Strengthening long-term value

This is part three of three in a series on cost cutting and business restructuring in various situations. This article explores cost cutting and restructuring for value improvement. Read part one, on cost cutting in an emergency, and part two, on cutting costs when a crisis looms. 

Say everything's going well for your business: it's steadily busy, your employees are happy and the same goes for your customers. Still, you might feel like there's more value you can generate from the business. Perhaps you're not sure how to quantify that value or of the tools or technology available to help you do so. Or, perhaps you know where the value is in your business and you want it realized as you're considering selling. 

Restructuring to reach your long-term goals is a proactive process  -- you don't necessarily need to do it, but it could make strategic sense to. Doing so could be relatively straightforward  -- with small tweaks to maximize returns. Or it could require the entire business to embrace a new vision and undertake a culture shift. Either way, it's important to have a roadmap before implementing your vision and quantify the risk/return. 

 As you consider proactive cost cutting and restructuring, keep the following in mind: 

• Do you have continuous improvement processes to drive efficiencies? 
• How can you ensure your cost cutting will support future growth? 
• What funding is needed to achieve your vision? 
• How can you adopt automation and other technologies to help preserve and realize value? 
• Does your management style lead to the creation of value? 
• How are you doing financially compared to competitors? What can you learn from them? 
• How can you reduce costs while making your goals a reality?
• What can you do to encourage your people to embrace change and support the journey?

As discussed above, it's unwise to start planning for long-term growth and cost cutting or restructuring without a specific, actionable roadmap in place  -- one that has your people on board with the changes to come. 

There's a lot to keep in mind as you're building this roadmap. Keep reading to learn some important considerations. 

A key aspect of getting your business ready for expansion or sale is further building and strengthening its value  -- showing it's profitable to make it as attractive as possible to prospective buyers or investors. This can include uncovering sustainable operational efficiencies to put the business in a better place to weather external forces . 

Or you might be focused on reducing costs to increase your business's bottom line and boosting valuation. If your business is performing well and you have time for implementation these costs could be cut by way of investment, as opposed direct cost cutting. Consider, for instance, streamlining processes through digitization and automation, looking at alternative sourcing options, or exploring cost efficiencies through partnerships as opposed to contracts. You might also explore other possible organizational or capital structure efficiencies. 

Any cost-cutting changes you want to make are less likely to succeed if your people aren't comfortable with transformation. If they don't understand (and aren't on board with) your vision for the business, this will also make it difficult to successfully implement a change agenda. Therefore, it is important that leadership make the case for change clear and encourage engagement by staff. Sometimes, the best ideas are from the people closest to the front line. 

Cost cutting can be a divisive matter, especially when implementing technology changes. Therefore, technology-based cost cutting is best done gradually. One suggestion is to start with testing the change in one of your smaller business units first, with `front line champions' leading the cause, then support these champions as they roll similar changes out into larger units once it's proved successful. Allowing your people to see how changes benefit others can help them understand how they can potentially benefit as well. 

When you're focused on improving your business's profitability and overall attractiveness to buyers or investors, building a roadmap should be more focused on investing and making strategic decisions that show realizable current value or measurable future value and resulting cost efficiencies. A quantifiable plan that clearly shows where future value will come from can be attractive to them and could return multiples to you as seller. They are quantifiable in any business valuation, too. 

If you're more interested in benefitting longer-term shareholders, you should focus on the longer-term picture. Your roadmap could include a strategy to help reduce debt to provide greater long-term shareholder returns. Or you might consider a program to get strategic investors in and use that capital to pay loans down or off. 

However, though cost cutting has a clear benefit through financial return, if your focus is purely on costs you'll find it difficult to grow your business. You need to invest in it  -- as the saying goes, you need to spend money to make money. You should ensure any cost cutting or restructuring doesn't dilute any business units that are already performing well. 

As with any worthwhile exercise in business, cost cutting comes with its fair share of opportunities and challenges. 

On the plus side, undertaking this exercise is a chance to identify redundancies and duplicate efforts, better align services to match the business's needs, modernize practices and become more efficient as a result, and improve collaboration between your people. 

However, achieving a flatline increase or marginal reduction in costs can drive behaviors such as focusing on the easiest costs to reduce instead of the right ones. Additionally, the flat to declining cost approach doesn't consider costs that should increase for reasons of strategic growth. Limited data can also be a barrier to understanding what the true cost drivers are and to spotting potential growth opportunities. 

Undergoing cost cutting, no matter what the reason, requires a delicate balancing act  -- particularly when your business is doing well and you're exploring options for the longer term. Cost cutting should always be undertaken with a clear vision and careful thought and planning. 

Speaking with an external advisor can help reduce the uncertainties of cost cutting and restructuring. 

KPMG professionals have access to a wide range of analytics tools to help unlock value through a range of performance transformation offerings. They can also help build your business's capability for value creation, helping to maintain and improve margins and sustain those improvements over time. 

By choosing KPMG data analytics tools to help guide you through your transformation, you're choosing to work on improving your business in a smart, efficient and sustainable way  -- accelerating your time to resolution and tapping into deep industry and sectoral experience, as well as new ideas from around the world. 

If you want to compare your business performance to others, the KPMG Financial Performance Index (FPI) is an index of corporate financial performance that provides millions of datapoints going back to 2017. With the FPI, you can spot early signals of impending distress, understand your financial performance across geographies, sectors and subsectors, and compare one company's financial performance against nearly any other public company around the world.