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The immediate priority for your business is the safety of your people and customers, but long term sustainability also needs to be considered during this economic crisis.

Key takeaways

  • The economic crisis caused by coronavirus (COVID-19) is only just beginning and many industries have already been impacted including the transport, retail, hospitality, tourism and education sectors.
  • Cost optimisation is about improving capabilities – not just cost cutting.
  • Identifying the right cost opportunities and having a plan will avoid unnecessary negative impact to your business, customers and staff.
  • Manage the lifecycle of this crisis – not just the event.
  • Proactive businesses that renew their focus on costs and act before they are forced to will emerge stronger.

Now is the time for a renewed focus on costs

The coronavirus challenges are having a profound impact on Australian private, mid-market and family businesses. While some industries are experiencing a surge in activity, many are facing a rapid decrease in revenue and an evaporation of their cash reserves. It is unclear how long this crisis will continue or what the final economic impacts will be.

To give your business the best chance of surviving through this upheaval, a renewed focus on costs is critical and will allow you to position your business for continued success. Cost optimisation is more than just cost cutting and belt tightening and short-term tactics alone will not lead to sustained business success. Consider the effectiveness of your operating model and if your products, channels and markets still make sense in the current environment, and potential future state.

Typical reasons for increased pressure to rethink costs are: financial distress, downward pressure on revenue or prices, changing consumer needs, intensifying competition, need to fund growth or strengthen the balance sheet, pressure from shareholders.

It is time to adapt to tougher economic times.

Different approaches for different circumstances

Every business will be looking at costs, but what they do will depend on whether they are in a position of relative strength or weakness.

Our experience working with private, mid-market and family businesses has shown that organisations that take a more holistic, strategic view will have a greater chance of success.
 

Approaches to cost optimisation

Our experience has shown that successful businesses:

  • consider the business and operating model – not just cost savings
  • understand trade-offs between costs, income, impacts on customer service and risk
  • adjust or eliminate underperforming operations or investments
  • prepare to invest in certain cases to get a better outcome
  • embed a culture of high performance and cost leadership.

Some businesses may not have the time or a strong enough financial position to take this more strategic approach. Consider speaking to a corporate restructuring adviser if your business is under significant financial distress.

How to identify the right cost opportunities

Understanding your business’ cost drivers is critical to identifying the right cost opportunities and avoiding unnecessary negative impacts on your business, customers and staff.

We believe a successful cost optimisation initiative starts with gathering your current cost base and performing a spend analysis. This will help inform your needs and sets a baseline to measure and track success. Industry trends, benchmarking data and access to industry or functional experts may help to improve the identification of the right cost opportunities.

Every business is unique, but there are common areas to focus on costs:

Supply chain

  • Accurate demand forecast, informing inventory management and resource planning.
  • Vendor effectiveness and reliability assessments.
  • In-bound logistics planning and rationalising.
  • Inventory management, including critical spare management and contingency planning.

Operations

  • Production planning, relative to demand peaks, shortages and potential labour fluctuations.
  • Labour reliability and productivity management.
  • Support function effectiveness planning.
  • Asset effectiveness, including rent versus hire and build versus purchase assessments.

Business model

  • Divest from non-core markets.
  • Focus on the organisations existing or emerging market strengths. 
  • Rationalise underperforming products or services.
  • Close underperforming segments.

Procurement

  • Rationalisation of supplier base.
  • Streamlining material planning and ordering processes.
  • Category management, including the renegotiation of terms.

Finance

  • Process automation.
  • System integration.
  • Budgetary process re-design.

Systems and IT

  • Software consolidation.
  • Outsourcing/off-shoring, including short term and permanent scenarios.
  • Remote workforce planning.

Our experience has shown that poor design principles will result in poor outcomes that could have been easily avoided – for example ‘lean’ and ‘fat’ functions are equally penalised, compromises on service, quality and staff morale.

It can be prudent to establish two separate management groups, one for developing the strategy and one to execute it. This approach helps establish a common cost management agenda, drives accountability and engagement, develops future leadership capability and ultimately improves the likelihood of your cost goals being achieved.

Looking ahead to become more resilient in the future

Businesses that take a proactive approach will emerge from this crisis stronger and better equipped to adapt and leverage the market opportunities that will eventually emerge.

In these testing times business resilience and an ongoing focus around cost optimisation will be required. A one-off cost saving approach or mindset is unlikely to achieve sustainable value. It is important to manage through the entire lifecycle of this crisis – not just the event.

As a nation we have learnt over the recent months and various crises the importance of mateship, teamwork and support. Don’t take on the burden of crisis management and costs alone. Now is the time for broad authentic communication, with your people, your suppliers and shareholders. Flex your network, reach out to old mentors and trusted advisors.

Now is the time for a renewed focus on costs.
 

Information accurate at the date and time published.

 

If you have any questions regarding the content of this article and would like speak to someone from our team please contact us.