First of all, it is important to distinguish a cost optimization strategy from a cost cutting strategy. Cost optimization involves strategically aligning on the “special sauce” of the company and being targeted on which costs are truly levers that can be pulled vs. value creating costs that are mission critical to allocate resources to. This may seem common sense, but has proven to be a fatal flaw in many cost management strategies, leaving companies ill-prepared to benefit from market/demand upswings. The goal of a strategic cost optimization plan is developing one that allows you to weather the turbulence in the near-term, while setting your company up to seize strategic opportunities to fuel future growth.
The best cost optimization strategies are developed using stakeholders across the organization to ensure proper alignment on cost levers and group buy-in on the strategy. The following are common cost management levers to help you understand how to approach cost optimization across your business.
Programs and Projects
These are activities with a finite start and end date. These could include new product research and development, technology changes/upgrades, process improvement studies, employee engagement programs or any number of projects that generally have the intended output of driving efficiencies for the business, improving employee experience or driving better financial performance. While many of these projects start out with the right intention, it’s important to take an inventory of these to assess if the expected outcome is still aligned with current strategy.
Assess project portfolio to determine which projects to continue, delay, reduce or eliminate. Some projects may be mandatory, such as pending regulatory or compliance requirements. In assessing these mandatory projects, look for opportunities to optimize spend. All other non-mandatory projects should be assessed through a multi-factor qualitative and quantitative analysis.
Once you’ve determined the priority projects to continue to pursue, realign high performers to help drive these projects efficiently and effectively. Also evaluate your hiring, reskilling or outsourcing plans for these projects relative to time to value and time to market. Depending on the nature of the projects, utilizing consultants, outsourced support or part-time resources can help keep these project costs more agile as opposed to adding fixed costs to your structure.
Streamline project portfolio management processes to ensure projects continue to support their intended outcome, that the outcome continues to be a priority of the business and the projects are being completed timely. It is important to instill flexibility into the project portfolio management by utilizing milestones or toll gates throughout the project life cycle.
Automate manual processes, assess options to shift to cheaper solutions/systems and evaluate opportunities to harness big data and actionable analytics to improve decision-making and break down silos.
Products and Services
These are the capabilities to meet internal user and customer needs. These are the existing outputs of the business. Many times as a company matures there are products and services being offered that are no longer aligned with the core competencies of your business. This is the opportunity to reassess which of your offerings to continue vs. eliminate or change.
Continue to supporting ongoing ideation and innovation for new business contexts and unmet needs. This is important to ensure your products and offerings remain relevant to the future of your business. As you assess your current product portfolio, use the 80/20 rule to consolidate and simplify your offerings. Then ensure you understand the true cost to deliver and restructure your cost base.
Once you’ve determined the priority products and services, optimize resource alignment to the most important products and customers while creating different programs/service levels for different value tiers.
Reassess the variables and the weighing of the product prioritization methodology to ensure ongoing focus on supporting the most critical products and services in your portfolio.
Integrate technology into products and services to minimize customer friction and enhance value of delivered product or services, such as automating order taking or providing clients with self-service reporting capabilities for added value.
These are the ongoing costs required to support products and services. While it may be easy to fall victim to viewing these “overhead” costs as ripe for cost cutting, it is important to recognize many of these costs are mission critical to driving the success of your products and services. After you’ve aligned on your critical products and services, you can then better assess which of your operating costs are supporting strategic products or projects.
As a starting point, it is important to benchmark cost structure, evaluate current macro environment and company’s cash flow generation to inform the budget. These benchmarks may be internal (such as historical results) or external (such as comparable peer companies). Then address high-impact cost-savings areas first (e.g. what’s biggest drivers of cost), including determining which costs are fixed vs. variable. Certain considerations may include people (e.g. full-time employees vs. outsourced/part-time), fixed assets (e.g. assessing cost of ownership vs. leasing, including consideration of tied up capital in fixed assets) and IT infrastructure (e.g. on premise vs. cloud or outsourced IT). In assessing these considerations, it is important to reallocate resources to those opportunities with high and/or quick returns and that are aligned to the company strategy.
Measure capacity vs. demand to assess where you may be over or under capacity. Consideration should be given to productivity levels by geography, product line and functional area when assessing capacity.
Implement new operating models and working practices to eliminate redundancies and reduce complexity. Target process improvement where you can drive efficiencies or create a market differentiation.
Evaluate your total cost of ownership, considering costs incurred by internal personnel, contractors, outsourced support, hosting costs, etc. Lean into technology that can be used to increase standardization and agility throughout the organization.
Need help developing a plan? For more information or to request a discussion, contact Vrakas CPAs + Advisors today!