Did you know- only half of companies achieve the cost-cutting goals set out by the CEO or CFO, and very few are able to sustain cost savings beyond the first three years. Hastily cutting costs can do more harm than good, and failing to adjust impacted internal processes increases risk exposure.
But there’s a difference between simple cost-cutting and the ideal cost optimization.
As per Gartner, cost optimization refers to a business-focused, continuous discipline to drive spending and cost reduction, while maximizing business value. This can include obtaining the best pricing and terms for all business purchases, as well as automating and digitalizing IT and business operations. One such example is DataRails which automates data consolidations as well as additional routine tasks such as FX conversions, eliminations, and hierarchies.
To move from reactionary cost cutting to programmatic cost optimization, executives should consider the following actions:
1. Determine your cost management objectives
The pressure to reduce costs exists all the time. It’s important to acknowledge where your organization stands in its cost management journey. If short-term reductions are necessary, they’re needed, but it’s possible to act promptly to cut costs and still take proper account of the associated risks.
Keep in mind that cost management does not only mean cost cutting. It’s possible to implement new tools that cost in the short term but add value in the long term.
2. Make cost management an ongoing discipline
Executives must develop the culture and skills for programmatic and structured cost optimization. You’ll then be better equipped to consistently reduce and reallocate spending where cuts will have the least negative impact on business value. And in all cases, benchmark and identify which functional or business areas have cost variances significantly beyond peer averages.
The focus of cost optimization is threefold:
1. Improve efficiency. Aim to do everything better: Simplify, standardize, centralize, share for scale and automate.
2. Increase productivity. Encourage a culture in which everyone strives to do more with what they have, shifting effort and expenditure from lower-value to higher-value work. Better utilize existing resources, realign labor resources, prioritize and reassign projects and spend, and outsource processes and functions.
3. Shift spend. Identify and adjust resource allocations to achieve more from current spend. Simplify (fewer and less-complex processes, systems, tools), eliminate the redundant and underutilized, rationalize (e.g., remove redundancy), renegotiate with suppliers, and evaluate the impact of reductions on the organization’s financial performance, customers and employees.
Cost optimization does not necessarily mean cost cutting
Remember- cost optimization is about increasing value, which does not necessarily mean decreasing spending.
There are many tools such as DataRails that are able to address all three parts of cost optimization.
Leading companies take a proactive and strategic approach to cost optimization — strategically cutting cost while funding new growth at the bottom of the business cycle. This approach better equips them to sustain through difficult times such as COVID-19.
Organizations should aim to adopt a strategic approach to cost optimization, one in which resources are reallocated to deliver sustained savings and support revenue growth.