How do you make successful cost optimization a reality?

Leaders often struggle to establish?cost optimization?that is scoped for long-term sustainability. According to Gartner research, only 11% of organizations maintain cost savings for three consecutive years. But when done right, you’ll be able to maintain ongoing operations while finding opportunities to be more efficient — allocating savings into areas of the business that require growth, investment or innovation.

“Repetitive cycles of?cost cutting?are often linked to the lack of a sustainable cost optimization discipline and the failure to demonstrate a clear link to the value delivered,” says?Robert Naegle, VP Analyst at Gartner. “True strategic cost optimization programmatically reviews spend, optimizes current resources and shifts savings to investments that deliver greater value to the business."

Cost reduction in procurement is the process of reducing unnecessary expenses to increase?bottom line?and increase profit?margin. Procurement Cost reduction strategies include vendor consolidation, reducing maverick spend, effective category & tender management and improved risk management.

How do you make successful cost optimization a reality??

1: Enable financial transparency

Track spending at the outcome level to better understand its value to the organization. This increased awareness also helps to assess which expenses to optimize. View your budget in terms of the the following four variables:

1. How much you spend on core assets.?Think: labor, facilities, services, hardware and software.
2. Functional-level tasks made possible by your core assets.?This includes actions, like marketing campaigns or training programs, that produce results.
3. Your functional-level tasks broken out into business enablement.?Whether it’s internal or external, each function produces an impact, and it must be something that the stakeholder understands, cares about and would pay for — lead generation, product marketing, recruitment and retention, etc.
4. How much you spend to run the business versus change the business.?In this last view, take a look at what you spend maintaining operations in comparison to changing and innovating.

2: Set targets and benchmarks

Next, examine how your spending compares with that of your peers through external benchmarking. Use this as an ongoing status check and a way to narrow the scope in the search for optimizable costs.?

• Establish a cost baseline.
• Measure performance to external sources (when possible).
• Measure improvements over time.

Take note: when increased spending has no demonstrable link to increased business performance, question the expense.

3: Establish accountability

To ensure cost optimization is a long-term initiative, run it as an ongoing discipline with your business unit leaders and infuse it into your?organization’s culture. Showing stewardship over a given budget is proactive and warrants less scrutiny if optimizing costs becomes an organization’s proven priority. Plus, ongoing cost optimization efforts allow for investment in the future capabilities demanded by enterprise strategy.

4: Manage cost from both sides

Your budget should include costs linked to both supply and demand — analyzing the expenses you’re in control of (supply), as well as expenses your stakeholders or customers are expecting (demand).

These categories can help you better value and prioritize your spend:

Supply

• Sourcing and Vendor Management:?This is how much you pay for resources. Cost reductions are focused on price and units of resources consumed in the execution of work.
• Production and Delivery:?This funds the cost of “keeping the lights on” or doing what you currently do. Run spend tends to perpetuate when not actively monitored and optimized.

Demand

• Innovation and Change:?Commonly, these are the first investments impacted in reactionary cost cutting. Reductions are often delayed, and the impact is rarely quantified or understood.?Change spend should be time- and mandate-bound.
• Distribution and Consumption:?These costs are often significant and grow rapidly. The right to manage distribution and consumption-related costs are earned through demonstrated supply-side spend gains.

5: Use savings to drive enterprise strategy

Every executive leader has a responsibility to evaluate and reevaluate spend. You must reduce and optimize where possible to help fund new initiatives to drive the strategy of the organization. To do this, find a valuable use for savings.

Ask the following critical questions to your functional leaders to discover where your focus, time and money need to be as priorities change over time:

• What initiatives are you working on now to meet the needs of key stakeholders?
• How does that work drive the overall enterprise strategy?
• What support is needed to accomplish these initiatives?

Conclusion:

• Proper cost optimization can fuel growth, investment and innovation.
• Yet companies often struggle to establish a discipline that lasts longer than a year.
• To create a plan that’s successful — and sustainable — leaders should enable financial transparency, set benchmarks, establish accountability, manage cost from both sides and use savings to drive strategy.

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