Executive Guide to Strategic Cost Decisions

Holistic cost management can be a huge value driver, but it takes leadership from executives committed to investing in the future.

As the impact of the COVID-19 pandemic spreads, there’s no denying today’s urgent cost-reduction pressure. But executive leaders must still commit to evolving cost management so that scarce resources and funds consistently flow to the most valuable business outcomes.

This is not a job for operational managers, even if they bear the brunt of executing cost initiatives. It’s up to executive leaders to build strategy, culture and processes that embed a value-realization approach throughout the organization — and into everyday cost management.

Knee-jerk cost-cutting approaches are not sustainable, and are seldom strategic

“It might be difficult to see through the current economic downturn, but remember: This crisis, like any other, has phases,” says Chris Ganly, Senior Director Analyst, Gartner. ”You have to begin strategizing and planning for the recovery and renew phases now — phases that will emerge for most in the coming weeks and months.”

Cost Optimization: A proactive, strategic approach to costs

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To move from reactionary cost cutting into programmatic cost optimization and on to value optimization, Gartner recommends that executives take three phased actions. 

Read more: How to Pick Your Best Cost Initiatives

Action No. 1: Determine your cost management objectives

The pressure to reduce costs exists to some degree in most organizations even in “normal” times. Most counterproductive are the demands from senior leaders to deliver “a number” — an across-the-board approach not targeted to any cost element in particular. 

This type of edict is especially common in a crisis — and typically elicits a response that is short-term and often short-lived. “Knee-jerk cost-cutting approaches aren’t sustainable, and are seldom strategic,” says Ganly. Employees may simply prioritize the largest and most achievable spend reduction, regardless of impact. 

But 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. 

Top-performing executives will never cost cut their way to enterprise-level strategic relevance

Make sure decisions are made with a full understanding of the business impact and avoid cuts that simply shift spend — which is likely to return in another place or time without any gain or benefit to the organization.

Instead, first eliminate waste and low-value activities (e.g., retire duplicate or underutilized systems), rationalize services (e.g., eliminate redundancies) and renegotiate with suppliers. In all cases, cost-reduction activities are most effective when you identify and reduce or eliminate the true cost driver so it doesn’t return or move to another part of the budget. 

Read more: 10 Ways to Quickly Reduce IT Costs

But even in emergency situations, make sure to assess the business value against the amount of expected savings. Find a common language and a structured approach to cost decisions to define how you’ll select and prioritize specific initiatives and define targets and milestones. 

Centrally coordinate this plan and own it personally — or assign a direct report to do so — to reinforce the direct link between cost management and business performance. Apply these same approaches as you proactively optimize costs and value when economic pressure subsides. 

Action No. 2. Make cost management an ongoing discipline

The second imperative for executives — and which only leaders can drive — is to 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.

Learn more: Benchmark the Effectiveness of Your Function

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.

But don’t stop there.

Gartner illustrates the evolution of cost management

“Top-performing executives will never cost-cut their way to enterprise-level strategic relevance,” says Ganly. They extend their cost optimization efforts to focus on investing resources to drive business outcomes. 

By managing costs more strategically and programmatically, they’re delivering value to the business — even in economic or business downturns. This type of value realization takes a commitment to:

  • Align to value. Engage stakeholders so you can deliver value by meeting their needs and desired outcomes. Get functional leaders to partner with stakeholders to define what is valued, identify and resolve pain points, and realize that the stakeholders own the return part of the return on investment (ROI) analysis.
  • Plan and prioritize. Build, validate and socialize a justifiable business case that builds shared approval for investment priorities. Commit funding first to those requests that will have the most impact on a business outcome or the organization’s mission. Don’t prioritize based on available funds or the urgency of the request.
  • Execute and measure. Document the plan, communicate changes and evaluate value contribution against forecasts. Validate iteratively to check for course corrections and measure impact, not work. Communicate incremental contribution to the objective or mission.
  • Iterate and innovate. Actively evaluate progress, reassess stakeholders’ needs and adapt to changing requirements in an agile approach. Listen and react to customer needs and be agile and flexible. Be willing and able to terminate projects quickly by eliminating the use of the word “failure” and replacing it with less-fear-inducing terms, such as “learn” and “experiment.”

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Action No. 3: Build consensus with business leaders

Experience tells us that enterprises that survive cost pressures do things differently. And again, it’s down to executive leaders to drive this competitive differentiation. Best practitioners:

  • Prepare for cost management well before the need for such measures are obvious

  • Look beyond the short term and avoid knee-jerk reactions, such as large layoffs

  • Recognize that cost cutting is not a growth strategy, but one of survival

  • Maintain revenue by taking the opportunity to rethink their products, pricing or channels

But you can’t do those things without properly balancing the complex forces that compete for resources. And you can’t do that without input from your functional and business leaders — to identify critical projects that deliver business value; protect key talent; and distinguish between budgetary line items to cut, reduce, outsource and defend. 

Work with those leaders to:

  • Gain a broad perspective. Think beyond the impact on a specific functional group; consider the overall business and business strategy. Ask, for example, what the costs and benefits are of reducing head count. 
  • Obtain consensus. Cultural and political barriers often impede successful optimization. Make sure stakeholders understand and buy into the process for selecting and prioritizing cost actions and that the approach to cost decisions is consistent.
  • Avoid siloed cost reductions. Consider the effects for other functions and business units — and gain cross-functional support for cost-management priorities. Ask, for example, “How can we reduce the total cost of the services we provide our customers?”
  • Achieve transparency. Provide more than the traditional, high-level views into budgets so that business stakeholders can see the impact of reduced spending on specific assets and have enough information to, for example, weigh reduced spend on business continuity versus collaboration services.

You clearly need to prioritize spending on “run the business” activities during a crisis, but only a strategic enterprisewide approach to cost management can also preserve funding for the critical projects that deliver business value, protect key talent, and properly distinguish between budgetary line items to cut, reduce, outsource and defend. 

A proactive approach may require an initial investment, but can drive future cost reduction and maximize business outcomes — and continually optimizes the use of processes, resources and existing capacity. It’s this continuous approach that makes reallocating scarce funds to the most valuable business outcomes a part of the organization’s identity and culture.

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