When you get it right, optimising costs doesn’t just protect you during uncertain times. It identifies ways to increase margins, gain new product insight and unleash innovation. In our new report, Cost-out: gaining competitive advantage in downturns and beyond, we highlight the symbiotic relationship between innovation and cost optimisation. Our study of 180 cost-out leaders shows that this is a relationship that needs careful focus right now, particularly as creativity and innovation is needed to achieve successful and sustainable cost optimisation.
All too often we see organisations resort to short-term cost cutting in tough times: 180,000 US job cuts came in June; three quarters of UK manufacturers are set to cut jobs this year; and one quarter of companies are scrapping their innovation investment plans this year.
While survival often calls for tough choices, a view of the future should accompany any quick fixes. This means devoting the same thought and creative energy to the tools and techniques you use to control costs, as you would your innovation activities. Here, we set out why cost optimisation is good for innovation, why innovation is good for cost control, and how leaders can get the best of both worlds.
Anyone running a business during this unprecedented period will have a hawk-like view of budgets. An in-depth assessment of your overall investments will concentrate minds on where you can make immediate improvements to cash flow and where you can optimise existing arrangements.
This assessment can identify opportunities to pivot plans in a different direction to unlock new growth from political, economic, social and technological shifts arising from the pandemic. They include more local supply chains, the expansion of home working, increased remote healthcare, greater use of smart technology, fewer large gatherings and less physical contact with others and objects.
Leaders will need to consider the impact of these changes on their customers and business model. In a recent presentation, we discussed how we’re helping a number of clients develop new strategies for innovation or reposition as the world changes. For example, we’re working with a number of large retailers to develop their platform play in a society where online and quick and reliable delivery has become the new normal. In parallel, we’re supporting companies in various markets, such as the insurance and media industry, to ensure they can sustain their business by uncovering new growth areas in our new reality.
Traditional cost-out activity tends to be anything but innovative. Levers such as procure-to-pay, negotiation and RFx are tried and trusted approaches to removing cost. But the trouble is that competitors will be pulling these same levers. A different approach is needed. Leaders should be looking at products, tearing them down and rebuilding them; using online user boards and customer interviews to find out what they really want and reshaping or co-creating offerings in response; and using less popularised cost-out levers such as portfolio variance management, software cost-out and concept optimisation. All of the above can optimise costs while providing more innovative end-user outcomes.
The good news is that finding ingenious ways for controlling costs needn’t mean reinventing the wheel. A leading firm in the aviation sector wanted to grow their market while keeping operational and capital expenditure down. We compared best practice from the automotive sector, discovering that out of 25 potential levers for optimising cost, the company was only using five regularly. We integrated optimisation approaches, improving throughput and cutting costs by 37 per cent. In our report, we compare sector performance so anyone can identify other sectors to learn from.
Above all, cost-out innovation needs to be organised. All too often, organisations treat innovation as a separate activity. They disconnect it from business strategy and don’t account for it in annual reports. That makes it tough to see how innovation contributes to business results – and to justify it as an ongoing necessity. As well as providing a clear focus, organised innovation can help with how its structured, funded and scaled.
As people go about their daily work, they might not see innovation and cost optimisation as parts of their job. So, leaders need to create the right culture. They need to empower people to take those responsibilities seriously and reward them when they succeed. Aligning your internal approach to cost optimisation and innovation means making sure KPIs are integrated across functions and the various layers within your organisation. Teams and individuals need to be clear about their objectives and responsibilities.
That starts with making sure the whole organisation is on the same page. For our research, we interviewed 17 executives from different functions worldwide in a renewable energy company and found there was no common understanding of the focus needed and the capabilities available. We helped them align their internal approach. It boosted firm-wide co-operation, enabling the identification and delivery of an extra 28 per cent of savings in just three months.
There’s no doubt optimising costs is a complicated business – especially when leaders are under pressure to find savings at speed. But done well, cost optimisation doesn’t just protect you during uncertain times; it identifies ways to increase margins, gain new product insight and unleash innovation.
It’s more important than ever to recognise the role of innovation in successful cost optimisation, and the role of cost optimisation in successful innovation.
Our report shows that organisations in many sectors – such as transport, financial services and defence and aerospace – are lagging behind in terms of achieving the most effective cost-out. And it sets out how all organisations can combine a view of cost control and innovation to gain an advantage through downturns and beyond.