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When organizations launch a cost transformation, it’s natural to focus on the “cost” part of the equation. But the “transformation” part is just as critical.

The ideal cost transformation isn’t a one and done. It’s a journey. It may start with actions that have an immediate financial impact. But it extends well beyond short-term results to deliver sustained, lasting value that can be executed with certainty. Successful transformations thoroughly analyze and reimagine every aspect of the business, including the organization and operating model, operations and manufacturing, talent, suppliers, and business partners.

When cost transformations fully embrace this concept, they deliver a step change in capabilities that allows for scaling improvements through rigorous governance, improved processes, enhanced tools, and more consistent data.

They also upskill talent, enhance the culture, and improve ways of working.

A holistic approach to cost management moves the organization closer to “north star” goals such as increased market share, competitive advantage, and outsized profitability.

Prioritizing Cost Actions Based on Goals and Resources

A holistic cost transformation begins by prioritizing which cost categories to address first. Leaders typically base that decision on the expected return on the investment and the resources those actions will release to fund future strategy and performance goals.

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Sales, general, and administrative (SG&A) costs are common cost transformation starting points. Sales costs such as account management and compensation, among others, must enable growth. A transformation initiative would assess whether and which current sales personnel and processes could be more effective to enable growth. It could involve revising reporting, governance, ways of working, and incentive structures to make the team more effective and create more value.

Functions such as human resources, accounting, finance, legal, and IT fall under G&A costs. A transformation initiative would evaluate how G&A work is done to identify inefficiencies that could be optimized through process redesign or automation. If a cost transformation includes resetting the organization design—and most successful transformations do—the team leading the change would determine how to adjust roles, work-group sizes and structure, and KPIs. The team would also determine the overall model that is the most appropriate for what the organization needs to operate in a new, more cost-efficient environment.

Procurement costs are another common cost transformation starting point. Organizations usually assess indirect and direct procurement costs separately because they are so different. Indirect procurement describes spending categories such as office supplies, parcel and package delivery, travel, and other products and services that are not directly involved in producing goods or services. Because indirect procurement is not as essential to what the organization makes or sells, cost-cutting decisions related to them are typically more streamlined.

Direct procurement costs describe the costs for the raw materials and components that distinguish an organization’s products from other offerings. For a car company, those components could include the chemical that goes into its scratch-proof windshield. Transformation leaders must understand and evaluate direct procurement spending to make cost-cutting decisions. They need to consider all the implications of modifying direct procurement requirements and sources, especially if changes could potentially affect quality or performance.

Other major cost categories to review in a cost transformation are supply chain, operations and manufacturing, warehousing, distribution, and logistics.

Starting the Cost Journey

When creating new processes, transparency and alignments are key parts of a holistic cost transformation. Along with deciding which actions will create added value for the organization, leaders must determine how to shift the culture and engage employees. They also must manage the change so it’s continuous and processes don’t revert to business as usual once an initiative ends.

If you are considering a cost transformation, here are three steps to take.

Put a plan in place before announcing anything. Planning is the foundation of a cost transformation, but leaders often skip it in their hurry to free up cash to capitalize on an opportunity in the market. Or they may decide spending in a key cost category is higher than the industry average, so they need a quick cut. If something unexpected happens, such actions could lead to an adverse outcome.

Instead, work out your end goals ahead of an announcement, including changes to the operating model and organization design. Identify key employees in the new organization structure, incentives to offer them through a retention program, and how to measure their performance. Be thoughtful and deliberate. Allot at least a month or two to producing a plan.

Use data to figure out what you know and what you don’t. A common challenge is not having the right processes or tools in place to detect problems that could lead to unnecessary costs. It’s hard to identify the best solution if you aren’t collecting the right data—or any data—on existing processes and workflows that could reveal cost-related issues.

A cost transformation starts with analyzing current operations and workflows to identify processes and performance gaps that are leaking value. An analysis could pinpoint processes you could improve through automation or digital upgrades. With this analysis, you can set performance benchmarks and map out the actions needed to reach cost-related goals. You then can implement short-, medium-, and long-term initiatives and industry-specific measures to right size expenses.

Lead from the top. The CEO and other top leaders must be a cost transformation’s biggest supporters. If they are, the rest of the organization will follow. Break down the barriers that could stand in the way of success. Encourage employees to “own” the change journey that a transformation entails. Provide incentives and create alignments and trust among teams.

Mastering the steps outlined here in a focused, systematic way may sound simple, but it’s easy to get distracted. And when leaders are distracted, the organization gets distracted, and the fundamentals can fall by the wayside. For a cost transformation to work, reduce distractions, measure the things that matter, and make sure everyone in the organization does the same. Make it clear what people are accountable for. Be relentless about following up.

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