets. High failure rates. Nearly half of all organizations surveyed are pursuing cost reduction targets of less than 10 percent yet almost two-thirds (63 percent) are failing to achieve their goals.
Cost reduction targets and success rates
- High expectations for growth. Despite concerns about the economy, 80 percent of respondents expect their revenues to increase over the next 24 months.
- A strategic paradox: Thriving in Uncertainty. The top two cost reduction drivers globally are directly related to growth. However, the next five cost reduction drivers are all defensive in nature, indicating that while growth is the top strategic priority, companies in every region are also protecting themselves against uncertainty by getting numerous aspects of their cost structure into fighting shape.
Drivers of cost reduction
- Developing cost management capabilities. The top three focus areas are: "forecasting, budgeting, and reporting" (55 percent); "new policies and procedures" (51 percent); and "IT infrastructure, IT systems, and business intelligence platforms" (49 percent).
- Little change in cost management approaches. Companies expect to use the same cost management approaches as in the past such as "targeted actions" and "intensified productivity programs," but zero-based budgeting is expected to fall from 15 percent to 11 percent globally.
- Implementation is the biggest challenge. This is the top barrier to effective cost management according to 53 percent of respondents.
- Tactical actions remain predominant. Many companies surveyed continue to focus on tactical cost actions (40 percent), such as streamlining business processes and reducing external spend, versus strategic cost actions (33 percent), such as outsourcing, centralization, and business reconfiguration. This tactical focus tends to limit the magnitude of cost savings that can be achieved.
The simultaneous focus on cost and growth reflects a "save to grow" mindset where companies use cost savings as a strategic lever to help fund their growth efforts and initiatives—without sacrificing profitability. This mindset is now prevalent in all parts of the world.
Cost management practices to thrive in uncertainty
Because tactical cost management approaches typically yield cost savings of less than 10 percent, many companies would be better served by applying approaches that are more strategic and thus more likely to deliver greater savings.
Companies pursuing strategic cost improvements have generally fallen into one of three categories: distressed, positioned for growth, or growing steadily. However, in the current business environment a new competitive scenario has emerged that simultaneously focuses on three of the strategic levers—growth, cost, and liquidity. We call this new scenario "thriving in uncertainty."
But there's a need for different playbooks for different markets. In some markets, macroeconomic factors seem to be pushing companies toward greater uncertainty and distress, favoring value creation levers that are more defensive in nature. Other markets seem to be moving toward a more positive outlook, which tends to favor a growth-oriented playbook.
Margin improvement in the age of digital disruption
Given current low success rates when it comes to cost reduction, in the future, digital disruption—and the exponential technologies that drive it—are likely to be key factors that companies need to consider as they strive to sustainably reduce costs and improve margins.
According to our survey findings, digital disruption is already recognized as a major external risk in the US. However, it is also creating unprecedented opportunities. And while digital disruption is currently less of a focus for companies in other regions, their perspectives could change very quickly given the exponential speed and impact of digital technologies.
Digital disruption viewed as external risk
To avoid falling behind, companies in every part of the world should understand the potential impact so they can capitalize on the opportunities, particularly with regard to automation, analytics, and cognitive technology. Unlike traditional tactical and structural cost approaches—which may be nearing or past their peak—cost solutions based on exponential technologies are just emerging and have the potential to deliver increasing savings over time.
As digital technologies enable increased innovation in business and operating models, disrupting entire industries, companies may be able to see sustainable cost savings of 30 percent or more. In an increasingly digital world, disruption is unavoidable. To thrive, companies should become their own disrupters—rather than allow other companies to disrupt them.