Here's why some companies succeed in tough times and others do not
For many companies, cost cutting in tough times is an automatic reflex action to survive, but a global survey of 1500 of the of the world’s largest public companies shows there’s far more to optimal survival than that.
Indeed, the survey revealed that 201 -- in other words 13% of these companies – had, by implementing cost transformation, achieved EBITDA (earnings before interest, taxes, depreciation, and amortisation) above the median for their industry, while concurrently experiencing revenue growth below the industry’s median.
In other words, by implementing processes we’ll now explain, it was possible for some of 201 of the 1500 companies surveyed over a three-year period in tough times, not only to survive but prosper while experiencing depleted revenue.
Indeed, in three years post-survey, 76 of the 201 experienced even higher revenue growth and profit margins. On average their revenues grew 16.8% and their EBDITA by 6.8%.
Patently these 76 notably successful companies had been doing what others had not been doing towards ensuring their futures.
It was Vinay Couto, a vice-chair of Strategy& (Pwc’s strategy consulting business), Paul Leinwand, a principal at PwCUS, and Sundar Subramanian who leads Strategy& (while also heading its enterprise, strategy, value, and digital transformation practice), who conducted the survey. From it they determined what the best managed companies did in recent challenging times and what too many companies didn’t do.
Accordingly, Macks Advisory invites its newsletter readers, most of whom are associated with much smaller companies than those surveyed, to nonetheless assess for use the following cost transformation processes the above economists have recommended for operating a company in tough times.
Proven modus operandi for tough times
They say the key to optimum business success in such times is cost transformation. You must ignore sunk costs and start with a blank sheet. (A sunk cost, also known as a retrospective cost,is one that has already been incurred and cannot be recovered. Sunk costs are contrasted with prospective costs, which are future costs that may be avoided if action is taken.) It’s recommended you don’t challenge every line of cost. Instead of pursuing what can seem like endless and disjointed effort, the following critical steps are recommended.
- Regard every dollar you spend as value you give customers, and in the specific cross-functional capabilities needed to deliver that value. Discuss budgets in depth with your leadership team, focusing on what maximises support for your strategic goals and capabilities required to achieve them.
- Incremental adjustments are unlikely to get you there. Take a bold, holistic look at what businesses, product lines, operations, or SKUs (each stock keeping unit sold being labelled with a unique bar code) should be an integral part of your company’s future. Consider how you’d meet the challenge of a competing company arriving on the scene unburdened with
your past decisions. Consider the requirement of new products and services this might create. How would you simplify customer offerings of the highest value?
- By all means increase benefits derived from digitalisation by rethinking entire processes, but you’ll make better short-term gains applying automation on top of, or in place of, existing tools. Don’t be held hostage by drawn-out technology programs.
- These can be expensive and increase costs by hamstringing a lot of people. Decide what truly needs to change, then how best to deliver it. Do you know of companies in your industry with scale and capabilities in some areas better than yours? Outsourcing non-differentiating capabilities, or even elements of your most important capabilities, may save you money to invest in your business where it’s vital.
- Cost cutting shouldn’t be just a reflex action in tough times. Cost-vigilance and management should be a constant, prime activity of business managers.
- By creating zero-based budgets, allocated and focused across functions focused on your company’s most vital and differentiated capabilities, you’ll axiomatically create a culture and process for managing costs.
You want to get started?
Link costs to their strategy, avoiding hasty cyclical costs that will leave your company weaker.
Transformation of costs requires commitment from the top. There may be board members and executives lacking mindset or capabilities to embrace cost transformation, so that facilitation of their required changes in thinking and abilities should be a priority -- failing which these people’s departure should be ensured swiftly and discreetly.
Build confidence among employees. Their sight of early wins with the program will accelerate this, helping to convince them change is not only possible but practical. Shutter projects that don’t show positive results or may become non-strategic.
Close performance gaps in a few critical areas to reduce costs and free up capital for fuelling longer-term initiatives.
Aim to spend no more than two years on cost transformation because research shows thereafter employees’ performance deteriorates when they must endure repeated and invasive changes for longer.
Building a dedicated infrastructure
Your company will need a chief transformation officer during the revamping, who should focus on syncing strategy and costs in whatever may be the prevailing economic environment. This officer should be equipped with power to hold executives responsible for critical “transforming” and “performing”. Operating a revamping business is difficult and needs such an officer.
Because they bridge the gap between executives and frontline employees, middle managers should be enlisted early and given a voice in the process. They thus become invested in it, bolstered by information from front line employees aware of what expenses can be cut and which processes streamlined without compromising quality or client satisfaction.
For a start, focus on what you consider are critical behaviours. Changing behaviours can be difficult, and changing a lot of them in the same time span can be impossible. Begin therefore focusing on a few where you consider it’s vital that employees develop new ways of thinking and acting.
The need for you to reallocate resources to strategic capabilities and highest growth areas of your business is on-going. Ensure financial systems create transparency around good costs (those associated with differentiating capabilities) and bad costs (unavoidable ones necessary to keep the lights on and doors open).
