Article

Strategic cost transformation

A must-have solution in your post-pandemic toolkit.

As the COVID-19 crisis evolves, a speedy economic recovery becomes less and less likely. Most industries need to brace for further disruption and, in many cases, continually difficult (or even worse) business conditions. There is unprecedented uncertainty about the length and severity of a recession and, importantly, the Dutch government’s ability to continue financial support. Business leaders should recognise that the way they have dealt with this crisis so far may not suffice in the near future. Many should prepare for significant downsizing after a long period of growth.

Over the past five months, Deloitte has been speaking with executives in the Netherlands. Many are optimistic about their company’s robustness and adaptability, and the macro-economic outlook. Although they may be right their views could be overly confident in the face of a prolonged and deep recession. Government support might run out, (financial) buffers may deplete and customer demand might not return to pre-crisis levels any time soon.

Some current crisis strategies already seem outdated, which prompts such questions as: Are companies sufficiently developing and planning for worse scenarios? And are cost-transformation and downsizing plans part of those scenarios, ready to be deployed? In today’s uncertain climate, such plans are a necessity, and developing them smartly will ensure that a company’s survival and financial soundness are balanced with the wish to emerge stronger from this crisis.  

Blog series: Thrive through transformation

See the full overview of the blog series

Structural cost transformation

In our recent interactions with Dutch executives, we observed that many companies have followed a similar path as they have dealt with the significant disruption that has brought up to 80 per cent declines in revenue:

  • Most companies, if not all, successfully eliminated variable cost items, like discretionary spend, temporary/contract workers, recruitment, and non-performing/non-core projects; the majority executed this in March and April.
  • The more heavily affected companies had to pause large parts of their business and, when possible, reallocate resources and associated costs to other parts of their business – almost always with government support to help dampen the shock. In many cases, adaptability was remarkable, but the result was often a ‘wait and see, until the business returns’ strategy.
  • Few companies have already 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). In some cases, brave leaders have decided that their business will not return to normal and are acting accordingly, but these examples are limited to very specific industries or in the context of other, underlying business adversity, such as lower oil prices. In other countries we have seen prevalent downsizing and ‘flexibilising’ of cost structures, but not much in the Dutch market – with its robust government support and strong employee protection schemes.

What has become evident from these actions (or lack thereof) is that although most companies should transform their cost structures, very few are planning to.

Knowing when to act: Scenario-based planning for cost reduction

The previous recession taught us that, for many organisations, large-scale cost transformations are inevitable when the economy slows down for a prolonged period. But with so much uncertainty, how does one prepare? And how to avoid cutting too deeply and hurting future growth potential? Or, worse, acting too late and not surviving the crisis? The following are some key guidelines to approach cost transformation smartly.

  • Dust off cost-reduction playbooks from the previous financial crisis, but combine learnings from the past with the latest thinking.
  • Develop business and financial scenarios from best, to base, to worst cases, specific to your business and its underlying business drivers.
  • Define and agree on a few simple, forward- and backward-looking indicators to identify which scenario is in play. Monitor those indicators diligently.
  • For each scenario, define potential interventions. Specifically for cost measures, evaluate and balance the trade-off between short-term (easy to implement, lower impact, lower cost to achieve) and long-term measures (more transformative, but more impactful). (See Figure 1.)
  • Decide on all interventions for each scenario upfront and at board level, so that you can act, not debate, when the next scenario unfolds. Have a transformation team ready to go. Deloitte has seen companies with intervention-linked scenarios before COVID-19 react more swiftly to this crisis, despite not having envisioned a pandemic. Their leaders had thought through and agreed upon interventions, preventing lengthy mid-crisis analysis and dialogue. 
Figure 1: Rapid versus structural improvement

Fighting COVID-19 effects: Cutting the fat to survive and thrive

The overall cost-transformation objective should be to survive and stay financially sound without hurting future growth potential. Even better would be to reconfigure the company to thrive in the post-pandemic world and re-invest some of the savings in critical capabilities and growth opportunities for the future. The idea is to cut the fat, not the muscle, to come out stronger and outperform the competition.

Figure 2: Strategic cost categories

When planning the transformation of cost structure, business leaders should not neglect the classic, but highly effective, cost-reduction levers shown in Figure 2. However, this time around, companies have the chance to reduce costs smarter, faster and with the help of technology:

  • The smart use of analytics enables much faster opportunity identification and more precision about where and how to cut costs. For example, artificial intelligence–driven spend analysis tools can enhance spending visibility and provide actionable insights quicker and cheaper than traditional analysis.
  • Robotic Process Automation (RPA) or Robotic Cognitive Automation (RCA) to insourced processes can reduce (coordination) costs, as well as increase quality and control over previously outsourced and offshored processes.
  • Digital solutions enable new and more innovative business models. As an example, cloud capabilities can be applied to increase flexibility and competitiveness, while reducing operational costs.
  • A cross-functional approach allows companies to address both their top and bottom lines. Optimise across functions by making the customer journey or end-to-end process leading, to reduce total costs and enhance customer experience.
  • 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.

Embrace lessons from the lockdown period about how business can be done more efficiently and effectively. The impact of COVID-19 can offer crystal-clear insights; ask yourself: Which are our essential/core activities, and which are not? How can we eliminate waste and low-value–adding activities?

Use this time to finally tackle difficult decisions, such as whether to remove legacy products, and to truly transform for the future. Be willing to make bold and fundamental decisions that are based on future trends.

Save-to-thrive

To better understand the short- and long-term impacts of the COVID-19 on organizations around the world—from both a transformation and performance improvement perspective—we recently surveyed 1,089 executives with direct involvement in their companies’ cost management and enterprise transformation efforts, and who represent a broad range of industries and global geographies.

The report of this survey can be found here.

Did you find this useful?