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How cost take out can enable a performance mindset

Executives are addressing the changing global environment by anchoring their cost structure in sustainable performance as an attitude.


In brief

  • In this new, challenging economic cycle, only those companies that operate sustainably, cost-efficiently and adaptably will thrive.
  • Cost saving potential can be improved when performance improvement is embraced as an attitude, rather than a single project.
  • Performance as an attitude starts with challenging the status quo and not abstaining from taking-out cost resolutely.

Today, after four years of business leaders having to respond to repeated shocks, many companies find themselves in a difficult position. They have had to quickly react to global changes such as rapidly shifting consumer behaviors, a reconfiguring of supply chains, an upending of the global energy market, and rapid changes in the growth, inflation, and interest rate environment.

Each of these shocks has led to existing cost structures being jettisoned. The higher costs of capital and increased pressure on efficiency require companies to reset their assumptions. Besides, big transformations need to be funded increasingly through internal sources, within a shifting competitive landscape, with accelerating technology innovation, and the continuing need to become a more sustainable business to attract and retain customers and investors.

Redefining cost structures

 

Now, it is the start of a new economic cycle with its own challenges. Only companies that operate sustainably, and cost-efficiently, with constant adaptation to the challenges of the future will thrive. It is “survival of the fittest” in its purest form – not the biggest ones, but the most fitting ones, those that adapt most successfully.

 

We should also bear in mind that success is also being defined in a new way. Financial objectives sit alongside social, societal, and environmental ambitions. This requires agile business models and flexible cost structures. Business leaders must put the topic of cost take out, and continuous performance improvement, as a priority on their agenda. They need to secure their organization’s future by building sustainable resilience against disruption and embedding operational and financial excellence deeply into their corporate culture.

 

According to the EY July 2023 CEO Outlook Pulse Survey, the majority (63%) of respondents are either maintaining or accelerating their portfolio transformation. This bolder cohort will fund their transformation mainly internally through performance improvement. This reflects how the environment has shifted from one of growth at any cost, fueled by ultra-cheap money and elevated liquidity, to a new paradigm of sustainable investments, with a clear path to profitability or value creation for every part of the business or new initiative.

We were really clear that the opportunity was massive, what we were less clear about was, how we structure ourselves in an agile, lean way to fuel our growth aspirations

Companies may think that the cost saving potential has been looked at many times and has already been exploited. According to our experience this perspective changes, when the exercise becomes a) more fundamental and looks at the business model as a whole rather than optimizing the existing setup and b) when it is not about “performance as a project”, but rather “performance as an attitude”. 

Challenging the existing strategy and business model based on the current and anticipated market conditions is the first step. A limited view focusing only on one function or part of the business, as often seen in the past, does not go far enough. Structures and processes must be radically re-imagined and -designed to be agile and flexible, supported by state-of-the-art technology. Adapting holistic KPI-systems and ensuring a continuous identification and drive of cost efficiency potentials is a second important step.

On top of that, technology, especially the dynamic development of Generative AI, offers attractive possibilities to reduce cost and enrich roles. It also frees up capacity for the necessary transformative work and change management.

In BOGNER’s 90-year history, our setup, structures, and processes had grown too broad to fit today's demands to generate the earnings we needed for sustainable growth – we had to change.

Transformational guiding principles for reimagined cost structures

The re-imagined cost structures need to be as close to a “green field” or “minimum-viable-product” approach as possible to form a sustainable basis. They should also follow these guiding principles:

  • Courageous targets – cost take out programs should be designed with a clear target and in a transparent manner. Improvement measures must have a clear reasoning and follow the same, methodologically sound basis with an implementation based on actions clearly linked to financial impact.
  • Wide lens – squeezing out additional efficiency in the status quo will fall short. Instead, it must be about levers with fundamental changes to the business model, structures and processes. They also need to take into account technological potential and the juxtaposition of financial, social, societal, and environmental goals.
  • Accountability – ownership and a sufficiently strong support in the organization are critical in the development, as well as in the detailing and implementation of, cost take out measures. This is the only way to establish continuous improvement of these structures
  • Implementation drive – anchoring measures in the KPI system and creating meaningful incentives sometimes seems counter-intuitive. Often, we hear the argument that teams now need to fix things that have gone wrong under their watch in the past. But this approach falls too short. People need to be sustainably incentivized to correct deficits and avoid them in the future, even if they share the responsibility for deviations in the first place.
  • Culture change – especially in large and historically very successful companies dealing with cost structures must often be learned anew and continuously renewed. A communication and change strategy accompanying the cost take out program increases acceptance, enables realization, and promotes a holistic attitude towards continuous cost control. This is a must for all companies since the negative connotation of “cutting cost” has to be replaced by the neutral motive of “funding sustainable transformation”.

EY teams can help you to unlock cost potentials efficiently and to implement a culture of sustainable performance as an attitude. The EY approach covers potentials along all relevant areas of your business, while at the same time making necessary changes to the business model itself and adapting structures.


Building a culture of continuous improvement or unlocking potential for sustainable transformation

The experienced EY teams guide EY clients in detail in cost take out projects, from the concept phase all the way through implementation and stakeholder management. We leverage our truly global network, the experience of EY people as well as the breadth of proprietary, industry leading tech solutions to help enable a sustainable transformation at pace. One leading example is our wavespaceTM, which efficiently speeds up the concept phase and jump starts the implementation while helping ensure stakeholder buy-in at the same time.

Summary

If companies want to successfully master the versatile challenges of the future, management has to navigate and act fundamentally. This implies constantly challenging the status quo and not shying back from taking out cost resolutely. It is about anchoring a mindset of sustainable performance as an attitude within the organization to master the survival of the best fitting firms and to secure a company’s future.

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