Controlling costs has become one of the topmost pressing issues for business leaders today. As companies prepare for an uncertain future, they are trying to maintain lower spending levels and in fact have a new appreciation for how lean they can be in certain areas. However, a common mistake leaders make is to cut costs across the board especially in time of crisis as the current period. What is required instead is the ability to differentiate between good and bad costs and align the cost structure to support the strategy.

Equally important in the preparation for the next years is to shift their budget and spending to invest in strategic priorities and capabilities driving growth. The costs allocated for this fall into the ‘good cost’ category. On the other hand, costs that no longer contribute to creating value for customers fall into the ‘bad cost’ category and must be systematically reviewed, scaled down or eliminated. This is best done by deploying the “Zero Basing” approach.

We highlight below 6 levers for effectively managing your cost structure. The first three usually receive obvious management attention, while the latter three are areas that are often overlooked which can provide additional perspective for cost reduction:

• Managing Overheads – which covers people, SG&A as well as manufacturing overheads.
• Purchase productivity – managing suppliers and input costs as well as redesigning the supply chain.
• Process productivity – optimization of processes using lean techniques and outsourcing evaluation.
• Organization structure – delayering the functions and scientifically right sizing the sales.
• Synergies between businesses – exploiting customer-facing synergies through bundling of offers & shared services.
• Digitization – using technology to automate processes as well as reducing the cost to serve customers.

We believe that a narrow focus on controlling costs can often stifle innovation and active search for growth opportunities. A recent research study confirms that firms that under-invested for too long are unable to fully capture the pent-up customer demand when it returns, which eventually hampers their revenues. Leaders can further uncover new opportunities with a change of perspective i.e. by redefining the problem and view it as margin improvement (which is the ultimate objective) instead of cost reduction. This can be looked at from a combination of 3 lenses:

• Focusing on demand side margin improvement areas e.g. product mix, price management etc.
• Evaluating customer profitability and life-time value using data analytics to re-negotiate/abandon low margin customers.
• Not shying from allocating an increase in fixed costs where it matters but at a lower percentage than the revenue growth increase.