For the majority of organisations, strategic cost reduction is not a new concept. With the recent financial crisis, continuing emergence of digital disruptors and evolving customer behaviours, cost reduction has been a priority for many organisations over the last decades. Most organisations have embarked on some form of audit-centric cost reduction programme in that period, seeking to eliminate ‘non-essential’ expenditure through forensic interrogation of costs.
Covid-19 has brought this approach to strategic cost reduction into question, in three ways specifically:
- In many instances, past programmes have lacked an ability to sustainably change behaviours in organisations; many initiatives unravelled once the laser-focus on cost was eased and programmes wound down,
- Some of these programmes have created operational risks and points of failure within organisations by interpreting investment in resilience as ‘non-essential’ spend, and
- Companies are redefining what they had classified as ‘essential’ and ‘non-essential’ before Covid – opening up new areas for investigation.
Considering these questions means that many organisations still have significant opportunities to optimise costs within their business. Furthermore, they need to fund additional investment into their operations, to ensure that they are protected from any continued shocks and that they deliver to customers, which will need redirecting of savings from other areas.
Whilst actions have already been taken to alleviate immediate financial pressures, the mandate to sustainably optimise the cost base remains as relevant as ever. The new question many organisations must answer however, is how to balance cost reduction, organisational agility and operational resilience with more rigour than ever before.
To effectively balance these – potentially competing – priorities requires organisations to deliver visible and rapid returns, but not at the expense of being able to respond to future opportunities. With that in mind, any programme planned to address the cost base should seek to:
- create complete cost visibility; leveraging ever-improving AI and data analytics solutions,
- review the impact on profitability as part of any cost reduction exercise,
- integrate business process ‘stress tests’ and operational impact assessments when qualifying any savings initiatives, and
- continually test the impact of savings opportunities on organisational agility.
By integrating these key themes into future cost reduction programmes, organisations will also start to build the foundations of a cost-conscious culture, empowering individuals through cost and operational transparency.