The global pandemic has led to many organisations having to rethink costs in order to remain resilient through turbulent times. Whether the aim is to reduce costs by resetting the cost base or to optimise existing spend, now is the time for cost transformation.
Our resources bring together the insights to set your business up for a successful cost transformation project, however you’re approaching it.
Cost transformation insights
Resetting your cost base
The global pandemic has created new challenges for organisations, highlighting the need to keep a close eye on cashflow. In the short-term, organisations must consider how to remove costs to survive. In the longer-term, they must think hard about how to re-align their resources and spending priorities in line with the reality of affordability, changes to their market impact and revised priorities.
The most successful cost programmes use a mix of ‘top down’ and ‘bottom up’ thinking and consider a range of options before deciding on the optimum change portfolio, through understanding the benefit – cost to achieve – risk trade off.
All cost programmes typically start with a drill down into the organisations cost baseline:
- Testing the alignment with strategic priorities
- Using internal and external comparators to bring insights
‘Top down’ thinking challenges where to invest resources to achieve business goals whereas ‘bottom up’ (often using zero based approaches) focuses on the level of output needed and how that can best be delivered.
Developing a range of options through the process helps organisations develop a bolder and more balanced portfolio rather than narrowing down options too early.
Few, if any, cost opportunities come without some level of end state or transition risk, so a rigorous and consistent approach to risk assessment, alongside a clear decision-making process is critical to success.
Technology cost optimisation
Organisations are increasingly turning to technology as a way to drive operational efficiency and save costs. In order to become more agile and digitally enabled, the right technology needs to be place.. Cloud based solutions (both software and infrastructure), automation amongst others can drive significant benefits both in terms of productivity and agility.
However, there is a risk that organisations lose sight of the benefits that technology is meant to deliver. Organisations should focus their investments around solving their business issues and invest in technology and solutions that align with this. Areas to consider when making technology investments should include:
- Look for off the shelf, or standard solutions and adapt your processes if possible - keep customisation to a minimum as this drives up cost of implementation and support
- Develop a ROI / benefits plan around your needs and track taking into account both cost and time invested as much as benefits generated across the whole lifecycle – technology has ongoing costs as well
- Include the end user from the start when shaping the features of digital solutions to make sure any investment meets the needs of the business
- Build incremental implementation of your solution through an MVP approach to prove value early on – if the value doesn’t materialise don’t be afraid to change approach / solution
Cognitive contract management
Typically, 3-5% of total supplier spend is lost through overpayments. This ‘commercial leakage’ is recoverable at scale and is a great way to inject cash back into your business and reduce long-term supplier costs. The challenge has always been that this leakage is locked behind a complex web of commercial documentation, including detailed contract clauses, POs and invoice backups.
Traditionally this was addressed through supplier audits, where supplier audit experts forensically assessed commercial documentation to identify where things were going wrong. These supplier audits are often fruitful, but are time consuming and can only cover part of your spend.
With advances in cloud maturity we are now able to unleash the full potential of technologies like OCR, NLP and other unstructured data techniques in a cost-effective way. This enables us to codify the supplier audit checks and execute them cheaply at scale. We have worked with a number of clients to shape this new way of uncovering leakage and ultimately to build automated measures to prevent the cash from even leaving the door. We call this Cognitive Contract Management.
The role of tax
Tax and Finance functions play a pivotal role in helping their organisations reduce the liabilities or further improve cash flow through tax incentives, reliefs and process improvements.
Better management of VAT cash flows can increase working capital by 5%-20%, yet the role of indirect taxes is often overlooked by finance and tax leaders. There are also a number of areas where businesses commonly overpay or under recover VAT, which can be reclaimed from HMRC. These VAT reclaims can generate a cash windfall and ongoing cash savings.
It is not unusual for businesses to underestimate the scope of tax reliefs and incentives available to them through R&D incentives and Capital Allowances, meaning they often miss out on timely and permanent tax benefits.
Our approach to supporting clients on working capital is our Cash Taxes Review focused on VAT, R&D Incentives & Capital Allowances Reliefs to identify new, additional, or improved claims and/or take advantage of available reliefs -the aim being to obtain cash repayments. The review can cover all three areas or any combination of the three, depending on the client’s circumstances. This is not tax planning or a tax minimisation strategy.