Part 1: Cost resilience: What is it and why is it important?

Post-pandemic we saw organisations go through multiple rounds of cost-cutting exercises, and because of this they are finding it increasingly challenging to unearth new savings opportunities. Add to this inflation, a looming recession and pressure to invest in technology transformation, business leaders need to deliver cost savings. Despite this, Deloitte's 2024 MarginPlus survey reveals that a staggering 99 per cent of executives are planning margin improvement programmes in the next 12 months¹. However, the sombre reality is these programmes rarely deliver on targets.

Cost resilience in top tier companies has gone beyond its traditional role as a periodic ‘deep clean’ exercise, becoming an indispensable, ‘always-on’ business capability. By weaving cost management into the very fabric of an organisation's operations and strategic decision making, organisations can build sustainable resilience.
 

What is cost resilience?
 

Delivering cost resilience can be defined in 3 phases – ‘Find the money’, ‘Get the money’ and ‘Sustain the cost position’. The final phase is often overlooked and involves continual trimming of the sails across the profit and loss (P&L) to maintain cost advantages. Companies struggle across all three phases and generally underinvest in the final phase, leading to additional cost creeping back into the organisation.

This strategic shift is paramount in today's dynamic business landscape. Deloitte's latest CFO survey underscores this, revealing CFOs prioritise cost optimisation (51%) and cash flow enhancement (35%) amid growing optimism regarding their companies' prospects².

Figure 1: CFOs prioritise cost optimisation and cash flow

Building a cost resilient culture across an organisation provides a significant strategic advantage. When cost and cash management are deeply ingrained in the organisational mindset, the resulting healthier ‘balance sheet and cash flow’ empowers organisations to capitalise on opportunities. This means seizing competitive advantage during economic downturns, capitalising on competitor vulnerabilities, and providing the financial flexibility to fully leverage market tailwinds and surges in demand for products or services.
 

Why has cost become more relevant?
 

The Deloitte CFO Survey revealed a sharp rise in corporate risk appetite for Q2. A staggering 36 per cent of respondents said now was a good time to take greater risks onto their balance sheets which is the highest level in four years, and the second highest since Q1 2015³. With that context, navigating external risk factors has become increasingly important and is expected to remain a challenge. A range of factors including rapid change, geopolitical instability, persistently low productivity, weakened competitive landscapes and skills shortages amplifies the urgency for organisations to uncover new avenues for cost reduction and margin improvement.

The Deloitte CFO Survey for Q2 in 2024 shows 70 per cent of executives expect costs to increase in the next 12 months. Combining this with flattening margins across numerous sectors amplifies the vulnerabilities many organisations face. Heightened pricing sensitivities, dependence on volume, and the constant pressure to maximise operational efficiency become even more critical in this environment. Additionally, we see organisations that ramped up infrastructure and personnel to capitalise on anticipated growth face heightened risk exposure when those projections fail to materialise.

That said, with growth prospects constrained, organisations cannot simply ‘cut their way to success’. The imperative now is to cultivate agility by developing multiple growth levers and ensuring sufficient resources for reinvestment, even amidst challenging market conditions.
 

The resilience gap: Why organisations struggle to achieve sustainable cost resilience
 

Recent Deloitte research found 46 per cent of organisations have invested in transformational roles, however, 80 per cent of cost reduction programmes fail to meet their targets and 1/3rd achieve less than 50 per cent of their intended savings, the highest failure rates since 2008⁴.

This pervasive struggle stems from a combination of factors:

• agility challenges with adapting to rapid market shifts and evolving demand patterns proves difficult
• legacy constraints including rigid, outdated platforms and infrastructure hinders the implementation of efficient processes and technologies
• flawed foundations where poor governance, inaccurate business cases and unrealistic projections undermine programme success.

Achieving sustainable cost resilience demands a fundamental shift in perspective. Instead of viewing cost reduction as a periodic exercise, organisations must embed cost consciousness into their very DNA. This transformation requires adopting a new lens focused on continuous cost management and encompasses four key pillars:

1. Dedicated, specialised teams: Move beyond temporary task forces assembled in times of crisis. Establish dedicated, cross-functional teams with deep cost management expertise who operate continuously, proactively identifying and capitalising on cost optimisation opportunities
2. Full P&L visibility: Break down silos and embrace a holistic view of costs. Shift from short-term, piecemeal cost-cutting to a comprehensive approach that scrutinises the entire P&L statement, uncovering hidden interdependencies and maximising savings potential
3. Strategic cost avoidance: Transition from a reactive to a proactive stance. Embed cost awareness into all decision-making processes, fostering a culture of cost consciousness and pre-emptively mitigating unnecessary expenses
4. Leveraging risk intelligence: Implement a standardised risk framework across all business units to identify and assess potential cost drivers. Facilitate seamless knowledge sharing and the adoption of lessons learned across functional areas, ensuring consistent risk mitigation and cost optimisation strategies.

By embracing these four pillars, organisations can move beyond the limitations of cyclical cost-cutting and establish a foundation for sustainable cost resilience. However, from our experience we have observed a stark contrast:

• the majority of FTSE 100-250 companies pursue ambitious cost programmes on 3-year cycles or in reaction to market events. As evidenced by our MarginPlus Survey, these rarely deliver on targets and often stagnate or stall before reaching the end of their delivery plans
• the minority of companies maintain dedicated teams with senior cost management expertise, enabling them to strategically and decisively ‘trim the sails’ year-round. These organisations consistently outperform their peers when it comes to delivering on cost targets and are better able to take advantages of changing market conditions.
   

Conclusion
 

While the pursuit of cost resilience is a common goal, the path to achieving it diverges significantly among organisations. The majority often find themselves trapped in a cycle of reactive, short-term cost-cutting measures that yield limited and unsustainable results. To break free from this pattern, a fundamental paradigm shift is required.

Organisations must transition from viewing cost management as a periodic exercise to embedding it as a core competency and continuous process. This transformation necessitates a holistic approach encompassing dedicated expertise, comprehensive P&L visibility, proactive cost avoidance and the strategic leverage of risk intelligence.

If you are interested in learning more about how we can help you with your Strategic Cost Transformation programme, please get in touch with one of our experts.

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References:

1. 2024 MarginPLUS study: Refocusing amidst uncertainty, Deloitte, 2024.
2. Deloitte CFO Survey Q2 2024, Deloitte UK, 2024.
3. Deloitte CFO Survey Q2 2024, Deloitte UK, 2024.
4. Rethinking Business Margin Improvement, Deloitte, 2024.