Gartner Information Technology Research

Strategic Cost Optimization Resource Center Primer for 2021

Published: 04 February 2021

ID: G00735368

Analyst(s): Gartner Research Contributors

Summary

As organizations emerge from the turbulence of 2020, functional leaders must preserve cost efficiencies while restoring costs that support transformational growth. Use our strategic cost optimization resources to make informed cost cuts, and smart investments for growth and digitalization.

Scope

The Strategic Cost Optimization Resource Center provides resources for sustainable cost savings, smarter budgeting and resource allocation, and investment in growth and transformation.

We focus on the following topics:

  • Cost Cutting: This topic focuses on best practices for generating sustainable cost savings and eliminating spending in areas no longer fit for the postpandemic world.

  • Budgeting and Resource Allocation: This topic teaches leaders how to budget smartly for maximizing staff productivity and modernizing functional processes while protecting sources of value.

  • Growth Investments: This topic focuses on how to adopt investment and planning processes that accelerate new capabilities for supporting the broader organization’s growth and digitalization.

Analysis

Figure 1. Strategic Cost Optimization Resource Center Overview

Economic crises offer a unique opportunity to transform organizations and outperform peers. Organizations that rapidly grow their top line while controlling costs are rewarded exponentially by investors. Further, boards expect leaders to find new avenues for growth while getting the organization on firmer financial footing. However, achieving this kind of efficient growth is not easy in the face of rising complexity and economic and geopolitical uncertainty.

Given this dual mandate from the top, executive and functional leaders must shift first their focus from cost cutting to strategic cost optimization.This means adopting a continuous discipline in preserving cost efficiencies resulting from operating lean during the pandemic, and reintroducing only those costs that support or enhance points of differentiation and critical operational improvements. Functional and executive leaders must develop a shared understanding of cost frameworks to drive informed trade-offs with their budgets and resources.

One cost that was relatively unaffected in 2020 is spending on digitalization. Although investments in digitalization stayed the same or accelerated during the economic crisis of 2020, only 11% of organizations have achieved digitalization at scale. Realizing scale from digital efforts requires more substantial funding than what is generated by IT budget savings; digital transformation is not a zero-sum game. Leaders should adapt budgeting and investment governance processes for digital initiatives to avoid subscale investments that do not generate returns.

Topics

Given the tepid economic recovery from the COVID-19 recession, organizations must make sensible cost optimization decisions that strengthen their financial position while creating the capacity for continued growth. Leaders should seek to develop their capability in three key areas in order to be successful in cost management.

Our research in this area addresses the following topics:

Cost Cutting

Only 43% of leaders achieve their cost-saving target in the first year of cost reduction. Fewer (only 11%) are able to sustain cost savings for three consecutive years. Best-in-class organizations think of cost management as a continuous discipline. They set realistic cost targets, avoid across-the-board cost cuts in favor of strategic divesting, and drive behavior change to support a climate of cash consciousness and smarter spending across the organization.

Questions Your Peers Are Asking
  • How do leaders create a culture of effective cost management?

  • What part should my function play in cost optimization?

  • What are the most effective approaches to cost management?

Recommended Content
Planned Research
  • Leading cost efficiency gains post-COVID-19

  • Survey Analysis: Business cost optimization practices

  • Cost optimization maturity framework

  • How cost measures impact employee performance and perception

  • Ignition Guide to managing organization’s personnel cost

Budgeting and Resource Allocation

Boards expect leaders to find a way to lower their cost of operations while preserving their ability to deliver on performance. This requires making smart budgeting and resource allocation trade-offs that ensure teams are staffed for maximum productivity while allowing for technology investments to modernize outdated processes.

Questions Your Peers Are Asking
  • How does my function’s budget compare with that of peer organizations?

  • How do I make the right resource allocation trade-offs across people, processes and technology?

  • What new investments in standardization, automation and process improvement will generate additional efficiencies?

  • How does my organization optimize costs and benefits with limited resources to do more with less?

  • How do I demonstrate and improve the returns on functional spend?

Recommended Content
Planned Research
  • Guide to zero-based budgeting for executive leaders

  • How to distinguish between commoditizing, enabling and differentiating costs

  • Behaviors that drive cost differentiation

  • Managing the return on functional costs

  • Findings from functional budget benchmarking

  • Best practices in supply chain financing

Growth Investments

Fewer than 10% of organizations create enough capacity to take on growth and innovation opportunities required to outperform peers in this hypercompetitive environment. This is because leaders still rely on outdated processes for prioritizing growth investments. Leaders must adapt growth investment criteria, and metrics for newer, digital investments and business models to redeploy scarce cash to areas of highest return.

Questions Your Peers Are Asking
  • How do I make sure the investments I am pursuing accelerate the company’s growth strategy?

  • How do I build a more credible business case for big investments?

  • How do leaders fund innovation and growth across the enterprise?

  • How can the organization leverage digital technologies to change the cost structure of the company?

  • How can the organization best manage excess cash relative to capital allocation needs?

Recommended Content
Planned Research
  • Optimize the upfront investment costs associated with growth opportunities

  • Adapting growth investment governance for the new era

  • Changing your cost structure through digital investments

  • Leverage digital economics to monetize your digital business transformation goals

Suggested First Steps

Essential Reading

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