Reimagining cost transformation: An imperative for 2021

In the initial months of the COVID-19 pandemic, companies across sectors rapidly took multiple actions to just survive. From reducing the cost to arresting downfall in revenue to managing people assets, the pandemic forced senior management of organizations to simultaneously employ multiple levers to mitigate the impact of the slowdown. As we reach the end of an eventful year (but not the crisis), it is imperative for organizations to prepare for an uncertain 2021. The early signs of a gradual recovery are certainly there, but there is a long way before demand comes back to pre-crisis levels.

In this scenario, it is important to ‘re-think’ spending levels while strategically prioritizing investments to drive growth in the new normal. Companies that win in the coming years will fundamentally redesign their workflows and would establish cost management as a core competency to sustain savings. To understand how industry leaders significantly outperformed peers in the last two downturns, we spoke with 25 CXOs across industries who initially defined and subsequently led these cost transformations during the post-crisis years. 

1. Moving beyond benchmarking and setting targets. A benchmarking exercise frequently involves a somewhat simplistic approach in which the company’s spends are compared to peers, and cost reduction targets are set without taking the company’s context into account. This approach often has a detrimental impact on revenue generation, following which the company is forced to make new allocations towards those very expenses which had been cut down. Successful enterprises adopt a 360-degree approach and very rarely adopt benchmarking in isolation.
2.  Integrating both the hard and soft elements of cost management. Sustainable cost management involves a combination of the right hard elements (people, systems, and technology) and soft elements (organizational culture as manifested in values, behaviors, and ways of working) working coherently to drive value-creation. Re-training of existing employees to cater to new market needs, a technology that automates routine work, negotiation with suppliers all help a company to realize sustainable long-term cost reductions.
3.  Cross-functional organization-wide Zero-Based Budgeting (ZBB). ZBB has long been advocated as a straightforward, simple way to strip out costs that cannot be justified in the coming year. Cross-functional ZBB moves beyond organizational silos to realize cost efficiencies possible at the interfaces of various functions. From realizing cost benefits through operational excellence in core processes such as marketing, sales, and procurement to challenging existing process designs – cross-functional Zero-Based Budgeting (ZBB) leverages all drivers to achieve sustainable cost reductions.
4. A cost transformation that leverages best practices of performance improvement initiatives. Historically, cost initiatives have been blamed for the imposition of policies top-down exacerbated by the lack of prioritization and coordination. Sustainable cost transformations use rigorous and time-tested tools and methodologies and are aggressively monitored by a business transformation office. The incentive model is also adapted to support the aggressive pursuit of the target budget, and a dedicated budget governance structure prevents costs from creeping back in. This is accompanied by the creation of financial systems that create a deep understanding of identifying “good” costs, those that create differentiating capabilities, to dispensable “bad” costs, that need to be eliminated. 
5.  All cost-cutting is ‘strategic’. Good cost transformations are multi-year initiatives instead of a one-time ‘across-the-board’ cut. These enterprises ingrain the fundamental concept that ‘cost cutting’ is essentially reallocation and channeling of investments toward strengthening the enterprise’s value proposition. The budget is directly connected to strategic priorities. These initiatives are also structured to ensure that the company never gets out of shape.

By implementing the above best practices, companies can leverage an ongoing cost transformation to create ‘cost-consciousness’ as an organizational capability and a source of competitive advantage. This earns an organization the freedom to make the right choices over the long term, while sharply maneuvering events like the current crisis and others.