As pressure to reduce costs increases, CFOs have an opportunity to deepen their cross-functional influence and fortify their advisory role to the CEO and other C-suite leaders.
Consider long-term viability: In today’s fast-moving business climate, old-school cost cutting can, while perhaps achieving a short-term quarterly objective, do more long-term harm than good.
Keep in mind: Optimizing costs is as much a good idea in the cool of the day when times are good as it is in the heat of the moment when times are challenging.
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As pressure to reduce costs increases, CFOs have an opportunity to deepen their cross-functional influence and fortify their advisory role to the CEO and other C-suite leaders. Capitalizing on this opportunity likely calls for some CFOs to forget everything they know about traditional cost cutting while embracing—and instilling throughout the organization—a mindset focused more on sustainable cost optimization.
The stakes of this gambit are exceedingly high.
Economic uncertainties related to tariffs, supply chain upheaval, inflation and/or stagflation, and geopolitical conflicts are among numerous issues that have boards and C-suites taking hard looks at their cost structures. At the same time, the risks associated with cost-cutting missteps have never been higher.
A blanket across-the-board cut can undermine the organization’s execution of strategic initiatives, leading to declining employee morale, engagement and productivity and driving highly skilled, difficult-to-hire talent to competitors. Trimming the budget of a technology modernization initiative can delay the adoption of vital artificial intelligence (AI) applications while subjecting the company to a higher risk of being too slow in pivoting to disruptive markets. Indiscriminate or percentage-based cost cuts can compromise service quality, scale back innovation, hamstring future growth and even impair the organization’s long-term viability.
Bottom line, in today’s fast-moving business climate, old-school cost cutting can, while perhaps achieving a short-term quarterly objective, do more long-term harm than good. Similarly, drastic workforce reductions and other one-off slashing don’t work well for very long. There is a better way.
Multiple surveys of business leaders find that only 40-60% of traditional, one-time cost-reduction initiatives achieve their initial goals. A Gartner study indicates that just 11% of organizations are able to sustain cost cuts over a three-year stretch. On the other hand, cost optimization initiatives are proving to be increasingly beneficial. For instance, according to the results of Protiviti’s most recent Global Finance Trends Survey of CFOs and finance leaders, 60% of publicly held organizations have achieved measurable, meaningful progress in their cost optimization efforts by utilizing cloud-based systems. And that’s just one example. We’re seeing substantial savings from deploying technology to automate processes. Renegotiating supplier contracts, improving inventory management and implementing energy-efficiency measures (in capital-intensive industries) are examples of other cost optimization tactics.
Focusing solely on costs is a mistake: An optimization game plan
Cost optimization relates to the CFO’s responsibility to nurture and preserve the organization’s financial health. Think of the approach as a perpetual efficiency play that continually rebalances the right cost structure with an eye on revenue-generation and profitability objectives. Its focus reaches well beyond cost cuts.
While cost optimization efforts target the same pain points as traditional, more reactive cost cutting, these pain points are assessed in a more thoughtful and holistic manner: How do these costs influence our pursuit of strategic objectives? How would a potential cost reduction affect our product and service offerings, workforce, customer experience, ability to innovate, and growth prospects? Advanced data analyses and AI tools can help address those questions and refine the search for “smarter” opportunities for cost savings.
Consider this scenario: A traditional cost reduction play might call for a business process to be offshored, end of story. A cost optimization approach might result in that same process—let’s say accounts payable (AP)—being offshored, but with some critical differences. A smaller AP team might remain onshore to handle exceptions and manage relationships with high-value suppliers and vendors. That team also might receive training in risk management and the use of AI applications to help them operate more effectively and efficiently. Plus, the upskilling necessary to enable these additional job functions could be funded by a portion of the cost savings realized from moving the bulk of the AP group offshore.
As finance leaders create cost optimization playbooks, they should consider how the following actions can benefit their organizations in the near- and long-term.
- Connect costs to value: Just because costs can be reduced doesn’t mean it is the right answer to do so in all cases. It is helpful for finance groups to link costs to the business value they drive as well as to strategic objectives. For example, an analysis of the talent structure in a company’s compliance group may identify opportunities to reduce spans and layers through targeted layoffs. But CFOs need to have a broader perspective to understand if this is the right move. Consider that if the company is in an acquisitive mode, those layoffs could impede pre-merger due diligence and post-merger integration activities, which in turn could lead to heightened regulatory compliance risks. In this case, a potential restructuring of the organization may be a better consideration versus a cut of valuable talent with institutional knowledge.
- Focus on realized cost savings: There is often a stark difference between projected and realized cost savings, as those studies I mentioned earlier illuminate. Analyses of achievable cost reductions have grown considerably more sophisticated and rigorous in recent years. However, those data-driven projections carry little value when the actual cost savings fall well short of established targets, and the related disruption, on balance, may not have been worth it.
- Deploy data-driven tools to pinpoint savings opportunities: Process mining, task mining and other data-driven approaches can help drive new thinking on cost optimization targets. Whereas process mining works well for deconstructing larger systems and activities (e.g., invoice processing), task mining gives finance groups insights into how individual employees and teams switch between automated and manual tasks. Task mining can produce value-stream maps, analyzing the length of time it takes to complete individual tasks and the costs associated with that work. Most importantly, it helps define the business case for change with objective data supporting the findings. With a focus on the customer (or end user, if applicable), eliminating nonessential tasks and taking time out of a process can reduce costs without sacrificing quality.
- Leverage AI: AI tools can also shed new light on cost optimization opportunities. For example, AI applications can churn through massive volumes of call center transcripts to identify and organize customer complaints, which increases the productivity of call center customer service teams. AI tools also can help compare similar work streams in different offices or regions; resulting analyses can yield impressive efficiency gains.
- Reallocate savings to innovation and growth: Companies cannot cut their way to profitability—or to innovation or disruptor status, for that matter. Growth, transformation and sustained margin improvement require investments. CFOs should look for opportunities to redirect “saved spend” to customer experience enhancements, top-priority strategic innovation projects and other initiatives essential to future growth. In other words, CFOs can and should treat cost containment the way they treat capital spending: Look for ROI. For instance, can an AI-powered analysis to determine the number of manual journal entries performed outside of the ERP system ultimately help fund innovations and upgrades that eliminate 90% of those manual tasks?
Optimization must be ongoing
Perhaps the biggest difference between traditional, reactive cost cutting and cost optimization is that the latter should be performed continuously rather than in response to economic and marketplace swings. The point is clear: Optimizing costs is as much a good idea in the cool of the day when times are good as it is in the heat of the moment when times are challenging.
When CFOs stop their organizations from vacillating between across-the-board cuts to focus on increasing profitability on the one hand and investment infusions designed to stimulate growth on the other hand, cost optimization stands a better chance of becoming a standard operating procedure. Indeed, it becomes a key pathway to sustaining the organization’s agility, resilience and long-term viability.
This article originally appeared on Forbes CFO Network.
