Finance Leadership Series: PART 2 of 4
Optimizing Enterprise Cost Structure for Sustained Growth: Five Focus Areas to Help You Build the Case for Change
The second in a series from Thought Logic Consulting on cost optimization for leaders who want to position their companies for stability and growth, no matter what the market brings.
In Thought Logic’s first article on Enterprise Cost Optimization, we introduced an approach to help leaders position their companies for stability and growth in an evolving and continuous changing marketplace. Companies that indiscriminately cut costs in response to an economic crisis, oftentimes do not realize the anticipated benefits nor do they stabilize their balance sheets as planned. In contrast, Thought Logic recommends a holistic optimization strategy that creates sustainable operational and financial benefits.
As a refresher, Thought Logic’s viewpoint centers around four distinct success factors.
Since the first article published in September, a flurry of cost optimization activity has taken place at Fortune 500 companies. But without a holistic approach, improvements are not always sustainable.
According to a September 2020 APQC study, budget cuts and constraints not only top the chart of today’s challenges, but they will also continue to test organizations for the foreseeable future. Therefore, taking a proactive yet strategic approach to cost optimization is critical to sustainability.
In this article, Thought Logic recommends Finance leaders incorporate five focus areas when building the case for change and analyzing enterprise trends to create momentum around cost optimization.
1. Set Your Guiding Principles
Develop Cost Optimization Program Guiding Principles that align with the Business Strategy and your organization’s values. When crafting these principles consider:
- Involving project team members and leaders in developing the principles
- Ensuring principles are consistent with the organization’s mission
- Putting the customer experience at the forefront of the guiding principles
- Principles are not a prescription or how to, but simply a guide
- Defining decision making authority for program recommendations
Guiding principles should drive individual behaviors, and ultimately, team performance. Companies successful in optimization consistently promote their guiding principles in executive presentations and working team meetings. Leaders should continue to look for opportunities to sponsor the guiding principles and gain adoption at all levels of the organization. Simply posting them on a poster or tagline will not build the trust necessary to execute on the vision.
2. Understand Your Business Capabilities
As you begin to embark on the cost optimization journey, it is important to correctly map business capabilities to organizational profiles and structures. While business capability modeling has commonly been used to help IT leaders shape application and service architecture, it can be viewed by business leaders as a framework to help companies innovate. People, process, and technology are important; however, thinking critically about an organization’s capabilities and how its capabilities are structured to meet business objectives can help companies improve efficiency and effectiveness. In addition, capability modeling will help the enterprise be more flexible in the long run as digital transformation, processes, and even business models can change based on market conditions.
As capabilities are assessed and mapped within organizations, leaders will better understand how capabilities directly support their guiding principles and business strategy. Enterprises can then align investments with core capabilities to drive performance. Areas that do not directly align with guiding principles and organizational capabilities are candidates to be considered for outsourcing or sourcing by a third party, such as a Center of Excellence for Finance Planning & Analysis or outsourcing Accounts Payable. This thinking may also help to drive Make versus Buy decisions. When deployed correctly, business capability mapping can uncover 15 to 20% potential savings by uncovering redundancies, according to a November 2019 McKinsey report.
3. Establish Baseline Data Summary
In addition to aligning business capabilities to the enterprise, establishing a cost baseline is a critical step in beginning to outline spend targets. All costs within the organization should be analyzed, including labor, overhead and technology. There are several approaches for establishing a cost baseline but gathering a general ledger feed for one or two historical years and a three-year horizon should be sufficient. Setting up pivot tables by cost center and account will allow the team to highlight areas of spend consistent with the company’s capabilities. One example of the effectiveness of this focus area is the hospitality company that discovered it had been paying two different service providers for a property’s Wi-Fi/internet coverage for almost two years. In another case following an acquisition, a company realized it inherited a huge tax liability for ownership of a facility it had acquired. In past years, they were accustomed to leases.
Understanding the cost baseline from a labor and expense standpoint will only highlight areas of investment – this study does not uncover over- or under- investments. As part of the cost optimization exercise, it is important to have a comparative performance analysis or benchmark to understand investments of similar companies.
4. Perform Comparative Performance Analysis
Companies need to consistently perform Comparative Performance Analysis to understand trends in investments. It is important to consider several industry benchmarks as a guide. Companies should determine appropriate actions through process review and organizational opportunities as well as identify a timeline and roadmap for cost savings. A food and beverage company examined the cost of their Finance organization by better understanding aspirational cost splits for controllership, decision services, management, and transaction processing. Understanding the cost split allowed them to focus future investments in automating transaction processing areas, leading to a 20% reduction in cost. The savings was reinvested into decision services improving analytics and reporting for product profitability. This can be done at an enterprise level as well as a functional level. Various sources exist for benchmarks including Gartner and APQC, among other niche firms.
5. Set Optimization Targets
After a thorough understanding of the cost and expense baseline, it is important to begin setting targets. It is essential that the targets align with the cost optimization guiding principles established at the beginning of the program. For example, a retailer has decided to invest in an omnichannel strategy as part of their five-year strategy. In this case, investments should be aligned to the pillars for the prioritized channels. An airline focused on improving customer retention might prioritize investment in loyalty programs and credit card partners, or look at improving the in-flight customer experience With a strategic cost optimization approach, targets may be set with certain areas receiving an increased investment while other areas may see significant reduction of resources or capital. In establishing the target ranges for each function or cost center, leaders will evaluate which levers will need to be pulled to meet the cost targets. These levers will be explored in our next article.
After working through the five focus areas above, organizations must embed proven benefits management principles to create long-term sustainable advantage:
- Provide stakeholders a clear understanding of the financial benefits and operational impact associated with the benefits identified
- Assign ownership and accountability to the business for benefit delivery aided by support functions
- Proactively engage executive management to ensure business case benefits are achieved
- Engage the line manager responsible for controlling the transformed process to sustain benefits
This article recommends consideration of five key focus areas when creating long-term sustainable cost optimization. In our next article, Thought Logic will explore “How to avoid pitfalls” which takes a deeper dive into specific levers that can be adjusted to achieve spend targets, such as people resources, technology spend, organizational structures, sourcing of direct or indirect materials, process improvement, including automation, and location strategy.
Click here to read the first installment in our series on Enterprise Cost Optimization (2020).
About Thought Logic
Founded in 2014, Thought Logic is a business consultancy based in Atlanta, with an additional office in Richmond, Virginia. Thought Logic consultants offer a combination of domain expertise and core consulting capabilities that readily address today’s biggest business problems. The firm provide clients with logic-based solutions that improve project speed, cost, and performance – ultimately improving overall operational productivity, enabling clients to invest savings in other areas. For more information, visit thought-logic.com.