Published: 02 February 2023
Organizations pursuing growth face significant cost headwinds due to the triple squeeze of inflation, scarce talent and supply constraints. 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 centerinitiative provides resources for sustainable cost savings, smarter budgeting and resource allocation, and investment in growth and transformation.
Topics in this initiative include:
Some content may not be available as part of your current Gartner subscription. Contact an account executive if you wish to discuss expanding your access to Gartner content.
Global supply constraints, worker shortages and inflation made it harder to optimize costs in 2022, squeezing margins. Higher interest rates (e.g., by the Federal Reserve or other central banks) have added a new wrinkle, turning executives’ fear of persistent inflation into fear of an economic downturn. As a result, many organizations are being conservative in hiring, investing and budgeting for growth in 2023. Organizations looking to sustain organizational performance while optimizing costs in the current environment are faced with three new realities:
There is a rapidly shrinking window to pass inflationary cost increases on to customers in the form of higher prices. In other words, executives will have no choice but to address inefficiencies in the cost structure and align costs disproportionately to enhancing points of differentiation (e.g., digital capabilities that competitors cannot easily replicate).
Profitable growth will require productivity growth; not just labor productivity, but also productivity of assets and working capital. Cost cutting can only protect margins, whereas productivity growth expands profitability by enabling organizations to do more with the same or fewer resources.
A general cautiousness in hiring or pervasive layoffs provides an opportunity for your organization to plug critical skills gaps. Take a total skills market view to play offense on talent and do it cost-effectively.
Cross-functional collaboration is key to these actions’ success. Strategic cost optimization is not solely finance’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, supply shortages and recession risk are dampening growth and profitability. Organizations must make sensible cost optimization decisions to strengthen their financial positions and create the capacity for continued growth. This initiative helps leaders develop their capability in key areas to succeed in cost management.
Our research in this area addresses the following topics:
Gartner’s Business Cost Optimization Through a Crisis Survey found 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.
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?
How to improve cost and performance transparency in a product line funding model
HR actions to navigate recession risk
Adapting supply plans to recession risk
Benchmarking wage and salary increases in 2023
Budgeting and Resource Allocation
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.
Questions Your Peers Are Asking
How does my function’s budget compare with those of peer organizations?
What is the optimal team size for my function (e.g., IT function)?
How do I demonstrate and improve the returns on functional spend?
What are effective ways to run a zero-based budgeting exercise?
How can I create a more realistic budget for technology investments?
How can my organization optimize costs and benefits to achieve more with limited resources?
Budgeting approaches for governing enterprise digital spend
How to implement and manage cost allocations for corporate overhead
Shifts in digital spending patterns
What a best-in-class partnership between the CFO and CIOs on digital funding looks like
Findings from functional budget benchmarking
The 2020 Gartner CFO Cost Structure Survey found that 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).
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 technology investments?
How do I fund innovation and growth throughout the enterprise?
How can I assess and communicate the value of technology investments?
How can my organization leverage digital technologies to change its cost structure?
How can my organization best manage excess cash to meet its capital allocation needs?
Digital financial fundamentals: How digital winners are maximizing the returns on enterprise digital spending
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
Suggested First Steps
2020 Gartner Business Cost Optimization Through a Crisis Study: This study was conducted to understand how organizations’ cost management practices before and during the COVID-19 crisis allowed them to be ready for the rebuilding phase into the “new normal.” The research was conducted online from August through October 2020 among 314 respondents from North America, Europe and Asia/Pacific, across all industries, except government, and in organizations with annual revenues of at least $250 million. Respondents were screened for involvement in enterprisewide cost management in their organizations.
2020 Gartner CFO Cost Structure Optimization Survey: This study was conducted to understand how organizations prioritize different types of costs and spending and what distinguishes the cost structure of financially successful organizations from those of their less successful peers. The research was conducted online among 69 CFO respondents from North America, Europe and Asia/Pacific across industries except government, and covering organizations of at least $250 million in revenue. Respondents were screened for seniority and involvement in enterprisewide cost management in their organizations.