Cost optimization and reducing cost are two different approaches to cost management. While a better approach is to move from a mindset of cost cutting to one of cost optimization, there are a few key differences between the two:
Implementing budget cuts
Cost cutting leads enterprises to reduce cost from every part of business (e.g., all budgets will be cut by 15%), often creating a disproportionate impact on capital spending compared to operating spend. Cost optimization focuses on identifying parts of the enterprise that should be cut dramatically and investing in parts that will provide the greatest near-term positive impact (e.g., digital investments).
Creating business value
For cost reduction, the objective is to simply implement budget cuts, generally activities that are easier to defer or cut. This approach does not create business value and results in the enterprise being hampered. Cost optimization focuses on key business processes and capabilities to identify opportunities for cost optimization. Enterprises can often achieve more lasting improvements in cost efficiency (and value) when they “optimize” by business process.