The economic fallout of the COVID-19 pandemic is forcing companies of all sizes to reduce expenses and conserve cash and resources. Companies need to maximize the moves they make today without sacrificing their long-term ability to recover and compete effectively in the future. The highest-performing companies will find a way to come out of the pandemic poised for growth.
In undertaking a rapid cost-takeout program, leaders should design a strategy to secure immediate savings with a focus on survival for an indefinite period of time, optimize costs as the pandemic winds down, and reset operations for a new normal in the post COVID-19 business environment.
ISG can facilitate your cost takeout program. Click here to contact us and get started.
Here are the top five steps to taking costs out starting now:
1. Prepare: Begin with the end in mind
A successful rapid cost takeout initiative requires strong leadership. Oversight and coordination ensure resources are allocated judiciously, with the right decision authority and prioritization in place. Without this control, you risk a free-for-all in which teams compromise strategic capabilities or pursue similar opportunities without knowledge of each other’s efforts. ISG helps companies answer these six essential questions:
- Where can we immediately reduce usage and associated expenses?
- Where do normal costs of operations exceed the best benchmarks?
- What contracts are addressable for immediate renegotiation?
- What are new necessary expenditures you need to add to operate under COVID-19 circumstances?
- What can we easily automate?
- Where can we recover costs from contract leakage or overcharges?
From this initial scan, leaders can prioritize immediate quick hits and mid-term and longer-range savings. They also can see clearly how they can make adjustments to capability and capacity starting now.
2. Save: Set your enterprise thermostat.
Many variable expenses can be reduced immediately. These include energy use, travel and entertainment, usage-based maintenance, office supplies and projects that require temporary labor. Any discretionary or variable cost services should be ramped down to the minimum necessary level. Suspend or terminate services that you don’t need for the immediate future.
3. Survive: Negotiate in good faith.
Renegotiate your existing agreements, focusing on those that can have an immediate impact. Identify which of your agreements can be renegotiated under the current circumstances. The range of “addressable” spend may increase under the current situation. Suppliers will want to keep you as a customer for better times and will likely be willing to find creative solutions that include accepting lower margins, incorporating additional activities for the same revenue or deferring revenue or cash over a longer time period. This will especially be the case if you are willing to consider a longer-term relationship or adoption of a new technology, such as moving an application to the cloud. Consider getting outside expertise to accelerate and maximize savings.
In areas where you face additional capacity requirements, such as building additional network resiliency or acquiring software licenses to support work-from-home operations, seek outside expertise to accelerate selection and negotiation.
4. Optimize: Solve for the recovery.
Start restructuring agreements and delivery models now for the longer term. Changes to operating models, sourcing relationships, technical architecture and application rationalization take time but can lower costs and make your operating model more resilient in the near future. These will be necessary both for the short term if the pandemic persists and for the future state when we emerge from our current crisis. Find ways to start working on things now that can have a six-month or longer time to deliver value. In some cases, these initiatives can be bundled with quick hits to help defray the cost of getting started.
5. Persevere: Embed sustained capacity.
Improve the way you manage organizational change and govern third-party relationships. The COVID-19 pandemic illustrates just how quickly working arrangements can change. Energize your organization around successes, measure and celebrate progress where possible and embrace the need and opportunity to drive leaner and smarter operating models. Organizations that thrive will need to build the capacity to change quickly and reinforcing organizational change management capabilities will be critical to sustaining a responsive culture into the future.
Bill is a sourcing industry leader and active proponent of helping to create professional standards and best practices. His areas of expertise include sourcing strategies, shared services and contract negotiations. Throughout his career he has been responsible for both business development and delivery of strategic advisory services in procurement, vendor management and operational transformation.