Insights / Finance / Article

How to Pick Your Best Cost Initiatives

July 24, 2020

Contributor: Jackie Wiles

Weighing cost savings? Balance risks and benefits to maximize business outcomes under COVID-19 pressure.

As the scale of remote work surges during the coronavirus pandemic, should you cut your spending on contracts around data security, cloud storage and virtual private networks? If you view cloud storage as a bloated indirect spend item in your budget, you might say yes. If you’re focused on risks to business continuity and ultimate recovery, your answer is probably no. In fact, you might plan to increase spend to shore up systems and keep them robust.

The crisis is creating unprecedented pressure on enterprise leaders to do more with less. But that budget urgency only increases the need to assess cost initiatives strategically — to make sure that near-term decisions don’t jeopardize the ability of your organization to sustain through the crisis and do protect what it needs to drive recovery.

Focusing on business outcomes leaves less room for haggling over cost cuts — and lessens the risk that investments will simply flow to those who shout the loudest

“As organizations move through and beyond the low-hanging fruit of cost-cutting in a crisis, they need a programmatic and structured approach to cost optimization, says Cesar Lozada, Senior Principal Analyst, Gartner. “They also need a shared framework to evaluate cost proposals across a range of key factors, such as the impact on the business, risk and the level of investment required.”

Download: Cost Optimization Decision Framework

By delegating this same objective framework to their direct reports, executive leaders can quickly gather buy-in and momentum around an enterprisewide approach to cost management. The resultant decisions are pragmatic and business-focused — making it easier to decide which cost initiatives to start immediately and which to delay or shelve altogether.

Focusing on business outcomes leaves less room for haggling over cost cuts and lessens the risk that investments will simply flow to those who shout the loudest.

Read more: HR Under Pressure to Cut Costs? Know How to Protect What’s Important

Evaluate benefits and risks of cost proposals

Organizations commonly weigh cost proposals almost exclusively based on their potential to save money, without considering the effects those proposed cost savings may have on the business. But cost optimization has to be sustained — and sustainable — to maintain ongoing operations while finding opportunities to spend less or be more efficient.

Resources freed up by those savings can then go to activities that directly drive business continuity, growth, investment or innovation. In fact, the operations of a business should suffer no damage when optimizing sustainably.

“In reality, not all cost initiatives are worth the time, effort or investment they take, and many have risks that aren’t accounted for,” says Sanil Solanki, Managing Vice President, Gartner.

The cost optimization options with the greatest potential benefit often require additional investment, take more time and carry more risk

“What may seem like a relatively straightforward cut — like postponing a planned project — has business consequences and risks that must be taken into account and socialized. Executive leaders must work in concert with their peers to evaluate these risks and effects.”

The Gartner decision framework for prioritizing cost optimization initiatives considers not only the potential benefits (in terms of cash savings), but the impact on the business, time requirements, degree of organizational and technical risk, and investment required.

The objective is quality decision making: “The decision framework equips leaders to pick the best ideas, instead of just focusing on those that come to mind first,” says Solanki.

6 key considerations

The framework outlines six areas for leaders to consider as they evaluate the sustained efficacy of cost proposals.

  1. Potential financial benefit. Establish to what degree cost initiatives will impact the bottom line. Ask: How much will my enterprise save if the action is implemented? How does the action affect enterprise cash flow?
  2. Business impact. Determine what impact an initiative will have on your employees and the operations of a specific business unit or function. Ask: What will the adverse impact be on day-to-day activities and operations, such as decreased productivity or product time to market? If cross-functional peers and direct reports fail to grasp these effects, initiatives may fail.
  3. Time requirement. Whether you approach cost optimization initiatives via a waterfall or an agile approach, it will take time for the enterprise to realize the cost savings and improved business value. The question is what that time frame needs to be. Ask: Can we capture and realize cost savings within the desired time frame (weeks/months/fiscal year)? How do we measure soft savings with this initiative?
  4. Degree of organizational risk. The effectiveness of the cost optimization initiative may depend on whether you and your direct reports are capable of changing and adapting to new organizational processes. Ask: Will our direct reports ensure the changes are made? Is our enterprise capable of adapting to the changes?
  5. Degree of technical risk. This risk sits squarely in the domain of IT leaders, but IT and other executive and functional leaders must work together to assess how the cost optimization initiative will be integrated with their current operations, enterprise architecture, etc. Delays caused by or attributed to the initiative could result in a loss of service delivery or productivity. Ask: Will the change undermine the ability of our systems to deliver services? Will this change cause delays in enterprise operations that impact a few or many components of the architecture?
  6. Investment requirement. Cost optimization isn’t about cost reduction; it’s about sustained improvements in business processes, productivity, time to market, etc., so some initiatives will require an initial investment — which the executive board must agree to fund. Present a business case showing the potential business benefits vs. the status quo and the level of investment required. Ask: Does the initiative require a large, upfront investment before savings can be realized? Is our enterprise willing to make an investment at all?

Although a decision framework is only one important step in the cost optimization process, it provides a shared prism through which to evaluate cost ideas across functions. Consider grouping initiatives together and mapping them to a grid to easily visualize the effort required and the relative benefits of each initiative. This will make it easier for cross-functional teams to see the strategic and organizational trade-offs of the various options.

Importantly, a programmatic approach may show that the cost optimization options with the greatest potential benefit often require additional investment, take more time and carry more risk than low-hanging cost-cuts, which are easy to implement but don't yield sustained value.

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