Cost Optimisation: Three Critical Steps

Cost Optimisation: Three Critical Steps
  • Organisations are shifting their focus from business value creation to cost optimisation
  • There are 3 critical steps that should be considered for cost optimisation programs
  • The key goal is to reduce costs without sacrificing long-term growth

Entering the final quarter of 2020, we are starting to see a picture emerge of how COVID-19 has shaped this year; resulting in trends that are likely to play into 2021 and beyond. From our perspective we have noticed a shift in the use of our strategy execution software. Prior to 2020, many of our clients used Amplify to manage programs that supported business growth (such as growing market share and profitability). Recently, we have noticed the shift in Amplify’s application towards more cost optimisation programs.

While cost optimisation is a good practice that should involve continuous engagement where possible, it is not often at the top of an organisation’s agenda during favourable economic times. Unfortunately, the consequence of this is that when the economic climate does shift, organisations face pressure to make rapid decisions on cost reductions, frequently losing sight of the impact to long-term strategic goals.

In this blog post, we want to discuss cost optimisation through the lens of one central question – how can organisations deliver their products or services at a lower cost, but without compromising long-term growth? It is hoped the following ideas can guide organisations towards this direction.

1. Keep Strategy in Front

One of the starting questions we recommend organisations ask is how a cost optimisation program will fit within the broader context of the company’s strategy. As mentioned, the ideal scenario is that cost optimisation is a continuous program within organisations, a more proactive measure rather than a reactive response to economic shocks. In either case, however, management needs to consider how the program will contribute to the fulfilment of the business’ strategy.[1] Such an approach gives businesses the opportunity to look at cost optimisation from a different perspective.

For example, instead of merely asking questions such as “how can we reduce our annual expenditure by a particular percentage,” businesses can instead look at a specific set of costs and ask “do these costs actually contribute to our competitive advantage in the marketplace?” If the answer is no, the company can then explore if or how a strategic outsourcing arrangement could ensure that these costs are passed onto a third party; freeing up the business to focus more on its core competencies. Alternatively, is there technology available that would allow the entire process to be automated? Of course, there are several approaches that can be taken in this sense but keeping the company’s strategy in focus allows for costs to be viewed from a different perspective.

2. Ask the Right Questions

As has been alluded to, asking the right questions is an essential step in any cost optimisation program. The pragmatic nature of these programs is such that the answers to these questions provides important guidance for an organisation, and there are three questions which we found can be helpful for managers in this context: [2]

  • What can we do less?
  • What can we do better?
  • What can we do cheaper?

The first question allows managers to explore whether activities (and associated costs) can be justified relative to the contribution made to an organisation’s strategy and growth. For example, if a particular product line is experiencing limited profitability and is not aligned to long-term strategic priorities. It may be pertinent to reconsider the future of this product line during the cost optimisation program.

The question of what companies can do better ties back to the idea of keeping strategy in context during cost optimisation. An excellent example of this is the notion of a customer-focussed supply chain. The idea behind this strategy is for businesses to work with their suppliers to improve customer service throughout the fulfilment process; helping to maintain satisfied customers and reduce costs associated with acquiring new customers.[3] Again, cost optimisation programs allow companies to review such procedures to identify areas of improvement.

The final question is likely to be commonly asked in any cost optimisation program, and while ideas for performing activities more cheaply can be quite broad, a recommendation would be to approach solutions from an innovation perspective. For example, can cost savings be achieved through more process automation, new customer self-service portals and/or improved business analytics?[4] Regardless of choice, asking this question remains a fundamental component of cost optimisation planning.

3. Deliver Early Wins

One of the most effective approaches we have seen with clients engaging in cost optimisation programs is to break down the strategy into smaller targets and milestones and prioritize the delivery of early wins. This approach is particularly useful when working to achieve buy-in for a cost reduction program throughout an organisation, especially when an organisation is hesitant to commit resources for a broader transformation.   We have seen this done successfully through the use of a series of staged milestones – initially focused on incremental, low-cost, quick wins and then progressing to increasingly transformational, complicated initiatives.  The key is to not lose sight of long-term objectives and declare victory after the quick wins.  Aspirational goals should be set at the beginning of the program, serving as a catalyst for transformational ideas that can be implemented to drive sustainable change.

AmplifyTM allows to pursue cost reduction initiatives in a staged approach.

As an example, managers could ask themselves what needs to be achieved to reach a 10% reduction in costs. Once this milestone is achieved, the question then becomes what needs to occur to extend this program to 20% or 30% reduction. Broadly speaking, this staged approach allows you to focus first on incremental changes, before progressing to redesigned activities and then potentially complete elimination of other activities. By way of example, Amplify-Now’s cost optimisation program at an energy utility company resulted in a $350 million reduction in the client’s annual cost base, by progressively improving their delivery strategy so that benefits were realised earlier.

In conclusion, we acknowledge that cost optimisation programs are frequently challenging to implement. When difficult decisions need to be made, there is often flow-on effects in terms of staff morale and internal resistance can sometimes arise. However, our belief is that these programs can be successful if executed effectively. Our software is designed to serve as a business support tool during cost optimisation programs and is reflective of the philosophies that have been outlined in this post. Keen to see how we can help you? Click on the button below to try AmplifyTM today.

[1] https://www.oliverwyman.com/our-expertise/insights/2017/jul/five-steps-for-sustainable-cost-optimization.html

[1] https://www.pwc.com/gx/en/insurance/publications/firing-on-all-cylinders-five-steps-to-strategic-cost-reduction.pdf

[2] https://www.oliverwyman.com/our-expertise/insights/2017/jul/five-steps-for-sustainable-cost-optimization.html

[3] https://medium.com/blowhorn/consumer-focused-supply-chain-and-logistics-how-why-e84758a2d059

[4] https://www.gartner.com/smarterwithgartner/ten-business-cost-optimization-ideas/