By Chris Moore, lead for KPMG's Finance Transformation Advisory practice
Costs have been top of mind for finance leaders since the start of the pandemic. But when coming up with a cost optimization strategy to help them survive, sustain or grow the business during unpredictable times, they need to consider more than just cost-cutting measures.
The chief financial officer and finance leaders play a fundamental role in an organization's cost optimization initiatives, but they need to ensure that when making decisions they're creating value — not destroying it. This process cannot happen in isolation. It must be embedded in the business, with sponsorship from the C-suite and lines of business.
Creating value, rather than destroying value
At the start of the pandemic, the first reaction was to reduce costs — versus optimize costs — as businesses went into survival mode. COVID impacted industries and businesses differently as some thrived while others struggled. Some had to repurpose not just their business model but their entire cost structure.
Over the past year, we've seen some businesses slash expenses to the point where they're ridding themselves of some of the foundational requirements for running a business. While it may help them survive in the short-term, it doesn't leave them in a sustainable position going forward.
For example, as a retailer shifted from in-store sales to digital channels to survive the pandemic, they may have focused on minimizing shipping costs rather than maintaining customer satisfaction. If they cut costs to the point where it takes too long to get products to customers, they may end up losing those customers to competitors with a faster fulfilment cycle.
At the same time, the retailer is missing an opportunity to invest in digital channels for post-pandemic growth, and instead is only viewing it as a stop-gap measure during the pandemic. So, when looking at cutting costs, it's important to understand the entire value equation.
Understanding the future state of the business
When finance leaders look at cost optimization initiatives, they should be looking into the desired future state of the business. Usually this process is a natural evolution of the business; they look at how the business has changed over time and how they're going to reposition investments.
But with COVID-19, many businesses were forced to change, whether they were ready or not. They need to understand what their post COVID future state model looks like so they're basing their cost optimization strategies on the future, rather than on a historical model with irrelevant data that won't be of any use in a post-pandemic world.
When finance leaders look at cost optimization initiatives, they should be looking into the desired future state of the business.
We've experienced a lot of uncertainty over the past year, but we're not out of the woods yet. What happens in the next three months may be different from what happens in the next six months. Businesses need the ability to predict future trends, understand the impacts on their business model and adjust accordingly as more information becomes available.
Understanding those trends will be key to determining if your cost optimization hypothesis and strategy are working, and where you might need to course correct if the business model or outside environment is changing.
How automation and AI can help
New tools and techniques can leverage insights from both internal and external factors to help predict where the business is going. But there's a lot of data that needs to be analyzed, so the more you can use intelligent automation, bots and AI to pull out key trends and insights, the better off you'll be.
One of the major misconceptions about cost optimization is that it's all about cost-cutting. Instead, these programs should be considered from a transformational perspective. How can you change your processes or drive efficiencies through continuous improvements? How can you ensure the business is scalable to support future growth, particularly as we come out of the pandemic and embrace the next normal?
Maybe you were able to reduce costs by 20 per cent, but if you took out services that resulted in longer fulfillment cycles and customer dissatisfaction, that's not going to help the business in the long-term. A better approach is looking at how to redefine processes and drive efficiencies at the activity or transaction level and making it a better experience for the customer.
To do this, automation is critical. Without a robust forecasting process supported by automation and technology, a business lacks the ability to quickly react to change. By having a forecasting process that adapts to what's happening, not just within your own business but to external factors, your cost optimization strategy can be much more agile.
While the pandemic has presented rapid-fire challenges for all businesses in all industries, it's also an opportunity to move away from cost-cutting to creating true long-term value for the business.
For more information, check out our recently published Cost optimization playbook: A guide for ensuring stability and funding growth.
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