Neil Bansal shares an article on using cost optimization to fuel business transformation.
I’ve enjoyed the variety of reactions and feedback from the inaugural Coppertree Partners blog post. If you haven’t read it, I invite you to do so and come back to me with your thoughts. I had an engaging discussion with a reader who leads an important business line for a financial services organization. He feels stuck because he’s under tremendous pressure to reduce costs but also knows he can’t ignore innovation either. “I agree with your points in the article on reimagination Neil,” he told me, while continuing “but there is the hard reality that I have to deliver on aggressive cost targets now.” I understand his situation and I’m sure there are many of you sharing those sentiments. Financial institutions have been aggressive on cost reduction with many moving jobs outside prime real estate locations. Last October there were articles that even JP Morgan despite its financial strength was “quietly shrinking its workforce” in New York and amidst Covid organizations are busy evaluating their remote and physical footprints.
Cost optimization is critical and if done successfully can fuel your transformation agenda. Top performing organizations know this. A McKinsey study revealed that in financial services top quartile performers spent approximately 3% of revenues on G&A but bottom-quartile performers spent 11% of revenues – a gap of 8 percentage points (holds true for other industries albeit with smaller gaps). I’ve been involved in programs that have reduced G&A by 30% and more but you need to do it carefully given how much digitalization, automation, analytics, and innovation flows through functional teams.
Be strategic and prioritize
In good times companies can neglect costs in pursuit of revenue. You may become a bit bloated and previous cost cuts can creep back in. However cost cutting itself is not a strategy! You need a cost optimization that is coherent with your strategic approach. Understand the future revenue pools of your industry and your company’s current position and trajectory within it. This will help you determine the most valuable activities to fund to capture those pools and deliver on the outcomes you desire. That might mean entering new markets or creating new products or services. It can be easy to neglect or delay this in a cost transformation and leaders shouldn’t be too democratic here. A COO I once spoke with was adamant that “everyone should feel the pain” during a bank-wide exercise to cut costs. He valued fairness and didn’t want to see any one group treated better. His heart was in the right place and I do believe that all teams should be at the table and evaluated, but applying cuts uniformly can hamper innovation and you sacrifice long-term value for short-term earnings when you don’t prioritize. It also doesn’t make sense to cut a dollar that generates dollars or saves you more dollars like a well performing internal consulting team that helps you avoid costs on expensive management consulting firms. Take a total cost of ownership perspective. If you switch to a “cheaper” vendor be sure to account for costs for them to onboard, be trained and ramp-up not to mention the extra time your IT, Cyber, HR and other teams may need to invest.
Key points include:
- Tackling Complexity
- Internal demand
- Cost cutting
Read the full article, Fueling Your Transformation Through a Cost Optimization, on CopperTreePartners.com.