Over the past few years, Canadian businesses have experienced rising inflation, interest rate volatility, and overall economic uncertainty. This uncertainty has put pressure on their growth and profitability, making it increasingly important to closely monitor financial performance and ensure the organization’s ability to respond to unforeseen disruptions.
“Businesses will likely continue to face economic uncertainty going forward. They will need to have a strong foundation for proactively managing costs and profitability. Without that, economic volatility can put companies in very challenging financial situations,” says Charlotte Zhen, Senior Manager, Management Consulting.
In this unpredictable environment, it is important to understand the cost management approach to take in various contexts. Some businesses may need to decrease expenses quickly to address urgent financial challenges (cost reduction) and others may be more interested in reducing low value-add costs to reinvest savings and promote long-term business growth and performance (cost optimization).
In this article, we explore how to practically and sustainably optimize costs through an integrated, business-driven, and digitally-enabled approach.
What is cost optimization and why is it necessary?
Cost optimization aims to ensure that a business’s incurred costs are generating value and supporting overall corporate goals and objectives. Emerging digital solutions provide an innovative and streamlined pathway to optimize costs, enabling businesses to do more with less.
“Cost optimization is about identifying unnecessary expenses and redundant activities, and streamlining them to reduce costs as much as possible while keeping in mind the impact to the organization’s key stakeholders,” says Haya Elaraby, Manager, Management Consulting.
Effective cost optimization can help businesses:
At its core, cost optimization starts with identifying and implementing practical, quick-win cost-saving opportunities to build immediate momentum. These impactful initiatives are meant to generate early successes that set the stage for sustained cost management.
When identifying cost optimization opportunities, it is critical to keep the customer at the heart of the decision-making process to ultimately drive sustainable long-term profitability and growth.
3 reasons why cost management initiatives often fail to meet expectations
Effective cost management demands a multifaceted and systematic approach to controlling expenses across the business. It is a complex process that can be hindered by a variety of challenges.
Companies often wait until they face financial pressure before considering cost optimization, missing the opportunity to proactively manage expenses in a way that isn’t disruptive to the business.
For example, if a company pursues cost optimization at a time of growth, as opposed to cost reduction in reaction to financial hardship, it can pre-emptively and strategically improve processes and redirect resources over time with the appropriate change management, minimizing disruption to the business.
When organizations pursue initiatives to generate cost savings, they often lose track of their longer-term strategic goals and objectives. As a result, the cost reduction implemented may result in increased costs in the future.
Modernizing systems and processes requires upfront investment, but the reluctance or inability to upgrade can result in higher operating costs, diminished competitiveness compared to industry peers, and risk of depleted financial performance over the long run.
“There is also the resistance to change, where there could be factors that are not flexible or prevent organizations from taking on cost optimization initiatives,” says Elaraby.
We recognize these challenges and help clients mitigate them as they develop their cost optimization programs. Our approach is rooted in proactively driving efficiency and effectiveness, tailoring cost optimization initiatives to enable the achievement of both short- and long-term goals, and promoting successful implementation with diligent change management and program governance structures.
An integrated, outcome-focused approach to cost optimization
As C-suite executives bring different perspectives to a holistic cost optimization exercise, collaboration and alignment are essential to ensure that the opportunities identified and implemented are aligned with the organization's overall objectives.
Let’s explore further how management teams can collaborate to drive cost optimization.
Step 1: Align on strategic goals and objectives
Prior to engaging in a cost optimization exercise, executive leaders must align on the purpose of the initiative and what the desired outcomes are. Key questions executives may ask include:
- Is there an urgency to achieve a certain reduction in budget to promote financial stability, or do we want to minimize unproductive spend to reallocate savings towards value-generating investments?
- How can we use cost optimization to gain a competitive advantage and differentiate our products/services?
- How can we save costs, while being mindful of the long-term vision?
It will be beneficial for the management team to set clear guidelines and guardrails on key considerations, such as the impact to customer experience, impact on employee experience, willingness and ability to invest in long-term efficiency, and the level of change required. These decisions will enable leaders to understand the constraints within which they’re identifying cost optimization opportunities in their respective functions.
Step 2: Identify functional cost optimization opportunities
Executive leaders can then leverage a scan-and-triage approach to identify opportunities for cost optimization within their respective functions. Some examples of questions that executives may consider at this stage include:
- What are the key cost drivers/focus areas within my functional area?
- Have certain spend categories been increasing substantially over time?
- How can we streamline our processes to realize cost benefits? Are there any costs that were once justifiable, but no longer necessary due to the company’s shift in strategic direction or ways of working?
- Are there activities that my team is spending time on that have limited strategic value? How can analytics and automation help reduce the time spent?
- How can we leverage automation and digital initiatives to realize efficiency gains and reduce waste for our processes and people? How can we optimize our technology spend to reduce low value-add costs and reallocate to high value-add investments?
The answers to these questions will enable executives to then reflect on opportunities to improve the use of their employees’ time and capabilities, simplify and streamline processes, and leverage technology to drive efficiency and effectiveness.
This leads to the development of function-specific cost reduction initiatives, such as:
It is often best practice to generate quick wins to drive momentum, which would then free up resources to focus on longer-term, larger-scale cost optimization initiatives. When selecting cost optimization initiatives to move forward with, it is also crucial to evaluate the investment required, as well as associated risks that must be managed.
Step 3: Implement the cost optimization program
A cost optimization program is most successful if the opportunities identified are implemented on a timely basis, enabling the achievement of the initial financial objectives set for the program. This requires a program governance structure that focuses on promoting accountability and resolving bottlenecks.
An effective program governance structure typically consists of:
- A steering committee that oversees the cost optimization program.
- A project management office (PMO) that reports regularly to the steering committee on progress against key initiatives and corresponding results, as well as any risks or bottlenecks for resolution.
- Workstream teams that execute the defined initiatives.
How BDO can help businesses achieve practical, sustainable cost optimization
Our cost optimization solutions are tailored to your organization’s specific needs depending on your industry context, current business performance, and short- and long-term strategic objectives. We ensure that the opportunities identified are practical and actionable. Our teams help you identify quick wins to rapidly generate impact and momentum, and pinpoint opportunities for innovation and longer-term, larger-scale opportunities for cost efficiency.
“We understand that each of our clients has unique priorities and that there is no one-size-fits-all approach to cost optimization. We want to make sure that we support our clients in meeting their short-term financial goals and obligations, while also setting them up for long-term success,” says Zhen.
In a cost optimization engagement, our team starts by reviewing your current state financial data to pinpoint key cost and profitability drivers. This includes a complimentary consultation, leading into a four- to six-week jumpstart project that can proactively help you manage costs and prepare for economic headwinds.
Schedule your complimentary consultation with our team today.
Sam Abdulrrazek
Partner, Management Consulting
[email protected]
Jesus Ballesteros
Partner, Management Consulting
[email protected]
Charlotte Zhen
Senior Manager, Management Consulting
[email protected]
Vincent Mok
Senior Manager, Management Consulting
[email protected]
Haya Elaraby
Manager, Management Consulting
[email protected]