Moving on to your opportunity gap
Understanding your organization’s opportunity gap involves focusing on how to align its resources most effectively in order to maximize its potential. This means assessing the business across three core lenses: strategic, structural and operational. These are the three key levers that management can pull in order to improve cost-to-income ratios.
From a strategic perspective, is your organization operating in the right markets? Should it have a presence in all its current country locations? Is it targeting the right clients? Are we in the right lines of business? Is the product portfolio too big or too small? Does the business need to scale up in some areas in order to improve its return on its cost base? Is it so sub-scale that exiting the market would be a better bet?
Alongside these big strategic issues, there are also structural questions to consider. Do we need to add or remove capabilities to deliver the strategy? Does the organization have the most appropriate legal entity status and capital structure? Is its organizational structure still fit for purpose? Where are operations established? Is there scope for more offshoring or are there good reasons to bring more activities onshore? This is a particularly pertinent question in light of the resilience challenges experienced during the COVID-19 pandemic by some captives and outsourced services providers in lower cost locations.
The third – operational – lever looks at how the organization does what it does. Are there processes that could be redesigned or automated to improve efficiency? What benefits could be gained from increased digitization of data? Could the business work with suppliers in new, more flexible ways?
Pulling the strategic and structural levers will require senior executive sponsorship, and potentially regulatory approval, whereas operational levers will be available to all COOs and heads of function.
Addressing the perception gap
The perception gap is arguably the most important of the three “gaps” in the current environment – reflecting the rapid and dramatic changes resulting from the COVID-19 pandemic. Last year’s strategy based around a three-to-five year cost target may no longer meet investor and analyst expectations. Strategies based around ongoing incremental and steady improvement in cost-to-income ratios are unlikely to impress – not least because, after years of cost cutting programs, further significant improvement may be hard to achieve. Even where FS businesses have made progress in reducing costs, the goal posts have moved. Stakeholders know that the possibilities for substantial and rapid change have increased – and that the pressure for change has also risen. They are looking for a more inspirational message than one of gradual cost reduction.
CEOs and CFOs need to articulate how they are planning to transform their cost base strategically. They need to be transparent about their current position and what they are aiming to achieve.
If the right strategy is no longer about simple cost reduction, the story that CEOs and CFOs tell will likely be more nuanced than in the past. An alternative, new strategy may be anchored in scalability (ensuring that costs don’t grow in line with income) or flexibility (ensuring greater resiliency rather than single operating model or supplier reliance) or transparency (simplicity, ensuing appropriate understanding for all stakeholders or investors) in addition to the traditional anchor of ‘reduction’.
Addressing the perception gap essentially involves reframing the organization’s cost performance goals. It requires clear and coherent explanations of why these new goals make sense and how they will be achieved. New yardsticks for assessing progress will need to be established. If the core goal becomes scalability, strategic replatforming, or cloud migration may be the best indicators of positive momentum. If management want to build a more flexible business, evidence of the nature of outsource arrangements and the ability to hire talent in a more fluid way could indicate success. The financial impact of such changes may not be revealed quickly in financial statements, so their value will need to be communicated clearly.
Extracting maximum value
Extracting maximum value from these cost strategies isn’t just about sound program management or the use of clear key performance indicators. It’s as much about evolving the roles of all members of c-suite.
Extracting maximum value in terms of market credit depends on generating understanding of and support for the new cost strategy. COOs will therefore have a key role in the story-telling process, helping CFOs, and CEOs to tell the investor story. They still need to ensure that programs to increase cost transparency, flexibility and scalability are being implemented appropriately. They still need to monitor progress and measure success. But they will also need to ensure that investor relations and senior executives can deliver powerful analyst presentations that convey the coherence, subtlety and detail of the new cost strategy – making sure they can talk about “what” the cost base is as much as “how much” the cost base is.