September 25, 2017
How utilities can take the long view with zero-based cost transformation
By: Sourav Niyogi

In a capital-intensive sector like the utilities industry, traditional cost-reduction approaches have been implemented through operating model changes and third-party supplier negotiations that deliver short-term benefits and opportunities. Utilities have often led cost-reduction efforts through alliances and innovative approaches to contracting, but this approach has not been able to radically transform the cost base and create long-term benefits.

Today, amid myriad new challenges and competitors facing the industry, utilities need a more sustainable approach to cost management, one with more visibility into spend, clarified budget ownership, targeted reductions cascaded through the organization, and one that embeds a culture of cost ownership and cost reduction. Other industries including FMCG and manufacturing have already undertaken strategic cost transformations that have reset company spending and delivered significant sustainable savings and greater returns to shareholders. 

While cost reduction has always been a focus, utilities in general have not taken the long view toward implementing enduring cost transformation. With a mere 17 percent of CFOs believing their companies are properly organized to optimize working money, it’s clear that companies need to stop driving forward by looking in their rear-view mirror.  What is needed is a robust, more forward-looking approach to establish baseline costs—one that looks at every line item, from the front office to the supply chain and everywhere in between. This is often referred to as ZBx or having a zero-based mindset.

Zero-based strategic cost transformation could be a game changer for utilities and a key to success is a focus on three crucial levers:

  • Cost visibility: Who spends how much on what
  • Cost accountability: Who has ownership
  • Cost culture: Every penny counts to everyone

By truly understanding costs at a forensic level, key factors influencing bottom-line spending can be identified and targeted. About half of executives in an Accenture survey said they lacked the analytical insights to make more informed decisions on which costs to optimize in line with what works best for their business goals. Through a zero-based approach, spend addressability typically increases by 20 to 30 percent. Of the total benefits unlocked, more than 65 percent can be attributed to construction, asset maintenance and indirect cost categories, which represent a utility’s key spend areas.

Implementing a strategic cost transformation requires not only a full commitment from senior stakeholders in all functions of the organization, but also a fundamental shift in employees’ mindset. Cost accountability means the justification of every expense is made by the appropriate functional owners, thereby spearheading this shift in cost ownership and building a new culture where “every penny counts.”

But the key to success for this type of transformation is creating an approach that can actually be sustainable for the utility. Just like a crash diet, most cost-optimization initiatives don’t last. In fact, only 36 percent of companies surveyed agree that their business sustains the benefit of cost optimization programs. Like the adage says, “Costs are like fingernails, they always grow back.”

Changing company culture toward a more cost-conscious mindset can also be difficult. It requires activating leaders, shifting hearts, minds and behaviors and hard-wiring that change into the organization. The critical requirement is a commitment from the CEO and leadership team to undertake a zero-based mindset and then communicating the benefits of long-term change to regulators, customers, employees and other external stakeholders. Employees need to be engaged, excited and motivated to take on the move to a zero-based mindset, and understand that they are the ones who can make it happen.

The cost-conscious behaviors need to be habit forming and become the new norm. Therefore, embedding the zero-based approach in performance management, establishing an ambassador network and tracking the change across the organization are crucial in making the change stick. Reinvesting cost savings in areas that create greater competitive advantage and in customer service improvement could also help utilities achieve their overall regulatory objectives.

As our Three Winning Themes – For Utilities in Digital Supply Chain report shows, “harnessing the power of analytics” and recognizing and leveraging the full potential of digital technology to thrive in this changing landscape is more vital now more than ever. Today, digital technology and analytics can accelerate the delivery and sustainability of strategic cost transformations, as the use of AI and advanced data analytics continue to enable better cost visibility.

It’s clear that utilities need to pivot to new challenges and opportunities in terms of cost management. With regulations set to continue a focus on delivering total cost reductions while increasing reliability and customer service, utilities would be wise to consider how a zero-based strategic approach to cost transformation, enabled by digital solutions, could help drive trust and sustainable, profitable growth.

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