Keeping costs under control will be crucial as leaders aim to make sure their organisation recovers from the impact of the pandemic. Anyone running a business or other organisation right now will likely be laser-focused on costs over the coming months, particularly cash and liquidity, cost-baseline, and supplier and capacity management.
But all too often we see cost out programmes wither on the vine after a burst of activity. What will distinguish the winners in the long run will be their ability to translate short-term action into sustained success.
From our decades of experience working with global, cross-sector clients, we know there are six vital dimensions to optimising costs: strategy; organisation and governance; processes; tools; competencies and skills; and methodologies.
Our new research shows the better an organisation is at all six dimensions, the likelier it is to succeed at cost optimisation. Falling short in one area can limit your overall success. So it needs to be a comprehensive, always-on part of your organisation’s activities and embedded in everyone’s mindset. We have four recommendations for making cost-out success sustain:
Cost management is often seen as a finance function, but it’s for all of us. It’s everybody’s business and this calls for strong governance. You’ll need to give teams a reason to focus on cost at an early stage in product development, for example. Design incentives to encourage everyone to consider costs as they make decisions, making it clear this is an opportunity to perform. Then, make sure KPIs line up across the organisation to ensure consistency of delivery.
We worked with a telecommunications business that was struggling to deliver a cost optimisation programme with impact. We refocused their KPIs and ensured they were applied consistently across the organisation. This meant teams and individuals were clearer about their responsibility for optimising cost. It brought better understanding and buy-in, shifting focus towards real value drivers. And this helped counteract market pressures and massively improve savings delivery.
While you need everyone to take some responsibility, you also need people with specific expertise. We know how difficult it is for organisations with remote factories, disparate workforces or elongated supply chains to oversee costs. One challenge is being able to recruit and retain talent in some locations. What works here is to establish a central pool of experts, a centre of excellence approach. This will be easier to lead and manage and can instil best practice through the organisation. And you could bring in expertise if you don’t have the right capabilities or need to quickly upskill your teams.
It’s important to recruit and reward agile learners over those with fixed capabilities. The job is never done and will always change. So you need people with the dynamic skills, creativity and mindset to stay ahead of the game. When global investment managers Schroders needed faster delivery, increased efficiency and improved quality from their IT organisation, we introduced agile ways of working. After our experts provided agile training and coaching for 600 IT, technology, change and business professionals, the organisation has seen the speed of release increase by 20 per cent, the number of ‘at risk’ projects fall by 60 per cent, and business satisfaction increase by 20 per cent.
Businesses often go wrong because they only look at cost-out in terms of products, services, or functions. But you need a highly integrated end-to-end view. You need to see how costs flow through the various processes in your organisation: sales, marketing, manufacturing, operations, administrative, IT and supply chain. And for each of these areas you need clarity around process, system, structural and business model costs, right down to every element.
What that requires is an integrated, web-based toolset for planning, delivering and tracking costs. It’s important that all stakeholders have immediate and comprehensive access to one consistent and reliable set of data.
Companies that have historically been good at cost-out often become victims of their own way of working. What makes them good makes them vulnerable. Every organisation will hit a plateau at some point. Markets move on, technologies mature and your business will get disrupted. You need to keep benchmarking and looking to the wider world so you understand where your sector is going and can identify global trends.
The automotive sector experienced this as market pressures, narrow price bands and an engineering-oriented approach led to the development of value engineering as a means to stay price competitive – making it the leader in our cost-out rankings. But with low churn and the natural tendency to become comfortable, they're not yet optimising around newer developments. Software development and electronics cost will soon make up between 30 and 50 per cent of the cost of a car. A critical aspect is also managing the update of software on the vehicle. This is what has led Porsche to invest in Aurora Labs, optimising this critical aspect of vehicle safety and customer satisfaction. Vehicle manufacturers now need to develop new hardware and software simultaneously – and in a multi-partner environment. They need to get better at analysing and reducing software costs. And our latest research shows that’s a problem in many sectors, not just automotive but also IT and telecommunications.
Our new report identifies the ways in which different sectors can improve cost-out performance. It might be hard to see beyond the current challenges for your organisation but maintaining the tempo of the cost optimisation efforts you start now will ensure long-term success.