Key Tenets of Cost Transformation
Cost Transformation is a recurring process for businesses that enables them to change their direction.
Companies may divest of existing businesses that do not align with their strategy or core competencies, even if they are successful.
In recent years, activist shareholders have been driving these changes. Activist shareholders are usually hedge funds that demand significant changes in a company’s operations and expect management to quickly reduce expenditures.
Data analysis suggests that activist shareholders have generated higher returns compared to other investment funds. As a result, more investors are seeking activist funds for their portfolios.
Organizations can prepare for activist shareholders by anticipating their demands and implementing a proactive cost-cutting strategy across the enterprise, especially during tough economic times when cost-cutting is necessary.
The unconventional approach of activist shareholders can be modified to benefit businesses. By proactively controlling their cost base, companies can create a stronger and more productive business.
PwC has developed 10 Cost Transformation Principles to help organizations adopt the activist role themselves.
1. Transform sizably and quickly.
2. Reduce headcount first.
3. Rationalize what to retain, not what to eliminate.
4. Create atmosphere of possibilities not dread.
5. Stir the executive levels determinedly.
6. Review in entirety, even the protected interests.
7. Form an adjacent setup for Change Management.
8. Question the manner of conducting business.
9. Review end-to-end processes.
10. Exhibit instant successes.
The first 5 principles focus on the aggressive goals of activist shareholders, while the next 5 concentrate on strategic cost reduction and simplification, which should be the foundation of any cost reduction program.
Let’s go a little more into a few of the principles.
Transform Sizably and Quickly
Activist shareholders no longer accept the previous strategy of reducing expenditures, for example, by 10% over a 5-year period. They want a significant reduction in a relatively short amount of time, such as 20% or more in 24 months, with 50% of the reduction happening during the first 12 to 18 months.
It has been shown that fast and significantly altering expenditures delivers enormous leverage. A study of 29 cost-cutting efforts indicated that firms who reduced expenses substantially and swiftly were able to create 33% more cost savings in almost 1/3rd the time.
Reduce Headcount First
Before reducing personnel, the traditional strategy of cost reduction proposes eliminating unnecessary work via process reengineering. This involves substantial time for a number of reasons. The new plan places a higher priority on staff reduction than on process and system changes.
Reducing headcount creates a void that the remaining employees must fill in order to keep their division of the business running. The remaining staff are required to pick and handle tasks, resulting in more effective and efficient operations.
Rationalize What to Retain, Not What to Eliminate
Total expenditures are investments. Each expenditure is a decision, not in terms of what to eliminate from the budget, but where to spend. Each expense must be seen as possibly obviable. Correct choices are those that narrow the gap between Strategy and Execution.
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