Strategic Cost Transformation
Thriving in uncertain times
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Contents
How to thrive and grow in today’s disruptive and uncertain business
environment? 1
Transforming to mitigate external disruption 1
The five triggers of Strategic Cost Transformation 3
Our approach to Strategic Cost Transformation 5
Lessons learned from Strategic Cost Transformation programmes 6
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Strategic Cost
Transformation
How to thrive and grow in today’s disruptive and uncertain External macro trends
business environment? have increased pressure
Businesses today face extraordinary, prolonged uncertainty and disruption: high on companies to
inflation, rising interest rates, softening demand, geopolitical conflicts, supply
shortages, currency volatility, new regulations, and changes in tax policies, to name a establish competitive,
few. In addition, the effects of the global pandemic are continuing to be felt in some
countries even as others have returned to business as usual. Meanwhile exciting
sustainable cost
developments in new technologies and intelligent automation are allowing structures and the right
organisations to harness new capabilities and insights through data to make better,
informed and rapid choices on their ways of working, service delivery model and capabilities to operate
organisational setup. and grow effectively.
All around the world the current macroeconomic and technological challenges —
combined with ongoing difficulties such as talent shortages and technology disruption
— are making it hard for companies to achieve their growth and earnings targets.
Advanced economies are expected to see a pronounced growth slowdown, with all
industries and sectors feeling the impact. The world’s leading companies are not
immune, with many finding themselves facing widespread hiring freezes and lay-offs.
Even in this disruptive and uncertain business environment, companies are still
expected to grow. Achieving the simultaneous goals of sales growth while reducing
costs requires a balance of old and new: applying and refining proven cost-saving
methods using the latest digital technology while at the same time investing in new
markets, new products, and new technologies.
Many companies fail to achieve their cost reduction and transformation goals because
they approach the effort as a portfolio of disconnected initiatives without the necessary
sponsorship, coordination, discipline, and investment. They fail to establish the
required governance, neglect to define success in a consistent manner, and fall short
when managing change.
Ultimately a successful optimisation and reduction of costs requires more than an
isolated view on corporate costs. A rigorous, end-to-end analysis of the company’s costs
is needed and, our experience shows, a fundamental rethinking of the business, the
usage and leverage of data insights as well as technologies, and the incorporation of
agile ways of working. These steps are key to creating a successful future business. This
paper analyses the cost-related challenges companies currently face and shows the
scenarios that trigger a cost transformation programme – and how Deloitte can help
you reshape your organisation to achieve sustainable cost structures.
Transforming to mitigate external disruption
A recent Deloitte Survey of nearly 300 senior business executives from leading global
companies across different industries found that rising inflation, talent shortages and
supply chain constraints are the triggers for 90% of cost transformation programmes at
global firms. The survey shows that more than half of the companies aimed for cost
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reductions of a minimum of 10% (Figure 1). However, 72% of surveyed companies still
missed their programmed cost reduction targets, mostly due to a combination of
external barriers and internal constraints, infrastructure / system-related challenges
and disjointed transformation efforts without the necessary governance and
coordination.
Figure 1: Cost reduction targets and success rates of cost transformation programmes
Top factors driving success in cost reduction programmes
To address internal and external challenges, our advice is to clearly define how an
organisation can achieve a competitive and sustainable cost structure and set up the
right capabilities and technologies to run and grow efficiently.
The companies surveyed in the above-mentioned survey cite several key success factors
and lessons learned that can help them achieve their cost transformation targets. These
include solid tracking and reporting (72%), a clear business case (65%), effective change
management (64%), investment in technology improvements (62%), realistic cost
targets (58%), and dedicated leadership (46%).
Senior executives recognise the need to shift away from small-scale, isolated initiatives,
and to embrace all-encompassing transformation efforts using all available options —
not only standard cost levers, such as procurement and organisational restructuring,
but also technology-driven cost levers and analysis tools, such as process re-
engineering through process and task mining (see our articles on Process Mining),
intelligent automation, data and artificial intelligence strategies, and adoption of cloud
architecture solutions (Figure 2).
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Figure 2: Most utilised or planned transformation levers
The five triggers of Strategic Cost Transformation
Different strategies require different approaches. In general, we see five starting points
(Figure 3) for a Strategic Cost Transformation:
1. Getting the house in order: Where a lot of change is expected, often because
of the arrival of a new leadership team or management group, an organisation
needs to clearly articulate its cost composition and baseline: in other words,
getting the house in order.
Client Example: In a turnover Deloitte helped a packaging client establish a
solid cost baseline across multiple functions compared to industry benchmarks
and address the identified fast cash-saving opportunities to stabilise
operations.
2. Local transformation initiative: A local cost reduction initiative could include
a complex process redesign, IT systems migration, internal reorganisation,
etc., all of which have wider impact on the organisation and would benefit
from the design and mapping of an enterprise-wide blueprint.
Client Example: Deloitte supported a global pharmaceutical company in
defining its end-to-end processes and services to streamline, harmonise and
ultimately break down functional silos / handoff points across hire-to-retire,
meetings congress and events, procure-to-pay and order-to-cash. The
definition of new ways of working and articulation of which activities could be
centralised / harmonised above market and which should be completed within
local markets allowed the organisation to deliver its services at a lower total
cost.
3. Fundamental cost reduction or income model change: If tactical cost
reduction opportunities are exhausted, a more radical review across the
entire business is required to bring about fundamental change in the cost base
or in income. A target operating model (TOM) approach can underpin the
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design process around smart sourcing, shared services and consolidation
options, among others.
Client Example: A pharmaceutical company had set very ambitious
transformation objectives, aiming to build a more effective and efficient end-
to-end operating model, with a Return On Investment (ROI) in less than two
years. Deloitte supported the client on the following key objectives: an
integrated, fit for purpose operating model and technology across all key
business functions; initial public offering (IPO) readiness (from programme
start) in 1.5 years; target savings of 26% cost reduction (labour arbitrage and
efficiency gains) and USD 30+M annual savings due to Global Business Services
(GBS) and other transformation initiatives.
4. Changing strategy: Systemic (internal or external) issues within the business
may require a major change in corporate direction. This requires
unconstrained thinking. Designing or envisioning a target operating model
(TOM) from scratch, unencumbered by current realities, enables this process.
Client Example: Deloitte supported a global pharmaceutical company in
developing a new agile, cross-functional, outcome-focused commercial
operating model blueprint for their top 10 countries. The focus of the
programme was the design of the organisational setup, new commercial
capability maps, end-to-end cross-functional / agile management processes
and mindset shifts / leadership coaching.
5. After a merger & acquisition or separation: The organisation has separate
organisations/ brands/ groups which operate parallel operating models with
significant duplication between them. An operating model analysis can
highlight areas of overlap and duplication, and a TOM design provides a
picture of the envisaged optimised end-state, articulates the operational and
IT synergies, and supports an integration process.
Client Example: Deloitte supported the separation of a division from a global
pharmaceutical company. Post carve-out and separation, the stand-alone
organisation was able to radically review its operating model, unburdened by
the decision-making processes and capital allocation decisions of the previous
owner, to create a business that is even more competitive in the market.
Figure 3: Strategic decision framework for a cost transformation journey
A strategic decision framework for a cost transformation journey
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While different outcomes (cost refinement, efficiency, and transformation) result from
pulling specific levers in response to the five different Strategic Cost Transformation Organisations
drivers illustrated in Figure 3, it is best, in our opinion, not to consider a strategy in
isolation. Leading organisations with successful cost transformation programmes look
need to take an
to pull multiple levers simultaneously, building on quick wins while implementing all-encompassing
continuous improvement measures with a medium to long-term view on cost
efficiency. approach to cost
transformation,
Deloitte’s experience across multiple sectors indicates that double digit savings on the
existing cost base can be unlocked over the course of a Strategic Cost Transformation using both
programme resulting in double digit EBITDA improvements, but only when taking an
unconstrained view of the business, adapted to the current market landscape and
operational and
ambition, and the organisation’s maturity. technology levers
Our approach to Strategic Cost Transformation to meet their cost-
Sustainable and successful cost transformation programmes that we have seen
saving and
commonly follow a similar approach, commencing with an initial diagnosis to rapidly efficiency
identify areas for potential improvement, followed by a detailed design and
implementation phase (Figure 4). They involve the following: ambitions.
- A top-down approach with engagement from business leaders to align on the
ambition and design hypothesis and agree on measurable results to realise
within a given realistic timeline.
- A holistic, data-driven analysis establishing the baseline – capabilities,
processes, costs, organisation, activities, and remuneration – and also
including benchmarking conducted on functional areas and e2e business
processes (e.g. order to cash) to identify and follow through on cost-saving
opportunities.
- Realistic consideration of people and the cultural change aspects, with a
change management roadmap and communication activities laid out across
the organisation.
Figure 4: Deloitte’s high level Strategic Cost Transformation methodology
Accelerators
To help carry out your cost transformation efficiently, Deloitte has developed a suite of
tools and accelerators that help with data collection and verification, speed up
capability assessments, and provide frameworks for effective design considerations
while supporting the programme management and reporting (Figure 5). Tools
generated in-house and Deloitte’s established partnerships with innovative third-party
software and data providers mean that organisations can benefit from the latest
technology.
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Figure 5: Deloitte accelerators and tools
Lessons from Strategic Cost Transformation programmes
Deloitte has identified key factors that make cost transformation programmes succeed
or fail. Ensuring the impactable baseline and ambition are correctly captured and
measured, together with a well thought through list of ways to prioritise, effectively
resourced and communicated through the different layers of the organisation, are
among the top areas that must be implemented to avoid going off track and ultimately
failing to achieve the desired benefits (Figure 6).
Figure 6: Success factors in Strategic Cost Transformation programmes
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Our experience shows, that to thrive in the currently challenging economic
environment and achieve cost targets, a company needs a holistic view on its costs.
Depending on their unique circumstances or situations and strategic goals,
organisations can pull different levers to achieve the desired outcomes of cost
refinement, efficiency, or transformation, including an associated increase in EBITDA.
With its proven Strategic Cost Transformation methodology, appropriate tools and
long-standing expertise from different, relevant projects, Deloitte can help you to
achieve your targets and sustain them in the long run.
Have you already thought about a Strategic Cost Transformation programme in your
organisation to withstand the current economic challenges and emerge from the
current difficult environment stronger than before? Do you have a clear idea of your
cost targets and do you need an experienced partner who can help you achieve them?
If you are interested in learning more about how we can help you with your Strategic
Cost Transformation programme, please get in touch with one of our experts.
Wolfram von Ehren Steven Marshall
Senior Director Director
[email protected] [email protected] +41 58 279 6821 +41 58 279 7620
This publication has been written in general terms and we recommend that you obtain
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publication. Deloitte Consulting AG accepts no liability for any loss occasioned to any
person acting or refraining from action as a result of any material in this publication.
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References:
12023 MarginPlus Survey: Transformation Amid Disruption | Deloitte US 7
