BLOG POST by Neil BansalFUELING YOUR TRANSFORMATION THROUGH A COST OPTIMIZATION
I’ve enjoyed the variety of reactions and feedback from the inaugural Coppertree Partners blog post. If you haven’t read it, I invite you to do so and come back to me with your thoughts. I had an engaging discussion with a reader who leads an important business line for a financial services organization. He feels stuck because he’s under tremendous pressure to reduce costs but also knows he can’t ignore innovation either. “I agree with your points in the article on reimagination Neil,” he told me, while continuing “but there is the hard reality that I have to deliver on aggressive cost targets now.” I understand his situation and I’m sure there are many of you sharing those sentiments. Financial institutions have been aggressive on cost reduction with many moving jobs outside prime real estate locations. Last October there were articles that even JP Morgan despite its financial strength was “quietly shrinking its workforce” in New York and amidst Covid organizations are busy evaluating their remote and physical footprints.
Cost optimization is critical and if done successfully can fuel your transformation agenda. Top performing organizations know this. A McKinsey study revealed that in financial services top quartile performers spent approximately 3% of revenues on G&A but bottom-quartile performers spent 11% of revenues – a gap of 8 percentage points (holds true for other industries albeit with smaller gaps). I’ve been involved in programs that have reduced G&A by 30% and more but you need to do it carefully given how much digitalization, automation, analytics, and innovation flows through functional teams.
Similar to my inaugural post, I’ll again offer “five suggestions” for leaders who find themselves in a similar situation to our aforementioned reader:
Be strategic and prioritize
In good times companies can neglect costs in pursuit of revenue. You may become a bit bloated and previous cost cuts can creep back in. However cost cutting itself is not a strategy! You need a cost optimization that is coherent with your strategic approach. Understand the future revenue pools of your industry and your company’s current position and trajectory within it. This will help you determine the most valuable activities to fund to capture those pools and deliver on the outcomes you desire. That might mean entering new markets or creating new products or services. It can be easy to neglect or delay this in a cost transformation and leaders shouldn’t be too democratic here. A COO I once spoke with was adamant that “everyone should feel the pain” during a bank-wide exercise to cut costs. He valued fairness and didn’t want to see any one group treated better. His heart was in the right place and I do believe that all teams should be at the table and evaluated, but applying cuts uniformly can hamper innovation and you sacrifice long-term value for short-term earnings when you don’t prioritize. It also doesn’t make sense to cut a dollar that generates dollars or saves you more dollars like a well performing internal consulting team that helps you avoid costs on expensive management consulting firms. Take a total cost of ownership perspective. If you switch to a “cheaper” vendor be sure to account for costs for them to onboard, be trained and ramp-up not to mention the extra time your IT, Cyber, HR and other teams may need to invest.
Get a true cost baseline and use technology
Getting an accurate cost baseline and visibility into all your spend is critical but I’ve found it to be challenging for most organizations I’ve worked with. Data may sit in disparate systems and need to be pooled, the same items may be classified differently across the company, and some fixed costs or indirect costs might be difficult to obtain. Technology here is improving and cloud based tools can be used to assemble and standardize vast pools of data. It’s also critical to make the costs visible, for instance by grouping them by type and owner. From a strong baseline you can categorize the spend by “must have”, “strategically important” and “nice to have” as you make the difficult decisions of what to fund to achieve your strategy.
Tackle and root out complexity
Many costs can be directly attributed to the complexity of an organization such as the number of divisions, locations, product types, ways of working, etc. Rooting out the complexity where possible can help reign in costs. I once supported the management of a consumer goods company that aspired to improve its lagging customer service metrics. As I dug deeper into the business I realized the issue wasn’t the agents. The company had become too complicated during its rapid growth. They had too many SKUs and unnecessary variations. Some products were too difficult for consumers to understand. They were looking to bolster customer support (which would be expensive) instead of fixing the underlying issues that caused so much support to be needed!
Challenge internal demand and involve your employees
A common mistake organizations make in cost and digital transformations is accepting internal demand as valid or being anchored by it when making decisions for the future. As mentioned a cost transformation is a unique opportunity to decide what to fund and what creates value in the organization. In an HR transformation that I led, one persistent area of waste came from business lines who made requests to HR for bespoke reporting. The existing culture empowered these business lines and it was difficult for HR to push back or agree to reasonable timelines. This had many ripple effects on cost (and morale) – for instance if work backed up it could lead to higher costs for surge external support. Challenging the requests had a big impact – many of them were exposed as frivolous or redundant with other reports and were eliminated while others could be done directly by the businesses who had access to the relevant databases themselves. Leaders should lean on their employees who can be valuable contributors in identifying waste and unnecessary expenses. Trainings around lean principles and guidance on how to be more efficient are valuable tools. Some organizations have even turned to gamification with incentives and rewards for teams that identify waste.
Do the hard cuts once
In an organization I’ve worked with cost cutting was relentless and unabating. Headquarters would regularly send out blast emails invoking the latest new organizational program to cut costs, each with a new internal title & branding. Managers would shake their heads as they grumbled to their team that they all needed to now find an extra 3-5% in the budget to eliminate. That’s clearly not the environment you want to create. Employees need the larger context and vision of what these cuts may mean and you want to ideally do it once instead of coming back again and again which is detrimental to morale. There are some good examples for leaders to learn from. In one company the CEO communicated cost cutting as a measure to ensure the viability of everyone’s jobs with a promise to keep all jobs if certain targets were met. I know another company that tied cost cutting to growth initiatives that would be funded by the cuts with opportunities for employees to move into those new roles. In both of these examples leadership was transparent and honest – if the survival of the company is at stake, better to lay that out clearly and then you can focus on the more immediate levers to free up cash like delaying capital investment, freezing hiring, renegotiating supplier payments, furloughing staff, etc.
There is obviously so much more to a successful cost transformation that I haven’t mentioned – for example establishing a strong governance, making the “no regret moves” without too much internal debate, and carefully tracking the results with clear accountability are all critical elements of any program. However I hope these suggestions provide a foundation and please get in touch with me at firstname.lastname@example.org to discuss further. I would love to hear your ideas and understand the challenges you face within your organization!