Getting Cost Optimization Right

There was a lot of debate this summer on whether or not the U.S will enter into a recession by year’s end. Two consecutive quarters with negative GDP growth later, it’s seeming inevitable. The last quarter also saw a rise in inflation, a decline in the stock market, and an inverted treasury yield curve. While the job market continues to stay strong the Federal Reserve has indicated that interest rates will continue to rise through the year, in an attempt to combat inflation. These are all traditional indicators of a slowing economy and we could enter into a recession by the end of the current financial year ie. 2022-2023.j???

Coupled with the economic slowdown is the recent pandemic, the effects of which we are still feeling and will continue to do so for some time to come. The global economy is yet to recover fully from the COVID crisis, though the US has fared better than most.

Pressure Leads to Errors in Decision-making?

In the face of looming uncertainty over recovery from this pandemic, executives and leaders are under a lot of pressure to restructure their organizations to reduce costs while maintaining performance and staying competitive. According to a recent study by Gartner,??

“Nine in 10 organizations resorted to cost reductions in response to the pandemic-driven recession. This is expected to continue, with more than three times as many executive leaders expecting cost reductions to continue, rather than abate, in the coming 12 months.” (Finance Research Team, Gartner, 2022)?

While restructuring is the right move, the unusual circumstances we’re all operating under could lead to errors cropping up in executive decision-making. Spotting them in advance will help businesses make better choices in the coming months. ?

Unintentional Mistakes?

Whether you’re making time-sensitive decisions about cutting overheads, reallocating resources, or funding growth, leaders need to recognize common cost optimization errors and avoid them.??

Using recent research by Gartner, I am recommending the following strategies to avoid common mistakes that businesses make when implementing cost optimization strategies.???

Setting Unrealistic Targets?

Only 43% of organizations achieve their cost savings target in the first year of cost reduction.??

A common response to economic turbulence is to set unrealistic cost savings targets based on current financial outcomes. You think, “We’re doing well financially now, so let’s use major cost-cutting as a way to save early.” This is short-sighted.?

Across-the-board cuts penalize the more efficient parts of your organization and can result in eroding important sources of value. It can also leave you without a buffer when your income dips during difficult periods. Equally important is the effect it can have on your team, who might get demotivated by big budget changes and feel like they’re being forced into unwinnable situations when meeting performance goals.??

A much better approach would be to plan cuts in tranches that can accumulate across the recession. Instead of making aggressive cutbacks right at the start of the recession, keep them pliable and agile to meet requirements as they develop.?

Optimization Built Without Behavioral Change??

Only 11% of organizations can sustain cost cuts over three years.??

It’s not enough to slash the budget and then move on as if it were business as usual. You need to introduce behavioral changes to your organization that can support the optimization effort. Short-term cost-cutting strategies will not lead to smart spending decisions.?

Although some costs— travel, bonus payouts, benefits, and luxury packages—can be limited by introducing changes in policy and adding restrictions, costs tend to reoccur as you fall back on old habits to maintain growth.??

You need to accompany cost-cutting measures with definite changes in operational wisdom and strategy. Changing spending habits across the organization will keep your larger optimization efforts on track and fruitful.??

Backing Away from Innovation??

Only 9% of organizations create enough capacity to take on the growth and innovation opportunities they pursue.??

Cost reductions can drain resources from high-impact innovation projects or indefinitely delay funding. This might seem like a good step in the short term, but in the long term, you will lose ground—and market share—to competitors who will keep innovating.???

Don’t let innovation become a casualty of your need to save resources. A better bet would be to shift the focus of innovation, from product development to retraining. Invest the inevitable downtime in production toward helping your employees gain skills they will need to stay current in the industry and improve product development once your finances are back on track.??

Delaying Digital Transformation?

Although most organizations have plans for digital business transformation, only 11% have achieved it at scale.??

A primary reason is that organizations are underspending on digital transformation. More than 60% of CIOs are self-funding their digital business initiatives through cost savings from other budget areas.??

However, realizing scale from digital efforts requires more substantial funding than what is generated by IT budget savings; digital transformation is not a zero-sum game.??

Organizations must plan for the cost of integrating new digital business capabilities into their business and the impact this will have on operating costs, otherwise, they will be left dealing with underfunded digital initiatives that do not generate competitive results. Another way to approach the situation is to research digital alternatives that could help you reduce overheads and optimize your current resources.???

Ignoring Data and Network Security??

The vulnerability of private data is a growing concern for organizations, as almost 60% of data privacy failures result from organizations’ own employees.??

Cybersecurity is quickly growing to be the biggest data-related concern for organizations that are capable of leveraging future tech. Yet only 50% of future-ready businesses have a cybersecurity plan in place. And, of those, about a third haven’t changed their plan since the pandemic. The recent shift to a remote-working environment has also compounded the security risk.??

Cyberattacks will only increase in size, sophistication, and scope. If you’re planning on making organizational changes without giving due consideration to your cyber vulnerabilities, you’re leaving yourself open to cyber risks, both from malicious attackers and careless staff.??

Conclusion?

Every business that isn't operating in a rapidly expanding industry will be looking to implement cost optimization measures over the next year to combat the looming recession and beat inflation.??

During times of uncertainty, businesses feel cornered into taking ad hoc cost-cutting measures. To anticipate and manage such uncertainty, business leaders must plan cost optimization measures that will drive short-term efficiency and effectiveness while sustaining long-term growth.??

Being mindful of these mistakes is the first step for leaders trying to improve strategic cost optimization.?