The realities of volatile capital markets and a struggling global economy confront management decision-making at every turn. In recent years, the challenge of managing costs has become increasingly complex, due, in part, to relentless competition, complex global operations, compliance, efficiency imperatives, proliferating risks and the sheer speed of change.
Regardless of their industry or the size of their business, in today's environment chief financial officers and finance organizations face enormous pressure to drive growth and deliver high performance. They consistently face a fundamental challenge: the ability to balance investment in the business to fuel future growth with the urgency to scale back and cut costs to weather the difficult economy.
Given the importance of the lessons of history, Accenture reviewed the financial results of 850 U.S. companies and analyzed how they navigated the downturn of 1990-1991.
While today's economic downturn is somewhat different, with commodity costs soaring, banks failing, stock markets plummeting, and home prices tumbling (to name just a few factors), the research still provides a good indication of actions that companies can take to position themselves for high performance when the economy rebounds. Analysis of the companies on the basis of return on invested capital identified which companies outperformed their industry for six years following the downturn.
What separated the top performers from the rest is that they managed boldly and acted decisively, strengthening their strategic positions, while practicing rapid and sustained cost management in areas of their business where their costs were not competitive. To reduce costs, they undertook a strategic, end-to-end evaluation of their business - addressing identified cost drivers to optimize the current cost-value relationship, while minimizing any meaningful interference with the future growth of the business.
Based on that analysis, it's apparent that rapid and sustained cost management creates value by freeing up incremental cash that can be used to help realize organizational priorities, like making investments to strengthen market position by trading off a low return on investment early on for a high return later. Some of these companies made acquisitions, entered new markets, divested underperforming businesses and invested in new product lines.
The initiatives that companies undertook varied, with the decisions based on multiple factors, such as the probability of success, timing of benefits, ease of implementation, and the potential for margin and cash flow improvement. Business strategies also are factored into the decisions made by top-performing companies. All too often, companies cut the wrong costs for short-term gain, when reductions should be based on data and analytical evidence.
THE TWO ADVANTAGES
Rapid and sustained cost management has two core benefits: the ability to gain an "operating advantage" and the creation of "structural advantage" within an organization. Operating advantage can be gained by looking at the state of the business to see what can be done better, faster and cheaper while maintaining or improving customer service. Structural advantage involves looking beyond the business to understand what is happening internally and externally and how it affects the business model today and in the future.
Gaining an operating advantage requires a strategic evaluation of organizational processes with the goal of rationalizing, simplifying and automating operating capabilities to drive margin and cash flow improvements. Such decisions should not be made without considering what is in the customer's interest and that of the overall organization.
For example, applying the principles of rapid and sustained cost management to marketing might involve analyzing the effectiveness and cost of each communication channel to determine where spending should be reduced or increased for a better return on investment.
To achieve structural advantage, a company must look at its capital structure, organizational structure, geographic presence, physical assets and its portfolio of businesses to assess and rationalize its asset base. That analysis can enable a company to make decisions about its overall business structure, addressing the aforementioned areas accordingly. Structural initiatives are intended to reduce the cost and complexity of the business operating model, drive long-term profitable growth and demonstrate multi-year expectations to the market.
For example, a large global consumer goods manufacturer needed to reduce its warranty costs, which averaged 12 percent of revenue. By gaining a deep understanding of its warranty cost drivers and end-to-end processes, it was able to change its business rules and operating model to achieve a 50 percent cost reduction with no decline in customer satisfaction.
What is important to remember when applying the principals of rapid and sustained cost management is that operating and structural advantages are inextricably related to each other, and mutually important in building sustained value for companies.
Together, they generate the cash flow and credibility with the investment community that is needed to fund growth initiatives, especially in an economic slowdown.
James Ellis is a managing director in the finance and performance management service line at consulting concern Accenture, where he leads the Finance Operations Group.
(c) 2009 Accounting Today and SourceMedia, Inc. All Rights Reserved.
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