Cost Transformation is a Journey, Not a Destination
Change is constant and happening at lightning speed for every business. New competitors challenge traditional marketplace dynamics. Increasing customer expectations drive more stringent performance goals. New technology affects the way work is done and business is delivered. New regulations change processes and compliance requirements. Business transformation is an absolute call to action for those who want to succeed. Specifically, financial success requires continuous evaluation of all the levers that impact financial performance – including the way costs are managed.
A cost structure that provided for past financial success will not necessarily support the achievement of new business performance goals. Success relies on organizations creating the right cost structure to reflect changes in the marketplace and evolving business priorities.
Traditional methods of cost management target low hanging fruit. This typically translates to cutting headcount and reducing easily controllable expenses such as travel and office supplies. Often, functional departments are given a cost-cutting target, and they manage those reductions within their functional silos. While straightforward to implement, these are short-term, narrowly-focused approaches to cost management and are not sustainable over time.
The Northridge approach to improved business performance and cost management is to embark on a cost transformation journey, with an outcome that reconfigures a firm’s overall cost structure for the future. This approach enables a firm to recognize the factors that drive its end-to-end costs and aims to understand how changes in business processes can create a new, optimized cost profile.
A Sustainable Approach to Cost Management
Successful organizations understand, at a detailed, operational level, the correlation between the work they do and the resulting costs incurred. Cost drivers can be represented in a number of ways, for example:
- Number and types of customers served (e.g. new, churn and renewals, or needs and demographic-based customer differences)
- Number of transactions performed (e.g. orders taken, inquiries answered, invoices produced, or requests for support)
- Method of handling those customers and transactions (e.g. manual or digital)
- Degree of process breakdown which occurs (e.g. errors, manual intervention, rework)
- Upstream and downstream interdependencies (e.g. cross-functional, end-to-end impacts)
Knowing the underlying cost drivers then enables a firm to focus on business transformations that can fundamentally change those cost drivers. Improvements can take the form of better use of technology to strengthen digital capabilities such as customer self-service options as well as enhanced business processes that simplify or eliminate work steps.
Identifying cost drivers and transforming the business to improve those drivers lead to long-term, sustainable cost transformation.
The Northridge Group was recently engaged to support a Fortune 50 enterprise in their cost transformation journey. Though current business performance was strong, they understood the pervasive market disruption in their industry, the looming negative impacts of increased complexity in their products and platforms, and their need to influence unit cost trends through an integrated technology strategy.
In a highly-collaborative approach, Northridge created the structure and led the process for this firm’s cost transformation. A three phased methodology was implemented:
- Through interviews and data mining, a baseline was established of the current cost structure, cost drivers, and cost challenges
- Using data-driven analytics, opportunities for transformation were identified and sized
- Executive-level discipline for governance and communication was created, with a goal of building an on-going cost transformation culture