Rethinking the management of expenses by reshaping the organization
By: Ignacio Barros
The pandemic, which virtually changed every industry overnight, requires organizations to take a new, more strategic look at expenses. Most companies took the immediate steps necessary to survive in the early days of the crisis, protect the business and ensure continuity. But now you face a more challenging challenge: creating a cost and cash management strategy that works not only during the recovery stage, since in many cases costs return to their previous levels faster than revenues, but also for a new normal of greater pressure on margins and with the need for greater agility as market dynamics change.
If we look at past global crises, like the financial crisis of 2008-2009, we’ll see that recoveries are critical turning points, either because they set companies up for a strong rebound and sustained years of market share gains, or because they relegate them. to a path of slowness, if they do not disappear. According to a Bain & Co analysis of 3,865 companies from all over the world during the period 2007-2010, that is, during the financial crisis, the best performing 20% of those companies had a common element, they played offense during the crisis. recession, through strategic moves like cost transformation, and these organizations were able to accelerate their growth trajectory, outperforming their peer average EBITDAs by almost four times at the end of the reporting period.
In general, companies see more pronounced gains and losses in downturns than in boom times. There are more stars on the rise and more ships sinking in periods of recession than in stable or boom times.
Four work fronts.-
While the 2008 financial crisis and other past crises give us clues as to what the winners did, the current crisis is different in some ways. So what should a company contemplate now in addition to the previous lessons? What are the great value generation opportunities? Based on our experience, here are four areas we believe organizations in any industry need to focus on in the next 12 months or more.
Simplification.-
The need for simplicity is not new but it is particularly relevant today as Covid-19 forces a greater focus on critical parts of the business. Snack maker Mondelēz International, for example, plans to remove one in four products from its portfolio to streamline manufacturing. In another example, a Latin American appliance company has reduced its product portfolio by 20%, in a radical move co-led by its manufacturing and logistics teams.
But simplification goes beyond product lines and must also include processes and organizational structure. In a well-known vicious circle, business and product complexity breed process complexity, which in turn breeds organizational complexity.
New ways of working.-
The pandemic hastened many transitions that had been slow in coming. Companies are rapidly changing their operating models to reflect the new realities of a post-Covid world, in which telecommuting and virtual meetings will be widely used long after the pandemic is over. These companies are optimizing their organizational structure, processes, and talent while incorporating tools to increase flexibility.
Banks across Latin America we’ve spoken with are planning to move a significant number of their non-customer-facing staff to work from home, a move that will help these companies better address changing consumer preferences and take advantage of their banking operations. service. A large B2B company that we have access to is drastically reducing its face-to-face sales model, except in very specific cases, in order to benefit from an advantage it discovered during the pandemic: its inside sales system allows its salespeople to cover more customers, therefore today the company has fewer salespeople with higher commissions per person (eg lower fixed costs and higher variable commissions) and, when done correctly, these sales are clearly preferred by their customers, who surveyed to measure their satisfaction with the current level of care. The ideal world, literally. They all won.
Automation and digitization.-
This is one of the main fronts that companies from all latitudes and industries are focusing on today, given its potential to fundamentally update the organization and change the cost structure. Many of our clients and companies to which we have access are already working – to a greater or lesser extent – on digitization, algorithmic analysis, they have an ERP and some analytics tool to improve their efficiency and make faster decisions, improving performance and the customer experience.
But not all companies do it well or at the speed at which they should, and that means that in every industry there are champions and technology leaders who take advantage. A US insurance company had experimented with automation for years, but fragmented and timid efforts inhibited realizing benefits of scale. Unifying and accelerating the implementation of automation was a strategic priority for them in 2020, with the goal of generating $1 billion in savings over five years from more than 60 initiatives that are well underway. The arrival of the pandemic convinced its managers to speed up schedules to automate processes such as criteria validation and claims processing. The accelerated improvements they’ve already begun harvesting and capitalizing on have put the company on track for hundreds of millions of dollars in savings this year, and they’re only in the second year of the plan.
Similarly, a Latin American home appliance company that switched much of its sales to an e-commerce model during the pandemic is now ramping up its investment in automation to support a threefold increase in direct-to-consumer sales. The company is rapidly rolling out tools to improve inventory management and short-term demand forecasting, among other capabilities.
Visibility.-
Cost and cash visibility was another big deficiency that emerged during the crisis, and companies were forced to quickly improve. As a result, many executives today are telling us about the importance of maintaining and incorporating the changes made while improving control, decision levels, and end-to-end visibility to improve cost and cash management.
They are changing how, when and where decisions are made as they make real responsibility and accountability a central component of their revamped cost structures.
Where to start.-
These four major restructuring fronts can affect all elements of a company’s cost base and cash position. Companies should try to prioritize and start with two or three bold and focused moves, choosing the cost-effective items where implementation can have the most impact. This means that after considering the implications for customers, the competition, and the business itself, leaders may choose to implement, for example, a bold move around new ways of working supported by automation and digitization. They would look across functions and business units (purchasing, supply chain, sales, marketing, technical support, etc.) to find key opportunities to restructure the cost base.
Other companies are reviewing their structure of administrative expenses, for example, the appropriate size of their offices for the new hybrid reality of blended work. The CEO of Morgan Stanley reported that the bank has shown that it can operate without leaving a footprint (“we can operate with no footprint”, he said). Tata Consultancy Services announced that 75% of its employees would permanently work from home by 2025 (the industry average was 20% before the crisis). Businesses across industries will continue to strengthen their virtual work systems by seeking global business services that protect them from disruption, relying on digitization to capture more value faster.
In purchasing, companies with successful management will improve the visibility of spending and reduce it in direct and indirect categories, rethinking their strategy to avoid interruptions in the supply chain. This implies, among other things, generating win-win schemes by determining the optimal number of suppliers, greater volumes and contract times, and the consequent discounts that said suppliers, eager for business, will have to make.
In cash management, companies with the greatest bargaining power will generate the largest amount of cash upfront possible, ensuring a solid and liquid position, to accelerate recovery while investing in their reshaping for the future. Many companies see, now more than ever, the need to develop robust cash management, optimization of net working capital and the generation of new and better ways and capacities to continue generating cash in the future. All of that calls for eliminating manual cash management processes and implementing new ones that support quick, real-time decision making with accurate forecasting. This is a new way of thinking, which requires greater visibility and a new set of skills.
Sources:
- Retooling for the new cost imperative (Bain & Co, August 2020)
- Cost management news – CFO Journal (Wall Street Journal & Deloitte, periodic)
- SYNERGOS own cases