In today’s economic environment of rising interest rates and persistent inflation, timely and accurate cash flow management and forecasting is a top focus area for finance leaders. As companies continue to focus on cash flow management and improved forecasting capabilities, they should also prioritize a Cost Optimization strategy that drives real and sustainable bottom-line cash flow results.

Businesses seeking to implement a Cost Optimization strategy frequently begin with making technology investments that improve data availability, enhance data analytics and visualization, and reduce reporting cycle times. While these tools are paramount to making data-driven business decisions, leaders must rely on more than just the tools. The most successful Cost Optimization strategy includes methods that build an optimization mindset into the fabric of the business culture. When Cost Optimization is not a standalone program but engrained in the culture, this approach can yield a 10-25% decrease in overall operating expenses while supporting the improved quality of products or services.

Cost Optimization should be a business-focused, continuous discipline that drives spending and cost reduction while maximizing business value. It should focus on business outcomes, be based on data-driven decisions, and utilize a structured approach to evaluate opportunities continuously.

The First Three Components

A successful Cost Optimization program includes the following components. In the first segment of this two part series, the focus will be on initiating the program, prioritizing objectives, and executing.

1. Engage Leadership and Employees

Leadership sets the tone for the effort by thoughtfully communicating the objectives of the program and developing cost reduction guiding principles that align with the business strategy. It is also important to communicate how the progress and success of the Cost Optimization effort will be measured and reported against current costs and performance baselines.

Incorporating the objectives of the Cost Optimization effort into performance goals and incentives for appropriate levels of employees is an important mechanism to encourage active participation. Doing so can also harness the creative ideas and talents of employees throughout the organization. Expectations and mechanisms for employee engagement at all levels need to be regularly refreshed and reinforced to drive and maintain long-lasting, sustainable results.

2. Build A Spend Analytics Dashboard

Collecting and presenting actual cost data in a spend analytics dashboard is vital to identify potential savings opportunities for the Cost Optimization program, and to measure ongoing results. The audience for the spend analytics dashboard includes the full Cost Optimization program team, not just management but also other team members engaged in identifying and implementing potential savings opportunities.

An effective spend analytics dashboard must be driven by reliable, accurate data, be produced and shared in a timely manner, highly visual, and action oriented. These characteristics ensure that the spend analytics dashboard will provide the information necessary to reveal trends, outliers, and actionable insights that the team can use to identify potential cost reduction opportunities.

In addition to the spend analytics dashboard, for some functional areas, benchmarking costs from industry, competitor, and overall best practice data can serve as an objective input to identify cost reduction possibilities.

3. Prioritize and Execute Cost Reduction Opportunities

Once potential savings areas have been identified from analyzing the spend analytics dashboard and other inputs, the specific opportunities will need to be fully evaluated and prioritized. Considerations for prioritization include, for example, time and level of effort to implement, timeframe for benefits realization (short-term, intermediate, or long-term), investments needed to achieve the cost reductions, upstream and downstream business dependencies, etc. When selecting cost reductions to pursue, it is also imperative to consider unintended consequences, such as headcount reductions that lead to increases in temporary labor.

Cost reduction will need to strike a balance between maintaining liquidity and investing in future growth opportunities. A structured, repeatable evaluation approach that includes business cases, appropriate due diligence and executive review will provide the analysis and documentation necessary to select which cost reductions to pursue at which time that can ultimately result in a 10-30% return on investment.

Be on the lookout for part 2 of the Cost Optimization series where we will give a more in depth look at how to optimize with suppliers, monitor, and maintain the cost savings.

Thought Logic’s consultants can help you understand how a Cost Optimization program could be implemented at your organization, including an initial assessment and roadmap. We have expertise in Digital Transformation, Finance, Organizational Solutions and Supply Chain, among other relevant areas. Our experts stay versed in industry-leading methods, leveraging years of consulting and industry experience with our unique culture of client partnership to deliver big results. If you would like to learn more about how we can help your organization, please contact Daniel Boyles or Caroline Freeman.