As senior executives face more pressure to respond to rising costs and eroding profit margins, CFOs can remind their colleagues that they have more cost-optimization strategies than they might expect.
Many business leaders reflexively reach for the headcount-reduction lever. This is understandable given the rising cost of labor and that downsizing and reducing year-end bonuses usually hits the bottom line relatively quickly. But headcount reductions also can limit an organization’s ability to generate more revenue while impeding the company’s race to resume growth once the economic cycle turns.
Finance leaders should underscore the need to analyze all implications of a cost-optimization decision while ensuring that a wider range of cost-optimization options are evaluated. These actions are especially important in 2023 amid slowing global growth, the possibility of a recession, inflation concerns, rising interest rates, wage inflation and ongoing disruptions in the global supply chain.
Among the half-dozen most effective cost-optimization activities business leaders can deploy, three focal points typically offer the quickest results:
- Technology cost containment: Many organizations invested heavily in new systems and supporting technology during the past several years. Few of those companies mothballed all of the legacy applications and IT infrastructure that their new tech investments were intended to replace. This failure leads to unnecessary licensing, maintenance and support costs. Organizations keep legacy systems on life support for several reasons, including data access, auditing risks, and a lack of (complete) confidence in the new solution. Legacy ERP systems and related financial applications often linger in this state of tech limbo. The failure to sunset old systems represents a widespread technology cost and a great place to begin cost containment efforts that should also address spending on shadow IT.
- Procurement spending analyses: Technology plays a valuable role in reducing costs, of course. This is certainly the case with the advanced data analytics and process-mining tools used to equip procurement teams with powerful insights on spending. These tools and approaches clarify a range of opportunities to increase working capital by more effectively leveraging the organization’s buying power. Actions include negotiating more favorable global contracts, taking advantage of discounts, rationalizing vendors and eliminating other sources of spend “leakage.”
- Automation: Other types of automation can help organizations reduce headcount or, in many cases, reassign headcount from back-office processing work to roles focused on revenue generation and value creation. Since the use of offshoring crested following the global financial crisis, many organizations have re-shored substantial portions of the workforce. Equipping these employees with business intelligence solutions, robotic process automation (RPA) applications and powerful analytics tools can achieve better cost optimization results in 2023 than offshoring yielded in the early 2010s. A growing collection of advanced technologies help business groups generate more value quicker. Once approved for use by IT groups, many of these tools can be implemented and configured by the business and end-user groups without further reliance on IT for maintenance and updates.
Business process reengineering often accompanies the implementation of new automation. This work removes process inefficiencies and helps reduce process redundancies and cost. Two other cost optimization focal points — new operating models and zero-based forecasting — deliver similar benefits. All three of these activities typically require more planning, time and effort compared to technology cost containment, procurement spend analyses and the implementation of new technology tools.
A company that operates five different accounts payable (AP) functions staffed by a total of 60 AP professionals might leverage automation and scale by moving to a centralized shared services model that delivers AP services in a more effective, cost-efficient way with a staff of just 30. Larger organizations that have conducted multiple acquisitions in recent years can notch major cost-savings though similar operating model changes.
The sixth cost optimization focal point, zero-based forecasting, identifies opportunities for improved profitability with enhanced cash flow by taking more frequent and more detailed looks at routine spending and potential investments. Zero-based forecasting allows organizations to implement better governance of spend throughout the year. These forecasting views are based on real-time trends and market realities, unlike traditional budgeting processes that establish plans and erect spending guardrails based on projections made 12-16 months ahead of time. (Cash flow forecasting can benefit from similar improvements.) Replacing the traditional annual budgeting exercise also eliminates a time-consuming process while encouraging all business groups to adjust spending quickly in response to external challenges and opportunities.
The technology-driven analytics that leading procurement functions conduct to optimize spending (and working capital) deliver a clear picture of where corporate dollars are going. Other cost-optimization activities throughout the organization paint a similar picture. By knowing which dollars are going where, CFOs and their executive counterparts can make more informed, and more valuable, decisions.