Cost Transformation – sounds strategic, but its not always

Most companies have a growth agenda

Growing your company by focusing on top line revenue growth is something that all businesses should have focus on, but achieving that growth comes with uncertainty as there are so many external factors out of your control. At a profit level, depending on the margins in your business, each incremental dollar in revenue you chase may only add 10-20c in profit.

One way is to reduce cost

Well one sure way that’s often in your control to grow your bottom line quickly and improve cash flow is to focus on cost reduction. Cost reduction flows directly through to profits and every dollar you save is a dollar back in the hands of the shareholders. Great, right?

Many executive teams, fresh faced and well tanned from their annual strategic planning weekend in Fiji. Where they have been reviewing the long range plans for the business will come back and talk about this great new strategic Cost Transformation program that they want to run. Usually with great intentions about reducing unnecessary waste and streamlining the cost structure of the business so it’s set up for success in the long run. In a lot of organisations however this is where the strategic thinking stops.

The keys are then often handed over to the finance team that looks at every easy and quickly implementable opportunity to save a dollar. Because while the exec team came back with the right idea, they of course want immediate results and the first progress check-in is scheduled for 2 weeks time.

So the team will get together to start spitballing ideas. “Next year, let’s not have that executive strategic planning weekend”, someone will say. “How about we just freeze recruitment and let go of 10% of the workforce, I’m sure we’ll be able to absorb the work – it’ll save us millions”, says another.

Yes, they will have fulfilled their objective and reduced millions from the company’s cost base, and may be labelled heroes when they go back after 2 weeks with a powerpoint deck that’s singing the tune the execs want to hear. So that’s where the story ends right…? Wrong.

Cost reduction isn’t Cost transformation

Far too many businesses follow this type of thinking when looking to reduce costs. It’s the easiest way and on paper it works. However reducing costs this way is a bit of a scattergun approach – sometimes there will be low hanging fruit (wasteful spending) that is quickly and easily dealt with. But often there is little thought for the fallout when more fundamental changes happen – such as staff cuts, offshoring of teams or cutting spending to that system upgrade.

What nobody talks about, or links back to the cost transformation project is that the terms on that new supplier contract aren’t as good as they could have been because the procurement team didn’t have time to negotiate. Or that wait time of calls into the call centre just went up because the new offshore call centre is having teething problems, and your customers are getting frustrated. Or that the system upgrade project that tried to do the same project with 80% of the budget will eventually descope all of the ‘nice to haves’ and all those staff efficiency benefits will be lost – it was only 15 minutes a day, and there’s less people now anyway, right?

Cost Transformation isn’t just about cost reduction. It’s not as easy as just cutting out the frills and arbitrarily handing out cost reduction targets. It’s about rethinking the way your business operates and sustainably reducing your expenditure. It’s putting your business under the microscope and streamlining process to remove waste, using technology, and actually removing the workload that can then either increase your capacity to do more or allows you to comfortably remove headcount.

It should be trying to achieve the impossible! It should be delivering improved customer experience metrics and operational metrics, along with a reduced cost base. Reducing your cost base without enough respect for customer experience, your people and how your operations run is a dangerous and short term game.

So what’s the formula to a successful Cost Transformation?

You must understand your business – the customers and the way they interact with your business, the products you sell and the profits they generate, and the processes that sit behind and make it all happen. That all then links back to where you might be too cost heavy, where you need to investigate, and what things you need to change. It’s not enough to simply look at a P&L and say something is too expensive and it can be cut by an arbitrary rate, and hope it all works out.

Customers

Just by looking at all of the customer touch points you’ll typically find waste. Even without looking at the processes sitting behind those touch points, if a customer has to call you 3 times on average to get their service active, not only is there likely waste in your processes, but what happens if the customer gives up after the second call?

Product Profitability

Most businesses will sell a suite of products and services which will likely come with differing margins. A lot of companies will look, and only look, at the direct costs associated with the sale but ignore all of the overhead costs. It could be completely justified to make say a 10% gross margin on a sale that drives no overheads, but if you’ve got teams of people employed focused on keeping that service running, with the costs sitting in overheads, you may be losing more money than you’re making. Not all sales are good sales. Not all products are worth selling.

This is where looking through the lens of activity based costing, even at a high level can help you understand the true profitability of the products you sell. You may decide at that point to simply cut out parts of your portfolio that don’t make sense financially, or strategically. Or maybe you’re confident if it’s marginal that you can get it back into black

Processes

This is where the rubber hits the road and deserves most of your attention. By first understanding the status quo and how things happen in your company (whether it’s customer facing, or back office) you’ll start to see inefficiencies once it’s all mapped out and understand why you spend what you spend. Then by going through a process simplification and streamlining exercise you can then comfortably look to reduce costs.

Technology

Making the right investment at the right time in technology that can automate processes and reduce complexity in your business can pay dividends for many years into the future. It’s always great to keep an eye on technology trends and understand how they may relate to your business and processes – and that’s whether you’re going to a formal Cost Transformation or not.

i.e. JPMorgan Chase recently invested in an AI platform called COiN that reviews documents and extracts data. This tool can review ~12,000 documents in a matter of seconds, and if this was done by a human would be over 360,000 hours of work. Safe to say JPMorgan Chase would have been able to sustainably reduce heads in their contracts department. Something they would have struggled to do to the same level, I’m sure, if they didn’t have that piece of technology.

Next Steps

Once you’ve figured out what changes you can make, and start to go down the path of implementing them, a great next step is to develop a dashboard. The dashboard should include customer metrics, operational metrics, cost metrics and other key indicators that will let you know if you’ve been successful – such as employee satisfaction. The dashboard should give you a great snapshot of how your changes are working, being perceived and the relationship different metrics – i.e. maybe your costs haven’t reduced as much as expected, but customer & employee satisfaction is through the roof and you’re indirectly getting the benefits you need.

Summary

Cost Transformation is a strategic cost reduction exercise which looks at the root cause of costs and looks to simplify and reduce complexity, so you obtain sustainable outcomes. Cost reduction alone, without all of the hard work is a scattergun approach that in the long term may do more harm than good.