Summary: Cost reduction initiatives can align with innovation, differentiation, and growth objectives if approached strategically, rather than through ad-hoc actions. With standardized cost management, process visibility, collaboration, transparency, and attention to each item impacting results and their correlations, companies embark on a stepwise and continuous path of efficiency and profitability gains.
In this article, you will read:
In a scenario of inflation, expensive financing, supply chain instability, and margin compression, cost reduction becomes a priority on the agendas of most executives and managers.
The pressure is even stronger in segments exposed to competitors that challenge business models, such as e-commerce, digital banks, and other techs and startups. However, rushed initiatives based solely on accounting indicators either do not sustain themselves or tend to fail. Therefore, standardizing the strategy and executing it with granular actions has been the most consistent path for efficiency and growth to go hand in hand.
Transparency and consensus on criteria
Jargons like “reengineering” or “restructuring” fell out of use before LinkedIn emerged. But they would certainly proliferate the “open to opportunities” status among employees, which in turn would worsen the perception among customers and prospects. Especially in B2B, due to the experience and typical skepticism of decision-makers, it's also predictable that “doing more with less” is understood as a warning of quality degradation. The best CFOs – highly specialized, but with a holistic view of the economy and the business – know this.
In the study "Drive Business Performance with Strategic Cost Optimization," Srinath Sampath, senior analyst at Gartner, summarizes three recommendations: clear metrics, standardized structure, and cross-functional collaboration. The research reveals that only 43% of leaders achieve their cost reduction goals in the first year of changes with this objective, and only 11% manage to maintain them for three consecutive years. According to Sampath, the failure is due to “poorly designed ad hoc initiatives.”
“A consistent framework grounds the organization in a shared understanding of which costs need to be cut and optimized and which should be protected to drive growth,” says the Gartner analyst. This standardized framework, in turn, underpins more cross-departmental collaboration, where department managers and specialists in specific business disciplines can see the impact of each change on the overall processes.
From a common conception of objectives and discovery approaches that provide a coordinated view of costs, processes, revenues, and results, it becomes easier to collaborate to eliminate bottlenecks, consolidate shared services, and other optimizations.
The broad understanding of financial goals also supports a positive agenda. In other words, it helps to know where to never cut costs and where to even spend more. What the most profitable customers value; what cannot be missing for less profitable ones who cover fixed costs; how to communicate optimizations to stakeholders (partners, employees, customers, and the market) and other answers, which do not depend solely on the CFO, underpin and guide decisions.
From macroeconomics to microservices – the variations of the Butterfly Effect
According to the 2023 Medium-Sized Companies Market Radar by Fundação Dom Cabral, the increase in operational costs and the fall in sales prices, due to greater competition, led to an 8.4% reduction in net revenue of companies in 2022. The average 14.93% decline in net profit is justified by the cost of money, in a period when the Selic rate ranged between 9.25% and 13.75%. In this context, identifying the bottlenecks that affect cash flow makes all the difference.
Investing in improvements in billing processes, adjusting payment terms with suppliers, or even reviewing credit conditions (be very careful here!) are some of the micro-strategies with a significant impact in the context analyzed in the FDC study.
Without revealing the name or CNPJ, analyst Ivair Rodrigues, director of research at IT Data, tells the story of a company whose sales dropped 12% with the launch of a pre-attendance app. As it was a diagnostic center, the generational explanation is as obvious as it is insufficient. Even the UX problems of the app are just part of a bad experience, where the cost reduction burden is shifted to the customer. Along with this, the lack of attention to EX, precisely at a time when automation generates anxiety and demotivation among employees, further narrowed the possibilities of adjusting changes and minimizing losses.
The digitalization and automation of processes and interactions can be an exciting experience for employees or customers. Especially if they perceive cost reduction as an underlying effect, or are not even aware of this axis. In some cases, for example, the savings obtained from reducing in-person attendance should be partially invested in gamifying the app or in a natural speech interface, depending on the audience profile – see this Raízen success case.
Costs reach the cloud, and vice-versa
For people blessed with the “miracle” of sanitary engineering – which almost no one calls “technology,” though it is the most essential – the communication challenge for companies is to teach how to turn off the taps. The ease of obtaining tends to divert the consumer's attention from the limitations and costs of resources.
In a panel of CIOs about cloud and cost management, the same participants converged on two complementary tips. The first is analysis by business line. The executives state that it is important to have granular analyses related to provisioning and costs for each application or product profile. Projects have premises of criticality, complexity, deadlines, and various business-specific factors that change the way investment and return calculations are made. At the same time, they emphasize the need for consolidated monitoring. With multiple departments and teams consuming services, it's important for someone to have a vision and control of the total cost.
Another recommendation is to define standards. The flexibility and plurality of options in the cloud is an advantage used sparingly in organizations more advanced in the journey. By defining a set of specifications to offer developers and business teams, management, commercial negotiations, and the base for increasing the level of automation and security policies are facilitated.
The emphasis on governance, management, and operational efficiency characterizes a new moment of maturity in the market. Indeed, there are cases where loads return from the cloud to the datacenter, and there are financial or non-financial reasons (compliance, for example) for this. This does not diminish the advantages of agility, autonomy, and scale that have become widespread with the advent of cloud computing.
Given the extensive catalog of services with all the capacity options, privacy, contract rules, SLAs, and even more variety in pricing models, decisions are, in fact, very complex. If we look only at the technical layers, a bad provisioning decision, either too much or too little, can compromise expenses or customer experience (CX).
The most basic cloud cost management agenda – which in many 21st-century organizations is the axis of IT and services cost management – is a challenge recognized by the big techs themselves, like AWS and Azure, which even encourage SMEs to turn to service partners to consume the cloud understanding the costs. When scaling to more complex digital environments, which can trigger services in multiple clouds, attention to data load movement and other factors that accelerate the “taximeter” requires even more specialization.
Growth with financial resilience – a strategic view of cost reduction
Changes aimed at cost reduction can even cause some perplexity, especially when the dispensable seemed meaningful and important. However, the biggest mistake is to make the quest for efficiency a game of sacrifices. Worse than internal perceptions of devaluation is when improvement is not communicated as a benefit to the customer and the market.
AP Digital develops, together with companies, a stepwise approach to risk assessment, impact analysis, and cost reduction tactics – what we call Discovery.
Obviously, as extensive as it is (and I especially thank those who made it this far in the reading), this article doesn't even come close to addressing all aspects related to cost and business performance.
What I tried here was to gather some references and considerations with clients and market leaders. If you want to share your story, feel free to reach out.
Professional with over 20 years of experience in product development and innovation. Luciana has worked in major companies such as CI&T, Coca-Cola Company, and Accenture.
Kommentare