As I speak with business leaders these days, it’s clear the disruption of COVID-19 has left them looking at costs differently. What changed? The pandemic has forced them to focus on what their costs should be and create a more variable cost structure—a cost transformation, not simply cost reduction.
That’s a good thing, but here’s the challenge. For a true cost transformation—creating the optimal cost behaviors that are sustainable over time—a company has to have deep visibility into everything it spends. Such visibility is key to both identifying opportunities to reduce or reallocate spend, as well as driving cost-conscious behaviors and new ways of working. Yet it’s virtually impossible to gain this kind of visibility with disjointed data and simple Excel spreadsheets, which are common across most companies.
More than ever, companies need to be able to apply intelligence to cost management. In fact, according to Accenture research, 84% of C-suite executives believe they must leverage AI to achieve their growth objectives. Yet 76% also reported they struggle with how to scale their use of AI and 68% said they don’t know how they can realize measurable value from their data in its current state.
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Drive visibility and new behaviors
Cloud-based data lakes make it easy for companies to collect data into a central repository and turn data into actionable insights with the help of advanced analytics so they don’t have to remain blind to what they’re actually spending versus what they should be spending. Here’s how that can help achieve cost transformation.
- Analyze companies’ operations and define the “right cost” structure. With analytics and artificial intelligence tools, companies have a highly granular view of activities that drive cost in business. When paired with internal and external benchmarks, this enables them to identify opportunities to unlock trapped value.
- Develop should-cost and driver-based models. These models allow companies to quickly identify outliers and patterns that don’t align with high value for the spend. They can also forecast the right values for the cost centers and then track actual performance. More advanced scenario modelling can help a company understand in real time the impact of business choices and predict how various decisions will affect their cost in the future. So with the right insights, employees can understand the cost drivers of every activity, which helps them better plan how they spend. That’s the key to materially changing a company’s cost structure and making sure those changes stick.
- Respond to shifting external conditions. Advanced analytics can help companies adjust operations in real time as market conditions rapidly change. For example, in response to COVID-19, we used our new patented AI based store cluster analytics to help multiple retail clients adjust operational costs based on various factors including changing pandemic conditions and local mandates. This enabled stores to adjust expenses dynamically versus utilizing a historical approach.
- Understand the effect of spend decisions on sustainability. With responsible sourcing tools and sustainability dashboards, companies can track sustainability measures across their value chain. For example, they can track their carbon footprint to see what activities drive carbon emissions and then change how they work and what they spend accordingly.
- Drive new ways of working. To a build a sustainable cost culture, employees need to be empowered with tools and insights that are consistent and drive single source of truth across the organization. For example, an oil and gas company is deploying a platform where specific widgets are developed to align operations, finance and procurement while enabling more collaborative ways of working.
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For a true cost transformation, a company has to have deep visibility into everything it spends.
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From cost reduction to cost transformation
When it comes to costs, the pandemic taught us the importance of looking forward. What should the company be spending on what—independent of what it spent last year?
With an advanced analytics platform, companies can answer those critical questions. Leaders can access and analyze what they’re spending at a forensic level and model what their new, optimal cost structure should be if they started from scratch. They also can gain the insights and support to instill a new cost mindset and new ways of working.
I’ve seen this firsthand in my work with clients. Companies that take advantage of the tools available are not just reducing costs, but they are achieving a true cost transformation. Contact me if you too want to set your company up to generate sustainable, long-term value.
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