How to manage costs to fuel future growth

With “cost reduction” the top strategic priority for UK companies in a Deloitte survey,  Simon Brew, consulting partner at the firm, discusses how companies should approach costs in the face of disruption and uncertainty

Cost management is back at the centre of the UK corporate agenda. In Deloitte’s first biennial pan-European cost survey, “cost reduction” was the top strategic priority for UK companies, ahead of “sales growth” and “product profitability” (see Figure 1). This reflects a defensive posture, particularly in comparison to other European countries, which on average, rank the trend much lower.

While a focus on costs is nothing new, industry disruption, macro-economic uncertainty and risk-aversion are pushing UK companies to change their approach to cost reduction. A “slash-and-burn” approach may have produced short term results in the past, but successful cost reduction strategies are now characterised by balanced, positive approaches that plan and invest for the future. Although the best plan will be bespoke to each company, to reduce costs competitively and effectively, companies must be more intelligent in how they align their approach to the organisation’s future needs. They also must learn to explore and embrace digital technologies.

‘Thriving in uncertainty’

88% of UK respondents expected revenues to increase or remain the same over the next 24 months (see Figure 2). In this environment, it may appear counter intuitive that business leaders are prioritising cost reduction. However, high levels of uncertainty are driving companies to take a more cautious approach. Political events such as Brexit, the recent US election and upcoming elections in Europe are arguably impacting on corporates’ plans (see Figure 3).  UK companies are pursuing simultaneous goals of growth, cost improvement and balance sheet management.  This mix of strategic priorities – what we call “thriving in uncertainty” – seems to reflect an environment of cautious optimism, combined with uncertainty about the future.

One forward-thinking approach that we have seen is a “save to grow” cost management strategy; using cost savings offensively to help fund growth initiatives. The key hurdle is to reduce costs in a way that does not reduce competitive advantage and impair the wider business. To do this effectively, companies must first identify the areas in their business which are key to their competitive advantage, and those investments – that if made – will fuel future growth. All other areas are deemed to be “at par with the competition” or “lowest cost”.

This clear delineation creates specific targets without harming the wider business and strategy. Using this technique, we have seen progressive companies then able to reinvest this capital in innovative areas of their business, positioning themselves well for the long-run.

Digital disruption: threat and opportunity?

Digital disruption is not just a threat to top line growth (revenue). For example, the online threat to the bricks-and-mortar retailer also presents an opportunity for retailers to reduce their physical footprint and lower costs.

Our survey suggests that UK companies may be significantly underestimating digital disruption compared to their US counterparts. 19% of US respondents cited digital disruption as their biggest external risk, compared to 5% in the UK. It arguably suggests that UK corporates could be neglecting new ways to drive competitive differentiation.

Companies can use intelligent automation – robotics, artificial intelligence and cognitive computing – to deliver significant and sustainable savings. This is becoming more common in the financial sector, for example, where banks are responding to permanently depressed margins. Here a strategy of blanket-cutting geographies and products may have worked immediately after the global financial crisis, but banks are now trying to overcome regulatory challenges, low interest rates and digital disruption. A number are starting to identify, develop and implement robotic process automation to simplify processes and reduce costs. It is also freeing up more of their employees’ time, which can now be spent on higher value tasks.

Using analytics to drive down costs

While there is no shortage of publicity on how big-data can drive growth, little has been said about how big data can be used to cut costs. Using advanced analytics on top of big-data gives firms a unique opportunity to interrogate data in new ways. It allows them to identify impactful, sustainable and previously intractable cost-reduction opportunities.

One global company, for example, faced challenges typical of multinational corporations – they had numerous operating units, separated vertical businesses, and highly localised information systems and data storage silos. This made it very difficult to understand their spend implications on a global level.

To overcome this, the business looked to build and use analytics to bridge the gap. Application of techniques, including machine learning, allowed them to rapidly categorise cost, line-by-line, across business units, in a consistent way. For the first time, the company has an immensely powerful view across their Selling, General and Administrative Expenses (SG&A) spend through a global, consistent data-lake – a storage repository that holds a vast amount of raw data until it is needed. This has enabled the company to investigate correlations and causes of cost in a way previously impossible.

Rather than using a sampling approach, machine-learning is able to interrogate much larger data-sets across more geographies, businesses and products, in order to identify deeper savings. The company is able to deliver savings more quickly and accurately than traditionally possible, and is now on course to reduce SG&A by $1bn.

Stop ignoring marketing and commercial opportunities

Many companies resist the inclusion of marketing and commercial functions, under the fear that it will slow growth. These are often overlooked as businesses do not want to disrupt their customer facing departments. As a result, these have not been scrutinised, even though they often provide significant returns.

Our experience is that you can deliver substantive cost reductions in these areas, while still driving growth and increases in profitability. For example, we have seen companies restructure their sales organisations – reducing costs – and simultaneously shift towards offering more interactive digital channels and solutions for customers.

Setting up for success – lessons learned

Corporates are learning from past cost-reduction programmes (see figure 4). They are realising the importance of having correctly skilled and focused teams, who will deliver step changes and continuous improvement. To remain competitive, in the current environment of uncertainty and digital disruption, one thing is clear – to intelligently and sustainably reduce costs, firms must continue to innovate and embrace the opportunities that digital technologies present.

For organisations considering or undertaking cost reduction programmes in 2017, we have found that successful programmes embody the following characteristics, placing themselves in a strong position for the years ahead:

• Identify the correct approach to cost reduction
• Deploy the optimal team to deliver it
• Cut costs in the right places by differentiating between areas of their business that are: a competitive strength and require investment; at par with the competition; deemed lowest cost
• Enable delivery of strategy
• Use emerging technologies to more accurately identify opportunities, quicker, and with lower risk of failure

Simon Brew is consulting partner at Deloitte.