With economic turbulence and uncertainty continuing in 2023, cost optimization will be a critical theme. Enterprises must find ways to weather the storm and pursue key transformation targets to ensure their viability and competitiveness in the future. Traditional, linear cost-out approaches are insufficient for today’s business environment and may even hamper the competitiveness of companies that still rely on them. To a large extent, all businesses are now digitally enabled, and this means constant change to operational strategies and processes, data visibility and customer engagement.
These changes touch every part of the business and, as a consequence, have changed the ground rules of managing costs. Increasingly, cost optimization includes operational transformation that replaces less efficient and effective ways of working with solutions that are both more cost-effective and provide additional value to the business. Today, cost optimization must focus on empowering growth and strategic positioning, increasing transparency and agility and enabling continuous execution.
Here are the top 5 keys to outperforming the competition:
1. Continuous execution will be driven by the Chief Cost Officer (CCO).
Traditionally, cost-out exercises have been launched by finance with budget targets set for each business area. Most companies have pursued savings in silos, without an operational focus on interdependencies between business and functional areas or more effective ways of doing business across these silos. Like the CISO role, which has emerged in the past decade, CCO will become more prominent. This role will lead by focusing on cost with an independent perspective and operational understanding of the ways technology is transforming business.
The CCO will generally report to the COO with a dotted-line relationship to the CFO and a close working relationship with the CIO, Chief Digital Officer (CDO) and head of enterprise transformation. The CCO will head a cost optimization Center of Excellence and be responsible for ensuring the enterprise continuously tracks and manages cost relationships and interdependencies, practices effective cost hygiene and applies effective technology-enabled approaches to optimize cost performance.
2. Strategic sourcing will be redesigned to be closer to the business.
Strategic sourcing’s focus on enterprise “spend categories” primarily uses the design principle of commoditization and aggregation of spend. This strategy makes sense in a stable business environment with more predictable spend patterns, but it can be insufficient in highly dynamic business environments. It lacks the agility and tight coupling with the business to help the team understand and provide tailored strategic solutions.
Technology has changed many of the benefits of economies of scale, replacing them with economies of agility. The ability to provide expert commercial strategies and solutions that can respond with nimbleness to rapidly evolving business needs is an underdeveloped capability in most strategic sourcing organizations. To optimize costs, companies must bring the most talented sourcing resources closer to the business and integrate them with operations, product development and go-to-market teams. Essentially, this will entail a degree of dismantling of the procurement silo while elevating the professional profile of practitioners so they become strategic members of an integrated business practice.
3. Cost transparency processes like TBM, FinOps and SAM will play a critical role.
Businesses are increasingly digitally enabled. To complete, they must more be more scalable and more dynamic. However, this means that we need to integrate capabilities to track and manage those scalable and dynamic aspects. In the IT world, dynamic tracking, collaboration and management of key cost drivers is critical. Technology Business Management (TBM) provides the transparency and allocation of IT costs to enable business users to make better-informed decisions based on the cost of different service options and to prioritize accordingly. Cloud FinOps provides a collaborative framework to measure and manage the cost of cloud resources. Software Asset Management enables the efficient use and optimization of software license costs and the prevention of unintended and costly compliance claims. Mature and effective capabilities in these and other similar areas are major factors in cost optimization.
4. Automation and data-driven insights will accelerate process efficiency.
It goes without saying that companies still manually process millions of operations that can be partially or fully automated. Modern automation tools enable fast and low-cost deployment across a wide range of processes, achieving dramatic savings in time and effort. On top of that, automation accelerates and improves the capture of process data, which is used in machine learning and data analytics to drive further improvements in cost and effectiveness. Companies that are not broadly using these powerful technologies as part of their cost optimization strategies will quickly lose ground to those who do.
5. Digital threads will become a core driver of enterprise-wide cost reengineering.
Businesses produce products and services for the marketplace, and their ability to do that on a cost-effective basis is key. Enterprises are increasingly using digital engineering models to build digital threads that create products and services with the customer experience at the center. Digital threads connect all elements and participants in the value stream (including internal and external stakeholders, systems and data) on a real-time basis. This enables data-driven decision-making and AI/ML-infused digital twins that will remake enterprise business processes like planning and scheduling, supply chain, R&D, quality and sustainability.
We predict that enterprises that effectively deploy these five strategies will achieve an overall 15-20% or better cost advantage over their competitors that do not. We strongly recommend you review your company’s capabilities in these areas and consider taking proactive steps to address any gaps in your cost optimization capabilities.