From Cost-Cutting to Cost Management

Don’t ask Jonathan Wright about cost-cutting. “We really focus on cost management,” says the Singapore-based senior executive in Accenture’s Supply Chain Management practice, who has global responsibility for the consulting firm’s supply chain fulfilment client work. Cost management, in Accenture-speak, has a cost-reduction element, but it is mainly about optimisation and reallocation of resources to strategic initiatives.

 
Wright spoke to CFO Innovation’s Cesar Bacani about the results of Accenture’s latest profit and cash optimisation pulse survey, how Asia’s companies are responding to the age of volatility in the post-crisis environment, business process outsourcing and other issues.  
 
CFO Innovation just completed its own quarterly Business Outlook Survey and cost-cutting continues to slide down the list of concerns. What you’re saying, though, is that cost-cutting should in fact be part of the DNA of the organisation?
We really focus on cost management as opposed to cost-cutting. There are subtle differences between the two. What we’re seeing and what I think is a real positive legacy of the downturn is that organisations are now forced to focus or have become accustomed to focusing on cost management as a way of doing business.
 
When we surveyed a number of organisations [for Accenture’s 2010 profit and cash optimisation pulse survey] about what they think about cost management going forward, they’re still going to be focused on it aggressively. It can have a cost reduction angle to it, but it’s also about reallocating cash to more strategic initiatives, particularly in the Asia Pacific, where there’s still a significant growth agenda. We’re seeing organisations try to divert cash to customer service, to marketing, to the growth countries and geographies.
 
So during the crisis, there was a knee-jerk reaction where everybody just cut and cut, and today, companies are turning the cutting into a cost management exercise?
I think that’s exactly right. Organisations were forced into [cost-cutting] out of necessity, to drop some things to prop up the P&L and support the company through that very difficult period. Some of the disciplines that were put into place are maturing. Organisations, I think, are now going to benefit from that increased focus on asking some really key questions. Where am I spending my money? Who am I spending it with and how can I spend more strategically? Really thinking through some of the questions that will allow you to manage that cost much tighter.
 
Are companies saying that they made a mistake in cutting so much and now they need to put back what they cut out?
I don’t know of organisations that have specifically said that. I think what they are looking at is to continue slashing the budget in line with business needs. Clearly there were some low-hanging fruits in terms of reallocating costs around the downturn. We saw the advertising and marketing spend being reduced. We saw [cuts] around employee benefits. Just removing redundant roles and activities within the business that were not delivering immediate benefits and immediate value. Now, some of that spend will clearly come back as businesses focus more on growth. But I think that they were the right and necessary moves [during the global recession].
 
In other words, they have now a head start because they have done the cutting and now they can be more strategic?
It’s one thing to get some rapid benefit; it’s another thing to get sustained benefits. What we saw last year were rapid benefits, which were necessary to react to the unprecedented volatility in the marketplace. But now, organisations are focusing much more on sustained benefits.
 
That involves much closer working relationships with the supply base, it involves using technology to drive higher levels of collaboration, it involves organisational change within the business, really thinking through how to drive more central and standardised processes. It can also involve business processes outsourcing. By outsourcing more of their transactional low-value activities, organisations can focus much more on their strategic high-value activities. .
 
Won’t you need to spend a lot before you can reap all the savings and efficiencies and sustainability?
It depends on the relationships. Collaboration and working closely with your suppliers will have different levels. One is just using some of the technologies and processes that already exist. But clearly, if you want to get to the next level of maturity, then you need to start to build out technology, spend in some areas of change management. But I would always want those to be self-financing. I would always want us to be looking at delivering benefits that will then pay for further evolution in that cost management or that collaboration.
 
AGE OF VOLATILITY
I heard companies and consultants saying these exact same things after the 1997 Asian financial crisis, but everything eventually came back to where they were pre-crisis. Will things be different this time?
One thing that is absolutely clear, and it’s something that executives across the globe are acutely aware of, is that volatility is the new norm. Uncertainty in commodity prices, in exchange rates, uncertainty in demand, it’s absolutely the new norm. The volatility means that we need to operate our businesses in a much more agile and dynamic way. Having close control of costs, thinking about cost much more strategically, will really help organisations react to changes [rapidly and effectively].  
 
If that is true, it seems to me that technology is a key tool.
Absolutely, IT is core for effectively managing costs, particularly as organisations become more global and supply chains become longer. Technology is an enabler to be more efficient with costs and is a key tool for providing the information that allows organisations to continue to be optimised.
 
However, there’s an important element, which is you still got to have the right skills, the right people, to make analytical decisions and to be able to analyse the data. We see an increased focus on business analytics, and extracting the right data and make informed decisions around their customers and their costs.
 
There’s an increasingly interesting space in terms of how to collaborate with distributors, which is particularly relevant in the Apac region. The traditional trade through distributors is more complex today. Technology has an increasingly important role to drive efficiency into that extended supply chain and to provide the information from that supply chain to help with planning and cost management decisions.
 
PEOPLE MANAGEMENT
You mentioned change management and the skills of the people who will actually do the analytics and interpret and report and so on.  
I think people are absolutely essential to the way organisations focus on cost. If I look at high-performing organisations, they’ve got three things. They have a very clear business strategy, and as part of that, they have a really clear understanding of their competitive assets, how they differentiate themselves in the marketplace, what they do differently to outperform their competitors. Secondly, they execute that strategy flawlessly. They’ve gone ahead, they’ve implemented it, and they’re driving that strategy across the region.
 
The third, and probably the most important, is that they have a winning culture. And what’s really important is that culture element, because ultimately, somebody once said to me, culture will eat strategy. If you don’t get the culture right, it will negate everything you’re trying to do with your strategy and the execution. People will always trump process. People will always take their own initiative and if you can drive people with the right initiative, right focus, then you’ll achieve high performance.
 
I think that’s very, very true in terms of cost management. Again, as the generation coming through, we’ve seen and felt and becoming much more comfortable with operating in a volatile economy, so cost management is becoming part of our culture and the focus of doing business.
 
Does traditional way of doing business in Asia have a place in this new post-crisis dynamic environment? I refer to the patriarchal structure, where the founder and the entrepreneur is the father of the company and what he says goes.  
I believe the organisation that has grown up through that type of legacy will face and are facing the reality that, if they want to become a global organisation and a global multinational, they need to increasingly focus on cost management in a much more strategic way. I think it’s about organisations’ ambitions, but one thing I certainly have felt is that there is a passion across the Asian companies that I have worked with for growth, for expansion.
 
Innovative and entrepreneurial approaches must continue to thrive, and I absolutely am a huge believer in entrepreneurial spirit. But the important thing though is as organisations become more complex, as organisations become more global, and as organisations continue to expand, I think you will see a natural increased focus on more strategic approach to costs. That is the key to the profitability; I think the key to profitable growth.
 

We [at Accenture] do tend to focus more on some of the larger enterprises in the region, either those that are looking to expand within their own geography or to expand within the region and clearly those that are looking to go more global. I think a lot of small and medium enterprises felt the pain of the downturn; equally I would expect that the new small-medium enterprises to still have a focus on cost management. But that is not my core focus.

 
OUTSOURCING
You mentioned outsourcing. How is it becoming an important part of cost management in Asia?
More and more organisations are looking much closer at their core competency, and where they can see areas of their business that is non-core, they are looking to outsource them. We still see significant opportunities for organisations to outsource the more traditional functions – finance and accounting, IT, human resources. But we also see increasing focus not only on business process outsourcing, but also the use of third party logistic providers for transport and warehousing, the use of specialists for repair, the use of specialists for some R&D functions, for some manufacturing design-type function.
 
You’re starting to see very innovative business models that allow collaboration [with many] different parties. They [lead to] lower costs, to come back to the cost management perspective, and also a higher performing capability by leveraging existing skills [in outsourcing service providers]. Talent can be a limiting factor and a key challenge for organisations, so they look to business process outsourcing as a way to gain capability and skills, as opposed to any other reason. You start to see in India some fantastic skills around analytics, around engineering, you start to see pools of skills around the world.
 
But of course in transitioning towards that new model, there will be new challenges and new risks as well for the organisation. Outsourcing might cost you more if you make mistakes in choosing the provider and failing to take cultural change within your company.
Change is very complex, and that’s why we focus very hard on it in any of our transformational programmes. It’s a key part of the way that we drive our outsourcing, it’s a key part of the way we drive any transformation system. It’s very much on the people, the change management. In any management decision, there is a risk-reward equation. As organisations increasingly focus on cost management and sustainable cost delivery, I think BPO has an increasingly important role to play in terms of creating that sustainable approach.
 

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