By Jeremy Kay, SiCW Theme Partner for Sustainable Cost Efficiency
This is the third consecutive survey in which ‘changing business operations’ has emerged as the single most popular theme. It’s tempting to wonder how this has happened.
Years into this crisis, it’s easy to think that, by now, the tightening economics in the underlying business environment should have been a sufficient catalyst to convince leaders to have taken tough decisions on their cost base.
Perhaps not. I think the challenge is larger than people realised and that many organisations continue to shy away from the really tough decisions.
There remain plenty of major structural concerns for business to have a long, hard think about. This is what has kept the overall theme of changing business operations at the top of the survey leaderboard.
In addition, do not ignore the role played by today’s more activist investors and shareholders. Thanks to them, management teams are under more pressure than ever before on this topic. Accordingly, it has to be one of their leading concerns.
If management has opted for an easier option, investors are scrutinising the actual value upside of that option – and insisting the more difficult options be put back on the table.
These investors can no longer be mollified with a story based on just revenue growth projections. They’ll likely be more amenable to a story based on growth that includes cost optimisation – but it needs to be a very good, robust story built on actually changing business operations.
At a time when creative financial engineering options are thin on the ground, this ambition to deliver value from improved operations is no surprise. Nevertheless, the ferocity of it has provided management teams with quite a wake-up call, especially when they realise that the initial actions didn’t deliver the improvements they had hoped for.
It shouldn’t be like this. A focus on cost should be a core business competence in all economic conditions, not something driven by a change in the wind. Yes, it may create risk and unease – but it can also deliver substantial EBITDA improvements.
Yet the survey results do deliver some encouragement that more businesses accept how cost decisions need to be part of the bigger business strategy and that the focus must be on optimisation and not just cutting. This means spending money on the right things to maximise bang for the buck.
Optimisation means turning the P&L on its side to follow cost along all the operational lines it subsequently has an effect on – and to understand what that means. Taking out costs in isolated parts of the chain simply pushes the cost out elsewhere, a bit like putting your foot on a plate of jelly.
So, where does it end? Cost optimisation needs to be a mindset change from the top to deliver structural change. It is not about announcing lottery style numbers and firing a few people; something that only results in broken promises to investors who will no longer accept such things.
Management teams must act strategically on cost. If not, what is becoming clearer in this environment is that someone else will do the thinking for them.
