Cost improvement practices and trends in Asia Pacific
Thriving in uncertainty
To learn what APAC companies are doing to manage costs and improve margins, Deloitte recently surveyed 299 business leaders (CXOs, executives, and senior management) from large and mid-size companies in China, India, Japan, Australia, Hong Kong, and Singapore.
Key findings from the study:
- Political and economic factors are the top external risks: For the region as a whole, the top external risk is political climate, with macroeconomic concerns a close second.
- Saving to grow: The top three strategic priorities are sales growth, product profitability, and cost reduction. This mixed set of priorities typifies a cost management strategy we call 'save to grow': using cost savings to fund growth activities.
- Growth expectations are rising: Expectations for positive revenue growth over the next 24 months are slightly higher than historical growth performance over the past 24 months.
- Thriving in uncertainty: The top two drivers for cost reduction are 'to gain competitive advantage,' followed by 'required investment in growth areas.' Both of these are distinctly growth-oriented. However, the next five cost reduction drivers are all defensive in nature.
- Most cost reduction programs are failing: The majority of companies (63%-83%, depending on the country) are not meeting their cost reduction goals. This is true despite the fact that more than 4-in-10 companies have cost improvement targets of less than 10%.
- Implementation challenges are the biggest barrier to effective cost management: This is particularly true in India and China, perhaps because they are pursuing the most aggressive cost targets.
- Lessons learned: Given that implementation challenges are the biggest barrier to effective cost management, it is not surprising that the top lessons learned revolve around change management, implementation strategy, and goals and objectives, all of which are critical to successful implementations.
- Developing cost management capabilities: Over the past 24 months, the most popular focus area for developing cost management capabilities was 'forecasting, budgeting, and reporting,' followed by 'new policies and procedures,' and 'IT infrastructures, IT systems, and business intelligence platforms.' Zero-based budgeting (ZBB) was the least popular focus area.
- Strategic cost actions are underutilized: In the APAC region, the two most likely cost actions are 'streamline business processes' and 'reduce external spend,' both of which are highly tactical in nature. The least likely cost action is 'outsourcing/ off-shoring,' which is more strategic. This heavy emphasis on tactical cost actions is a key opportunity for improvement, since strategic cost actions are generally able to deliver greater cost savings.
Companies across the Asia Pacific region face a number of challenges, including global economic uncertainty driven in part by an unpredictable political climate and shifting views about the benefits of global trade. In addition, the tidal wave of change driven by digital disruption is poised to spread beyond the US, potentially reshaping the competitive landscape in all global regions.
To tackle these complex and varied challenges, many APAC companies may need to pursue cost reduction more strategically. Tactical cost actions alone will likely not be able to deliver the required level of cost savings.
Instead, companies may need to adopt new approaches to cost management, shifting to actions that are more strategic and structural, such as increasing centralization, reconfiguring the business, and outsourcing/off-shoring business processes – as well as capitalizing on digital breakthroughs such as robotic process automation (RPA) and cognitive technologies.
During periods of uncertainty, companies that take bold action can recover more quickly and gain sustainable competitive advantages that boost performance both in good times and bad. Looking ahead, companies that are able and willing to make bold cost moves could find that today’s challenging environment is a prime opportunity to position themselves for long-term success.