Exzellenz in IT-Management und Digitalisierung

Optimisation: Why now it’s more important than ever to optimise and not simply cut costs

The phrase “we are living in unprecedented times” has now become a part of our everyday vocabulary and is no longer the headline grabber that it was at the start of the COVID-19 pandemic and the lock-downs that happened across the world. The phrase “the new normal” is another that many industry analysts and experts have coined over recent months.

However, COVID-19’s impact on our lives and businesses has been drastic and it is not over so the unprecedented times will continue for some time and one could question if we have yet arrived at the new normal.

There is still no vaccine or cure; our personal lives continue to be disrupted while sadly many across the world continue to lose loved ones as the virus continues to strike.

Our business lives also continue to be impacted. Those fortunate enough to still be in work are largely working from home but many are also staring at redundancy and unemployment. For some this will be the first time they have experienced unemployment but for too many this will be a bitter repeat with their second redundancy in the past twelve months.

It is common knowledge that the travel and leisure industry has been hit harder than most with thousands of staff laid off not just once but twice. If you were unfortunate enough to work for Thomas Cook you may have initially counted your blessings when BA, TUI or another travel company stepped in to rescue your career. However, it was a short lived respite and your career is once again on hold while those companies cut costs with wholesale redundancies.

So, sitting alongside the unprecedented, new normal, phrases is another old but all too familiar phrase that should be considered as part of the COVID-19 lexicon – that of “we need to cut costs”.

It is not just the travel and leisure industry that has been impacted however, but all industries. There is not a company or organisation out there who has not had to rethink its business model and consider costs whether that is due to the hit to revenues or impact of working from home. COVID-19 has touched every business and organisation from both the Public and Private Sectors.

For those that are hit the hardest the focus has inevitably turned to cost, and CFOs have had some tough decisions to make. But is it just about cost? The answer to that question is a resounding NO because to remain sustainable as a business also requires investments. If your business is to be there when the “new normal” eventually settles, you cannot just take the chainsaw out and take down all the trees with low hanging fruit.

While laying off several hundred or thousands of staff now may have an immediate impact on the bottom line, is it sustainable? Can you easily recruit those staff and the capability and capacity they bring when needed? Hiring and firing staff is not an instant process either on the way in or on the way out. Any cost reduction to be delivered from staff savings needs to be carefully considered and based upon a structured approach.

CFOs therefore need to be more topiarist and less lumberjack in their approach to any cost reduction plans. A skilled topiarist will not turn to the chainsaw in their hour of need but their favoured shears and approach the laurel with a clear vision and tact to achieve the desired outcome. They will be planning ahead and will consider what will be needed further down the line to create that horticultural work of art and not end up with a lot of stumps and offcuts.

Business and cost management is the same. CXOs need to consider not only the current cost base but also what investments will need to be made now and, in the future, to ensure not only long term survival but an optimised business that will thrive in the post COVID-19 new normal world.

Cost cutting is a tool, but it is one of many. The result should not simply be reduced costs but optimised costs such that the business is positioned to respond to the upturn and new world order that will inevitably follow. For the tool to be effective over the long term, smart CFOs will know cost cutting is not a chainsaw but a pair of shears that can be used alongside other tools to deliver a successful outcome.

So how do you ensure your costs are optimised given the many competing business pressures COVID-19 has caused?

The answer lies in data and the structured use of it to drive your business strategy. This is essential to ensure the strategy can be implemented and meet the objectives of short term cost reduction with room for strategic investments to provide long term sustainability.

Many organisations will initially adopt the “pain-share model” and focus their attention on their suppliers, contractors and service providers – “It’s simple: I will reduce my costs by reducing the costs of others.

But is it always the right thing to do and if so, how far should you go?

Businesses will always seek to manage and drive their purchase costs down through their regular procurement business-as-usual practices. COVID-19 will have undoubtedly caused many to revisit and go beyond this however, as one thing is certain – it is not business-as-usual!

Depending upon how the business has been impacted most will have taken one or more of the following step

  • Focus on their existing product supplier base and seek to further enhance discounts they can obtain
  • Cancel or seek to defer any pre-existing orders without penalty where the products are no longer immediately required
  • Seek to renegotiate commercial terms of long term IT and Business Process services agreements
  • Reduce contractor head count

These are all viable steps to take to reduce external spend but key to ensuring you are optimising and not simply cutting costs is to make sure these actions are sustainable.

You will need products when the upturn in business comes and you need to ensure your suppliers and service providers can continue to support you. If you cut too deep and make the pain for them too great, the problem can swiftly rebound, and the problem becomes yours once again.

By having a clearly defined strategy and leveraging market pricing and cost data where possible, you can make informed decisions on what can be achieved in the short term while protecting the long term outlook for the business.

The same is true for permanent staffing – while government schemes may have provided some assistance to businesses through being able to furlough staff, permanent job losses have been inevitable. Management of head count through permanent staff reductions and redundancy programmes will be high on the cost cut agenda for many organisations and will regrettably continue for some time. Strategy and leverage of cost and benchmark data is therefore key in ensuring the ongoing sustainability of the business. While the short term emphasis may be on survive, the long term game is still to thrive. Only a clearly defined optimisation strategy can ensure the latter.

At LEXTA we have seen an increase in demand for our benchmarking and cost optimisation services as businesses look to ensure they adopt an informed strategy. It is therefore reassuring to know that many organisations are adopting a sustainable approach by pursuing a cost optimisation strategy rather than simply cost cutting.

If you would like to find out more about how you can ensure you are topiarist and not a lumberjack then we would be delighted to hear from you.

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