Published: 04 February 2022
Organizations pursuing growth face significant cost headwinds due to input price inflation, supply shortages and policy uncertainty. Leaders can use Gartner’s strategic cost optimization resources to make informed budgeting and spending decisions while investing for growth and digitalization.
The Strategic Cost Optimization Resource Centerprovides resources for sustainable cost savings, smarter budgeting and resource allocation, and investment in growth and transformation.
Topics in this initiative include:
Budgeting and Resource Allocation: Learn how to budget intelligently to avoid unnecessary costs and maximize staff productivity while protecting sources of differentiation.
Growth Investments: Learn how to adopt investment and planning processes that accelerate new capabilities to support the broader organization’s growth and digitalization.
Cost Cutting: Discover best practices for generating sustainable cost savings and eliminating spending in areas no longer fit for the postpandemic world.
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Organizations are reintroducing costs in pursuit of growth opportunities as the global economy recovers from pandemic-related lockdowns. Bigger budgets are the norm in 2022 across many categories including travel and expense, IT and R&D. Much of this spending is a natural bounce-back from the austerity of 2020 and is within the bounds of responsible cost reintroduction.
However, input shortages and inflation have added a sizable headwind to optimizing costs. Costs that were taken for granted (e.g., labor, freight and component costs), have risen far above prepandemic levels as demand recovers without a corresponding supply bounce. According to our 2021 CFO Capital Allocation Survey, 84% of CFOs expect to spend more on personnel costs in 2022. Almost half are budgeting for 4% higher base salaries — a significant increase over previous years. Potentially higher interest rates will increase borrowing costs to fund capital improvements, acquisitions and other growth investments.
Although margin management actions (e.g., pricing changes) can provide respite against rising costs, executive leaders are challenged to ensure inflationary headwinds don’t dampen profitability. In this environment, executive leaders must take three actions to optimize costs without compromising growth:
Align costs disproportionately to enhancing points of differentiation (e.g., digital capabilities that competitors cannot easily replicate).
Embrace positive aspects of zero basing (i.e., a focus on value) beyond budgeting season to how ongoing spending decisions are made.
Digitalize at scale to unlock productivity gains that can offset inflation.
Cross-functional collaboration is key to these actions’ success. Strategic cost optimization is not solely the CFO’s job. It requires a collaborative effort across functions and businesses, powered by standardized cost management frameworks, a shared understanding of cost-to-value relationships and a consistent definition of success beyond cost savings.
Inflationary pressures and supply shortages are dampening growth and profitability. Organizations must make sensible cost optimization decisions to strengthen their financial positions and create the capacity for continued growth. Gartner’s research helps leaders develop their capability in key areas to succeed in cost management.
Our research in this area addresses the following topics:
Boards expect leaders to find a way to maintain or lower their operations costs while preserving their ability to perform, even in an inflationary environment. To fulfill this expectation, leaders must employ smart budgeting and make resource allocation trade-offs that ensure teams are staffed for maximum productivity and allow for digital investments to modernize outdated processes.
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?
Budgeting approaches for governing enterprise digital spend
Shifts in digital spending patterns
What does a best-in-class partnership between the CFO and CIOs on digital funding look like?
Findings from functional budget benchmarking
Our Cost Differentiation Survey found fewer than 10% of organizations create enough capacity to take on the growth and innovation opportunities they need to outperform their peers. Leaders lack capacity because they rely on outdated capital allocation and financial management processes to prioritize their growth investments. Leaders must adapt growth investment criteria, governance and metrics for investments with a nontraditional ROI profile (e.g., digital and environmental, social and governance [ESG] investment).
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?
Digital financial fundamentals — How performance on cost, profitability and investment metrics differs between digitally mature companies and others
Digital economic architecture: Specific actions leaders can take to achieve “digital” fundamentals
Timing the commitment/reallocation of capital across new digital revenue streams versus traditional business lines
Overcoming conventional mindsets to eliminate drags on digital growth investments
Gartner analysis finds that organizations that were effective at cost management prior to the pandemic were 1.4 times more likely to see positive business performance through the crisis. Cost-efficient organizations drove smarter spending decisions by standardizing cost frameworks and categorizations, creating a shared understanding of cost-to-value relationships throughout the enterprise, and having measures of success tied to performance optimization, not just cost savings.
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?
How to improve cost and performance transparency in a product line funding model
How companies communicate the impact of inflation in earnings calls
Benchmarking wage and salary increases in 2022
Analysts:
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