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Why cost reduction is just one piece in the post-COVID-19 cost resilience strategy

July 10, 2020

Yet, as organizations look at how to restructure their cost bases to ensure their long-term profitability, they must also  look to maintain cashflow and liquidity today to support rapid recovery. 

Three guiding principles 

In this context, business and IT leaders should adhere to the following three guiding principles: 

Principle #1 – Cost resilience is about more than just cost reduction 

One of the biggest economic impacts of the COVID-19 pandemic is on the nature of global business markets. They are no longer stable. While this makes cost reduction a vital strategic priority, there is another way to manage the peaks and troughs of this market – cost variabilization. This is the transformation of fixed costs and charges into variable models, often by reshaping operating model partnerships so that they become more adaptable to your business. During the current crisis, those companies with a strong hold over their profit and loss (P&L) position and utilizing variable models before COVID-19 have managed better than many of their peers.  

Principle #2 Liquidity is vital to immediate survival 

The huge decrease in the markets has turned the spotlight on cash positions, with boards and shareholders recognizing the criticality of liquidity. This has been especially evident in the aircraft manufacturing sector. Some of the best–known companies in this sector have even expressed uncertainty about their futures as their economic models struggle to contend with the complete shutdown of the industry. This demonstrates just how important it is to include ‘What if…?’ questions in the planning of inventory and cost optimization strategies. For example, what if your production line stops in three days and you no longer have products to sell? 

Principle #3 – Avoid over-reliance on just one supply chain center 

Over recent years, organizations looking to transform their economic models have shifted production centers and supply chain networks, some to low-cost countries and others to single geographies. As borders closed and global travel almost disappeared during COVID-19, this over-reliance on just one or two centers became a significant supply chain risk. The crisis showed that the companies best equipped to flex their operating models and adapt their supply networks had a more diverse supply chain strategy. Alongside their global supply chain partnerships, they had built relationships and networks closer to home to better manage their risks and ensure long-term cost resilience. 

Cost resilience opportunities  

While the cost constraints emerging during COVID-19 are clear, there is no doubt that the quest for cost resilience also brings new opportunities, for example with: New ways of working; automation and robotics; and new consumer behaviors 

New ways of working 

Companies were quick to implement new, agile ways of working to keep operations running at the start of the pandemic. In the financial services sector, for example, one French financial institution realised even before the end of lockdown that new ways of working had the potential to yield between 20-40% process productivity gains. Automation, workflows and approval level rationalization significantly sped up processes, while the introduction of customer self-care for certain activities freed up staff for more complex customer interactions. Largely, these new ways of working remain an opportunity, rather than an actuality, and organizations first need to understand what has changed and what cost reduction opportunities this change brings.  

Automation and robotics 

There are compelling use cases for robotics and automated processes. Some enterprises have already begun to reprioritize their digital roadmaps with a focus on implementing more automated and robotic processes as quickly as possible. Interestingly, this reprioritization is business-case driven, which it wasn’t prior to COVID-19. Companies have recognized that automation is not simply a cost reduction measure but is now a matter of business continuity. Organizations more advanced in using automation and robotics for key processes appeared to manage their business continuity better than others during the pandemic.  

New consumer behaviors 

A Capgemini Research Institute survey of more than 11,000 consumers worldwide in April 2020 found that the appetite for online shopping had never been bigger – and would continue to grow post COVID-19. Many companies have seized the opportunity to expand the mix of channels through which they engage with their customers and accelerate their digitalization programs. Yet to really turn this into an opportunity and benefit from the cost savings of moving more business online, ways of working must also be transformed.  

For example, in China, coffee chain Starbucks remodelled its stores as well as its customer engagement during the country’s lockdown, enabling people to order via an app and pick up their coffee or food purchase with no physical contact. Switching to more digital channels, however, is not a simple change. It involves a whole host of areas, including your workflows, marketing, operating processes, customer interaction, etc. Get it right and the impact on the bottom line could be huge for a global business running multiple outlets. 

In the past few months, some global manufacturing organizations have begun to bring about a paradigm shift in the offshore/outsourcing model. Many organizations previously resistant to outsourcing are now rethinking their approach, notably in financial services (corporate investment, banking, etc.) and manufacturing. Further, as well as looking at how to rationalize costs in their own internal processes, organizations are expecting their suppliers and subcontractors to get involved in optimizing end-to-end costs.  

There has also been a shift in the scope of outsourcing being taken on by external suppliers. As organizations seek to hand off certain areas of cost, the outsourcing activities traditionally focused on non–core functions, such as finance and IT, are being expanded to embrace productivity areas too. For example, a manufacturer in the aviation industry might now outsource certain activities close to its core production, such as quality, planning and scheduling.  

While this evolution might seem daunting for some companies, there are several measures that can help mitigate concerns. Transparency enabled by data will allow you to monitor the end-to-end process of your outsourced activity. Close collaboration with your subcontractor to establish a common vision is essential and your outsourcing partner must show a commitment to skills development, with training and coaching programs to ensure alignment with your business. It may also be necessary to review and change the way in which procurement is managed with subcontractors. 

Clearly, certain sectors need minimum staff on the ground to maintain operations, for example in factories, or in physical retail outlets. However, more and more companies are now looking at remote working and automation as a means to redesign the employee experience, whilst reducing costs. The cost potential and cost variablization opportunities here are significant, although an initial impact on IT budgets would be required to enable this more flexible (and ultimately more cost efficient) model going forward. We recommend building a strong business case not only around the costs of managing facilities but also on empowering employees with digital collaboration tools and more autonomy. As both employees and companies have adapted to new ways of working, it presents an window of opportunity to seize the initiative.  

Maintaining the pace 

The key to long-term cost resilience is to act now. However, whether organizations will take the opportunity to maintain the accelerated pace of digitalization after the pandemic remains to be seen.  

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