adminWhat is Strategic Cost Transformation?
Whereas mere cost reduction is a solution to providing immediate relief to a business’s cost base, strategic cost transformation is a holistic approach to delivering significantly lower costs in a manner that ensures the sustainable achievement of both short term and long term goals of the organisation. Simply cutting costs is often a knee jerk reaction to liquidity pressures and revenue compression and is aimed at achieving prompt respite to ensure survival of the business. Whilst this strategy may yield results in the short term, many such programs have failed to meet the intended objectives. Consulting group Bain and Company note that few companies who employ cost reduction initiatives succeed in attaining their cost reduction targets and maintaining the cost savings. Strategic cost transformation on the other hand is all to do with achieving long term sustainability and viability. It is also focused on creating a platform for future growth rather than seeking quick wins to abate short term pressures according to international management consulting firm Accenture. Bain and Company also note that the few companies that succeeded in cost reduction and maintaining savings employed a “fundamentally different approach from the rest”, an approach they termed “sustained cost transformation”.
There are a number of approaches that can be used to achieve significant cost reductions. Global consulting giant, Capgemini, identifies six appropriate cost reduction strategies which organisations can employ, which are summarised below.
“Organisational restructuring” improves organisational effectiveness by changing the structure of the organisation. Staff rationalisation programs typically fall into this category. ZB Financial Holdings Limited introduced initiatives to rationalise staff numbers in the financial services group and wound down the operations of two unprofitable subsidiaries in 2014 as part of its cost reduction initiatives. These initiatives led to the group recording a significantly reduced cost to income ratio in the current financial year.
“Functional transformation” involves reorganising functions in order to create shared centres of excellence that will effectively see the reduction of functional costs. Old Mutual Zimbabwe Limited has implemented a similar structure, Old Mutual Shared Services, for support functions that cut across all business units within the group.
“Business process reengineering” involves the radical redesign of business processes in order to achieve dramatic cost improvements. Cost improvements are realised through the elimination of activities and processes that waste time and resources.
“Strategic sourcing” is concerned with critically analysing an organisations procurement spend in order to improve economy and efficiency. In its 2014 Annual Report, Innscor Africa Limited notes the increase of profits of one of its business units, National Foods, which it attributed to a “highly successful strategic raw materials purchasing programme”.
“Technology enablement” is an approach whereby an organisation streamlines the technologies used to enable key business functions thereby achieving operational efficiencies. Delta Corporation Limited has since 2009 invested significantly in new machinery that has not only improved its production capacity, but also lowered its unit costs. The entity has recently lowered its prices for soft drinks, passing on the benefit of cost savings to consumers and ensuring the sustainability of its business going forward.
“Strategic transformation” relates to the delivery of “holistic, multi-level and comprehensive change across the organisation”. Strategic transformation may include some or all of the other five approaches aforementioned.
Key success factors
The success of strategic cost transformation projects is dependent on four key pillars; alignment with corporate strategy, leadership and stakeholder buy-in, realistic target setting and organisational learning.
Alignment with Corporate Strategy
Understanding the goals of the organisation is a key pillar of success in strategic cost transformation. Cost transformation initiatives should be effected in order to support the attainment of organisational goals, and not just for cost-cutting’s sake. Across-the-board spending cuts may be harmful to the organisation in the medium to long term hence it is necessary that organisations critically review cost containment initiatives and assess their impact on key elements of an organisation. An organisation should always consider the impact of such initiatives particularly on customers and ultimately revenue in order to avert value destruction. Critical success factor analysis, an analysis of those key things that an organisation should do right in order to meet strategic objectives, is crucial to ensuring alignment of cost reduction initiatives with strategic goals. Another approach,propounded by consulting group Bain& Company as a more comprehensive approach that delivers significant cost savings, is zero based budgeting. This allows the business to reconsider the entire cost structure and align resources with the entity’s strategic aims.
Another radical approach to strategic cost transformation which ensures alignment to strategy involves redefining the business model itself to create newer and leaner ways of doing business. This process helps the business to define cost structures required to support the new strategy and identify those excess to requirements.
Leadership and Stakeholder Buy-In
Transformational projects involve significant change in the way things are done and inevitably invite mixed reactions from an organisation’s stakeholders. These stakeholders include investors, customers, staff, suppliers, government and regulators among others. The role of the organisation’s leadership is key in securing the buy-in ofall stakeholders. Staff are an important stakeholder group, as unlike other stakeholders, are key to the implementation of cost transformational projects. British Telecom’s Group CFO, who presided over its strategic cost transformation project over the period 2009 to 2015, which realised $8.5 billion in cost savings, remarks that “putting trust in existing BT staff was the most important element of the transformation” and notes the importance of involvement of staff in such times. One of the biggest barriers noted by the Deloitte survey to effective cost reduction was lack of employees’ understanding of the need for the exercise and its benefits for the business. According to business writer Lewin, in order for change to be implemented successfully, it is crucial to analyse the forces that may potentially work against the planned change, such as resistance from staff, and institute measures to weaken such forces. Communication and education of stakeholders throughout every phase of the transformational project are therefore of utmost importance. Again, the Deloitte survey identified the biggest learning points from cost transformation experiences, as identified by respondents, as change management and communication, among others.
Setting Targets Based on External Data
Many companies that fail to meet their cost reduction targets, do so on account of unattainable targets. This is particularly typical of across-the-board spending cuts. According to Bain and Company’s survey of 300 executives, most entities develop arbitrary reduction targets which are often established based on internal benchmarks. Strategic cost transformation however, aims to create cost structures that are sustainable both now and in the future and hence this is only attained when an organisation develops targets that fully consider environmental data. Bain and Company’s research contends that excellent companies use external data to determine the level of cost reductions necessary to ensure long term viability. This data may include competitor data, market trends, technological trends, and regulation among others.
Organisational learning
Finally, it is important for organisations to continually measure the performance of the cost reduction strategies implemented, against planned savings, by developing appropriate performance metrics. This provides for organisational learning to take place by helping identify areas where the strategy is working, and where it is not, thereby allowing the organisation to consolidate successes and take corrective action on weak areas. At the end of the process, it is highly recommended that a post completion audit, that holistically documents the key learning points of the cost reduction project, be conducted. These lessons will be invaluable in the design and management of future cost transformation projects.
Conclusion
The sustainability of businesses in the Zimbabwean economy is under threat. Whilst there may be opportunities for revenue growth, cost containment is a sure way of riding the wave as business leaders have a higher degree of control when it comes to costs. Strategic cost transformation transcends mere cost control and ensures not only the sustainability of costs, but positions entities for long term survival, growth and competitiveness.
The success of strategic cost transformation programmes lies in the alignment of transformation initiatives with strategy, leadership and change management. Realistic cost management targets should be set and these are best obtained through external benchmarks. Finally, it is key that the performance of cost transformation initiatives is regularly reviewed in order for organisational learning to take place.
About the Author
Malvern Kuona is a Chartered Management Accountant, a member of the Chartered Institute of Management Accountants (CIMA). He is a practising accountant and is a Member of the CIMA Zimbabwe Board. He is also the current Chair of the Board’s Continuing Professional Development (CPD) Committee. Malvern writes in his own capacity.
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