Profitability is one of the litmus tests of any sustainable business. It is determined by an organisations ability to manage its direct and indirect operational costs; in relation to its revenue; while meeting the needs of its consumers, shareholders, and employees. As easy as this sounds, many entrepreneurs and executives have quickly found that ensuring sustainable profitability is no small feat. While effective cost management can directly impact profitability, economic headwinds and uncertainty can easily reverse such gains.
Like snow in the desert, no one could have predicted the COVID-19 pandemic or foreseen its effects on the global economy. As the world recovers from the impact of the COVID-19 pandemic and countries attempt to rebuild their economies, cost optimisation is essential for business continuity.
Cost optimisation is a business-focused discipline designed to regulate spending and drive cost reduction while maximising business value. It is more than just cost-cutting and belt-tightening, as the process involves continuous efforts geared towards optimising spending and getting the best value of money at every given period. The process also entails obtaining the best pricing and terms for all business purchases and standardising, simplifying and rationalising platforms, applications, processes, and services.
Although cost optimisation should be embraced as a key business element, most organisations adopt it as an emergency response.
According to a global cost survey conducted by a leading consulting firm in 2019, organisations are moving from developing solutions to meet mounting costs to focusing on improving processes and managing expenditure to adapt to the changing business and global environment while remaining profitable. To achieve this, organisations focus on implementing sustainable organisational changes, leading to process and cost optimisation. One such way is integrating technology to automate cost centres and reduce total expenses by the firm. Cost management and optimisation are essential in uncertainty; however, a proactive approach to optimisation could insulate the business from devastating losses when the crisis does occur. Cost optimisation is more than cost reduction and crisis management.
With the mention of “costs”, it is easy to assume that optimisation is the responsibility of finance and operational managers. However, as with every sustainable organisational change, cost optimisation starts with Executive Management. Strategy building, culture definition, and process creation are led by executive management. Similarly, Gartner, a global research and advisory firm, recommends that the executive must introduce sustainable cost optimisation. The introduction of these policies and integration with established culture and processes is one of the keys to sustainability.
The process of cost optimisation also involves:
- Decide on the “why and what”: It is easy to get so carried away with buzzwords that strategic initiatives are misused and often fail. Therefore, in implementing any cost optimisation initiative, the organisation must identify why it is embarking on this journey and what it wants to achieve. The organisation also assesses to understand the potential impact of these initiatives in the short to long term.
- Plan and Strategise: The next step on the cost optimisation journey involves planning and strategising. During this stage, organisations must understand what optimised cost implies for their business and begin to develop implementable strategies that would govern the optimisation initiatives. Identify and assess business activities to optimise: Organisations tend to divide their business structure and operations along product lines, geographic locations, or other needs for easy decision-making and reporting. To effectively implement cost optimisations strategies, the organisation needs to identify processes and activities that require optimisation.
In a crisis– when organisations are left with a cost base that requires immediate optimisation to fit the interim shape and size of their portfolio’s performance, many traditional business activities may not be necessary due to changes in business demand. At this stage, it may be important for the organisation to identify expendable processes which would not negatively impact business activities or sustainability.
- Communicate Plans to Stakeholders: Constant communication with all business stakeholders is essential to avoid miscommunication or misrepresentation of interest. Constant communication with all critical stakeholders should be considered paramount in driving cost optimisation strategy.
- Review and Realign: Once cost management areas have been identified, a revisit and re-alignment of initiatives are essential. Taking a second look at laid out plans and strategies will enable the organisation to identify gaps that may have been overlooked on the first take. It will also allow the company to make necessary adjustments to their strategy or initiatives before execution.
It is uncertain how long the effects of the COVID-19 pandemic will last or its final economic impacts. However, to give your business a fighting chance, a renewed focus on costs optimisation is critical and will allow you to position your business for continued success. It could be the proactive optimisation of costs to safeguard the future or a reactive optimisation of costs due to exposure to risks and uncertainty.
Thus, business leaders and executives should invest in the development of suitable strategies to sustain their business.
At pcl., we develop and implement cost optimisation initiatives to support strategic business transformation. Our Operational, Transformation and Excellence (OTE) service is designed to support the evolution of effective, profitable, sustainable institutions.