In benchmarking terms, you’ve heard of Quartile Three, Quartile Two, and Quartile One. Now get ready for Quartile Zero.
For years, companies followed a traditional benchmarking or comparative approach to cost reduction. They’d looked to move from the lowest quartile (i.e., worst-performing) in spend to the highest, ultimately landing among those peer companies with “best in class” spend. The focus was on identifying where the company outspent the leaders and how to shave costs to bring them in line with those setting the bar. The problem is, not only does this approach not fuel true competitive advantage, but it also isn’t aggressive enough because it only looks at traditional pricing and consumption patterns.
Starting with a clean sheet
Quartile Zero, which is at the heart of a zero-based approach to spend, is a dramatic shift away from this comparative approach. Rather than relying on first-quartile benchmarks, Quartile Zero starts with a clean sheet—true zero. From there, it considers how digital technologies, sustainability practices, and other dynamic forces can define what a company’s operations should cost—i.e., a fundamental change in the cost curve.
Consider, for instance, spending on legal services. A company in the midst of an acquisition will have myriad contracts needing review, adjustment, and ultimate approval—equating to hundreds of hours of attorney time from the company’s law firm. A traditional approach to reducing contract review costs would be to better control either price (negotiating a lower rate from the firm) or consumption (agreeing to pay for fewer hours). But what if the company uses artificial intelligence to handle much of the contract reviews? In our experience, an AI solution can cut the amount of time lawyers spend on contract analysis by as much as 80 percent. By using AI instead of just focusing on the traditional price or consumption levers, the company can drive down the total cost of contract reviews far more significantly—and set a new bar for what contract reviews should cost.
Here’s another example: an Expedia-like digital marketplace platform for freight-forwarding services that enables shippers to get instant real-time landed-cost pricing, routing, and carrier comparisons. Compared with the traditional process for buying freight-forwarding services, the marketplace provides quotes in just seconds and gives shippers visibility into ongoing market rates for more effective negotiation. Plus, the spot quotes shippers get can be 30 percent lower than their negotiated rates—which is a significant bottom-line impact for a large shipper.
As the preceding examples show, the impact of Quartile Zero thinking can be dramatic because digital technologies empower companies to far surpass even their best past performance and first-quartile benchmarks. Accenture Strategy research has found that a zero-based program cuts costs by an average of at least 15 percent and generates savings of more than US$260 million per year. Reductions vary from 5 percent to 28 percent due to different levels of ambition around the should-cost targets companies set for themselves.1
Companies are clearly getting the message. Accenture research has found the use of zero-based programs has grown by 57 percent annually since 2011. Despite that, however, only 13 percent of companies are investing in technology to bring further agility and efficiency to the organization as part of a zero-based program.2 And that’s where the really big opportunities are.
Mapping your path
How can you get on the path to Quartile Zero thinking? There are a couple of important things to think about initially. One is to map out how you can engage ecosystem partners (especially startups) to accelerate building the capabilities you’ll need to make Quartile Zero work. With the pace of technology, partnering with startups can give you a leg up in understanding new solutions in the market and give your company a quick win. Another is to be sure to leverage the classic savings levers (i.e., implementing policy changes, driving lower pricing through procurement events, rationalizing specifications, and making appropriate changes to consumption) to fuel the investment for the new technologies you’ll need. A third is to understand the organization structure, processes, and interactions between humans and machines necessary to optimize the technologies to meet the organization’s needs.
In the end, Quartile Zero isn’t about moving you along the cost curve to incrementally improve your position—i.e., implementing a tool to make a process a little faster and more efficient or reducing headcount by 5 percent. Rather, it involves thinking about the art of what’s possible—how today’s advanced digital technologies can enable you to completely redefine the cost curve. It’s not science fiction—it’s happening today. And its growing use and success mean the days of traditional benchmark-driven, cost-reduction approaches are numbered.
1 Accenture Strategy, “Beyond the ZBB Buzz”, 2018.