Traditional Cost Management is Broken

Written by

Davin Wilfrid

Published on

October 15, 2019

A New Era in Cost Management

This is the first in a series of posts excerpted from our new eBook: Rethinking Cost Management in the Digital Age

Not long ago, cost management was a tactic reserved for struggling companies: When cost threatened profitability, something was done about cost. At that time, successful organizations focused on growth, leaving cost management for leaner times. 

The digital age, with its massive potential for reinvention and disruption, changed everything. Now, smart organizations are focused on cost and growth, looking to fund innovation with the savings from improved efficiency. 

But they are struggling — mightily. Most organizations are failing to meet their cost management goals, even when those goals are modest. The reason is that most traditional tactics are no longer suited for today’s operational and market conditions. Short-sighted strategies, silos of information and decision-making, and incremental approaches are unlikely to produce results. 

Fortunately, there is hope. Smart organizations are rethinking cost management by reframing costs as capabilities. This simple but powerful shift is the key to unlocking a long-term cost management strategy that drives growth.

Cost Management Obstacles and Drivers

Today’s business landscape is defined by technological disruption, leading organizations to prioritize efficiency and growth at the same time. This has changed the nature of cost optimization or management initiatives from primarily cost-savings measures to something more complex. Recent research from Deloitte found that “Gaining a competitive advantage” and “Required investment in growth areas” are the top two drivers of cost initiatives (Figure 1). Efficiency is now a strategic imperative. 

At the same time, it’s easier than ever to spend money. According to Gartner, costs have risen faster than revenues since 2013, creating a squeeze on profitability that leaves finance leaders in a difficult position. The CFO cannot credibly demand reduced spending across the board without inadvertently derailing potential growth opportunities, and without visibility into cost a CFO won’t know where to place the right bets. 

87% of companies struggle with poor cost visibility

Source: Gartner

If the CFO is flying blind, he or she has no chance of connecting cost management to strategy. And if that link is not clear and actionable, finance leaders have little hope of successfully implementing an effective cost strategy. 

In fact, 63% of companies studied by Deloitte failed to meet their goals — even when those goals are to reduce costs by 10% or less. Most companies have little confidence in their ability to translate strategy into action (70%), citing lack of resource allocation (92%) and the complexity of change initiatives (82%) as key drivers. 

In short, companies are trying and failing to manage costs — and not because they’re setting their targets too high.

wordpress-infographics_figure-1

According to Deloitte research, the key drivers for cost management include beating the competition and investing in growth areas.

Source: “Thriving in uncertainty in the age of digital disruption”, Deloitte

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Source: “Thriving in uncertainty in the age of digital disruption”, Deloitte

Source: “Strategy Agenda Poll”, Gartner

So what’s the issue? Company leaders seem to know what they want to accomplish and why. But they fail, because they don’t understand how to fix it. 

Most CFOs and their counterparts struggle to make cost management strategic for three reasons:

growth-indigo

They’re balancing short-term
pressures with long-term
strategies

costs-indigo

They’re building static
budgets that are outdated
the day they’re created

review-indigo

They lack visibility
and alignment to see and
anticipate problems

In future posts, we’ll share how forward-looking leaders are overcoming these obstacles with innovative approaches to cost management initiatives. Want insights right away? Download our eBook Rethinking Cost Management in the Digital Age today.

rethinking cost management in the digital age cutting and growing at the same time? Image.
Written by

Davin Wilfrid

Published on

October 15, 2019

Davin is the Director of Content Marketing for Catalant. In his spare time, he builds terrible-sounding instruments.