Reducing costs by 10% or more is for situations where the need to lower cost is either very acutely due to changing business circumstances or the organisation has the ambition to strongly improve their cost-income ratio. This article, part of our ‘Cost take out’ series, explains how to realise this whilst maintaining commercial strength.
By Head of Digital & Performance Wouter Pijl and Principal Consultant Loek Bleijswijk.
Although at first it may appear to be very rewarding to focus on the potential of improving the cost-income ratio, a step towards double digits cost savings shouldn’t be taken too lightly. This is different from other cost reduction approaches, such as continuous improvement, and requires a tough mentality.
In the last decade, all financial institutions have optimised costs, with most managing to cut 3% to 6% a year. But going further to shed 10% to 20% requires perseverance, difficult choices, and smarter, innovative solutions. It will involve defying the status quo, challenging value streams, and even losing valued colleagues. Such extreme cuts require your business performance and model to be analysed and challenged from multiple angles. Management must ask how every euro, pound or dollar adds value to your customers, including cross-charges between functions?
Deflecting the waterbed effect
For lasting costimisation (cost optimisation), Delta Capita analyses, challenges and optimises the entire organisation from multiple perspectives. This is necessary because changing costs in one function will affect another. Like with a waterbed, if you push one side down, another rises.
For example, to reduce headcount in front offices, organisations often need fierce investment in customer support technologies. Lowering costs in one function is easy. Cutting overall costs without losing commercial strength is the challenge.
Figure 1 – Areas researched in double-digit cost takeouts
Delta Capita has the vision and experience to successfully run multi-view cost-saving programmes, with each perspective having its own analytical toolset and approach. Every client has unique elements, but our experience allows us to use a tailored approach to their needs.
For example, cost reductions in operations may come from efficiency, automation and value chain optimisation, but in support, the focus is on effectiveness, reserve capacity and outsourcing.
Success from on-the-ground analysis
One critical success factor is on-the-ground analysis, in cooperation with management and specialists in the organisation. This enables us to provide specific, tailored measures with the best possible support from the organisation.
Elements like benchmarking can sometimes be included, but only as indicators to what direction one could find potential cost improvements. Because every organisation has its own typical profile and of course its own strategy, it sets them apart from other organisations.
Figure 2 – Anonymised costimisation project — dashboard and possible measures
Other success factors are concentrated lead times, strong interaction with the organisation, and using the internal organisation for information, knowledge, and commitment .
Mitigating internal politics
Internal politics is always significant and often distracting when implementing double-digit cost reductions. Mitigation lies in strategic alignment, external objectivity, business case management and strong CEO or manager support. Above all, you need perseverance to challenge targets and leave no stone unturned.
External consultants can help. Being outside the hierarchy, they can more actively suggest and drive cost takeouts.
Tough but rewarding
Double-digit cost reduction initiatives could be driven by challenging external factors or internal vision. Either way, they will always be a tough but rewarding journey. Tough, as they come with new and disappearing roles and changing ways of working. Rewarding, as they can make you streamlined and focused, well-adapted to new environments, and prepared for competition.
If you are considering a costimisation initiative, get in touch. We love to analyse your potential, and make you a proposal that reflects our commitment to delivering results together.
Wouter Pijl and Loek Bleijswijk have extensive experience in improving cost structures while maintaining an organisation’s market strength. With contributions of Alex Zaiac, Principal Consultant.