The cost reduction conversation The cost reduction conversation

We are all seeing incredible inflationary increases of late and their impacts on both the cost of living and the cost of running a business are a real challenge.

I recently spoke with a CEO who was concerned at the thought of having to balance the impacts of a nearly 30-year high level of inflation, the ever-evolving war for talent amidst the background of the ‘Great Resignation’ and then the rising energy and commodity prices. 

The hard truth that they and other businesses are facing right now is, those are just three areas where businesses will feel the squeeze. With all sectors being impacted, the only difference for every business being just how much they will feel it.   Another client who uses wheat in manufacturing is facing a 9x uplift in commodity prices; and another last week reported 15 percent increase in delivery driver’s costs.

Passing on cost increases to customers is not always possible or the long-term answer. It's become clear that most businesses are looking at cost reduction or cost avoidance measures wherever possible.

“Looking ahead, the world economy will have to navigate a difficult period under a cloud of geopolitical uncertainty. Businesses and households will be hoping for the best but should plan for potential ongoing disruptions and uncertainty.” Yael Selfin, Chief Economist, KPMG UK

First instincts are naturally: How can we protect the bottom line? Look at some of the immediate reactions to the early throws of the COVID-19 pandemic, where businesses were forced almost overnight to do all they could to tackle any immediate risk to their operations.

Supplier relationships suddenly ceased, and projects put on pause, but, as markets stabilised, businesses were afforded breathing room and perspective and moved from short-term response to longer-term thinking.  There are similarities in how businesses can respond to cost pressures:

• Identify the ‘low hanging fruit’ or ‘no regrets’ cost reduction decisions
• Balance those with long-term ‘strategic’ measures
• Understand their impact on the wider business value

Doing so means that businesses can begin to see clarity in their decisions even amidst uncertainty and it is important to prioritise different cost measures and sequence them.

We see companies using up to 20 possible cost levers to cost reduction. Including taking a fresh look at products, customers and markets and their relative profitability, exploring savings across back-office functions like Finance, HR and IT; reorganising people structures; revisiting supply chains; and process improvement.

The advice is typically to identify, triage, prioritise and then execute these cost reduction levers.

Through conversations we’ve had with many businesses recently, across multiple sectors, we’ve seen these levers in action and often unlock savings greater than expected.

One client had identified significant savings of around £6 million per annum, but following a review with them, we identified other cost reduction levers within their business – that cost saving was more than doubled to £15m.  It provided senior management with a fresh perspective on other parts of their business which led to those savings increasing even further.

It is something we’re seeing more and more and so, despite the growing uncertainty around the rising costs and the pressures it’s placing on businesses, I feel there’s certainly room for optimism. By taking a step back, seeking advice where needed and gaining a clear understanding of the many cost reduction levers that exist within your business, you can successfully pull the right ones to unlock cost savings and opportunities and gain a sense of clarity in a time of uncertainty.

Contact us for a conversation about the best next steps for your business.