Optimize, not just cut, costs: How to manage costs during uncertainty
Prepare for uncertainty with a decisive – and disruptive – approach to cost management.
High inflation. The Russia-Ukraine war. Energy market volatility. Supply chain disruptions. These are among the reasons the world is watching for a global financial downturn.
As a CFO, how can you help your organization prepare for what could be ahead?
Consider taking a proactive role in cost management: Analyze cost structures. Design cost-cutting programs. Identify cost-reduction targets. And do it all with an eye toward owning – not reacting to – the disruption.
Three ways to deliver more value
Take a thorough, solution-based approach to cost optimization. Look for opportunities to drive transformation and deliver more value in three key areas.
One of the best ways to start: identify key opportunities and fast, self-funding wins that create momentum.
For many organizations, the most effective initiatives for rapid cost optimization involve areas related to working capital and spans of control. But that’s not usually as simple as focusing on a few cost items or reducing costs by 10 percent across the board.
Instead, focus on targeted cost cutting based on detailed analysis and data-driven insights. Use key performance indicators and other metrics to help track the value of the savings, and then assign quantified performance gaps to each discrete opportunity. Some of the opportunities can include time allocated for transaction processing, invoicing, AR receipt processing, report generation, external audit fees, and close cycle times.
1
Identify and secure quick wins
One of the best ways to start: identify key opportunities and fast, self-funding wins that create momentum.
For many organizations, the most effective initiatives for rapid cost optimization involve areas related to working capital and spans of control. But that’s not usually as simple as focusing on a few cost items or reducing costs by 10 percent across the board.
Instead, focus on targeted cost cutting based on detailed analysis and data-driven insights. Use key performance indicators and other metrics to help track the value of the savings, and then assign quantified performance gaps to each discrete opportunity. Some of the opportunities can include time allocated for transaction processing, invoicing, AR receipt processing, report generation, external audit fees, and close cycle times.
2
Build integrated strategies
Cost efficiency transformation requires integration – bringing together non-financial data, business planning goals, and near-term operational outcomes.
Integrated strategies require you to align with other areas of the business to ensure that cost cutting activities and goals are appropriately communicated. Your finance team can then identify and prioritize initiatives that support these elements. This includes summarizing the structure of cost-reduction initiatives, determining their impact on goals, quantifying the level of effort, and estimating the duration of initiatives.
3
Create a structured framework
Take these steps to make cost optimization successful and sustainable:
- Rapid assessment based on a thorough, up-to-date understanding of finance processes, technologies, and operating capabilities. Identify your operating model challenges and conduct deep-dive interviews with members of internal functions and shared-services groups to identify further details.
- Refined operating model addressing the challenges and inconsistencies identified by your initial assessment. If required, refresh benchmark analyses to reflect current conditions and identify areas of potential risk associated with the future-state operating model.
- Initiative definition based on actions required to implement the future-state operating model and organizational structures. Team members need to perform comparisons against existing initiatives to eliminate the risk of duplication while also estimating savings and costs associated with new initiatives.
Further development, supported by reviews with finance leaders, includes outlining the specific outcomes for each initiative, the documentation of key activities, dependencies, risks, and resources. Equally important is the identification of specific cost savings, level of investment, and return on investment for each initiative. At this stage, be sure to document clear ownership of initiatives to encourage engagement with the cost optimization program and promote success.
1
Speed to insight and quick wins
One of the leading approaches is to identify key opportunities and quick wins that develop momentum and are self-funding. The most effective initiatives for rapid cost optimization often involve areas related to working capital and spans of control.
Identifying these opportunities and quick wins is usually not as simple as focusing on a few cost items or reducing costs by 10 percent across the board; CFOs and their teams need to focus on targeted cost reductions based on detailed analysis and data-driven insights. Key KPIs and metrics can help track the value of cost reductions, with quantified performance gaps assigned to each discrete opportunity. These include cost reductions for time allocated for transaction processing, invoicing, AR receipt processing, report generation, external audit fees, and close cycle times.
2
Integrated strategies
CFOs need integrated strategies for cost reductions, bringing together non-financial data, business planning goals, and near-term operational outcomes. These strategies require cross-functional alignment with other areas of the business to ensure that cost reduction activities and goals are appropriately communicated.The finance team can then identify and prioritize initiatives that support these elements. This includes summarizing the structure of cost-reduction initiatives, determining their impact on goals, quantifying the level of effort, and estimating the duration of initiatives.
3
A structured framework
Successful cost optimization can involve a structured framework that includes the following steps:
Rapid assessment, based on a thorough, up-to-date understanding of finance processes, technologies, and operating capabilities. Finance teams can identify operating model challenges and conduct deep-dive interviews with members of internal functions and shared-services groups to identify further details.
Refined operating model, addressing the challenges and inconsistencies identified by the initial assessment. If required, finance teams need to refresh benchmark analyses to reflect current conditions and identify areas of potential risk associated with the future-state operating model.
Initiative definition based on actions required to implement the future-state operating model and organizational structures. Team members need to perform comparisons against existing initiatives to eliminate the risk of duplication while also estimating savings and costs associated with new initiatives.
Further development, supported by reviews with finance leaders, includes outlining the specific outcomes for each initiative, the documentation of key activities, dependencies, risks, and resources. Equally important is the identification of specific cost savings, level of investment, and return on investment for each initiative. At this stage, clear ownership of initiatives should be documented to encourage engagement with the cost optimization program and promote success.
Cost efficiency transformation requires integration – bringing together non-financial data, business planning goals, and near-term operational outcomes.
Integrated strategies require you to align with other areas of the business to ensure that cost cutting activities and goals are appropriately communicated. Your finance team can then identify and prioritize initiatives that support these elements. This includes summarizing the structure of cost-reduction initiatives, determining their impact on goals, quantifying the level of effort, and estimating the duration of initiatives.
Take these steps to make cost optimization successful and sustainable:
- Rapid assessment based on a thorough, up-to-date understanding of finance processes, technologies, and operating capabilities. Identify your operating model challenges and conduct deep-dive interviews with members of internal functions and shared-services groups to identify further details.
- Refined operating model addressing the challenges and inconsistencies identified by your initial assessment. If required, refresh benchmark analyses to reflect current conditions and identify areas of potential risk associated with the future-state operating model.
- Initiative definition based on actions required to implement the future-state operating model and organizational structures. Team members need to perform comparisons against existing initiatives to eliminate the risk of duplication while also estimating savings and costs associated with new initiatives.
Further development, supported by reviews with finance leaders, includes outlining the specific outcomes for each initiative, the documentation of key activities, dependencies, risks, and resources. Equally important is the identification of specific cost savings, level of investment, and return on investment for each initiative. At this stage, be sure to document clear ownership of initiatives to encourage engagement with the cost optimization program and promote success.
