As we begin to return to a normalized state of business operations, companies are facing a number of concerns including labor shortages, supply chain limitations, and higher prices for commodities. Managing inflation expectations is going to be important over the coming year as uncertainty still reigns.
According to HBR, the PPI (producer price index) is up 10% through June of this year. This is reminiscent of the months leading up to the Great Recession of 2008. And the companies that performed through that time increased prices and boosted productivity, often through cost cuts. Their analysis of nearly 6,000 companies found a median improvement of 27% in shareholder returns.
While cost elimination programs are part of the equation, it’s important to note that today’s situation is different from what was faced in 2008. The aforementioned labor shortages and supply chain issues are two elements that didn’t exist then and consumer demand remains high.
According to HBR, “As they prepare for higher inflation in this new environment, companies will need to make moves that not only cut costs but also build more scalable growth platforms, positioning them to strategically reinvest in programs that deliver greater resilience and stronger purchasing and pricing capabilities. They need cost programs that allow them to grow top-line revenue and reduce their dependence on volatile labor markets while improving employee retention”
The article recommends six things you can do to achieve these goals.
Get Spending Visibility
Make sure you have systems in place that enable you to see where funds are being spent and who is spending. Without this type of visibility, there is no way to effectively manage spending. Visibility is the first step in improving accountability and productivity.
Differentiate between Strategic and Nonstrategic Spending
Spending cuts should be done thoughtfully. During uncertain times, decisions may be made that don’t align with the long term goals of the company. “Managers must identify where investments should be pulled back and cost savings realized; where you can more selectively trim costs to improve the return on operating expenses; and where you can boost growth through greater investment in the strategic capabilities needed to achieve differential results.”
Unpack the Drivers of Spending
Once a system and decision making process are in place, drill down into spending to understand the drivers behind spending. This step will require time to understand the details at a granular level. Examples coming out of this action include, “establishing a preferred vendor program to increase buying power, reevaluating the right make-vs.-buy mix for core functions like software development, and deploying AI-powered sourcing tools to generate automated insights from spending data, flagging savings and compliance opportunities in real time.”
Now you are able to make informed decisions on spending during inflationary times as well as the long-term. Make sure the controls put in place are agreed upon and consistent, and the process is ongoing if it is going to be successful.
HBR suggests implementing a clean-sheet mindset or zero-based redesign to reduce work or reset the way it is done. “This approach forces companies to scrutinize both what activities are performed and how those activities are performed, with specific levers to eliminate unnecessary work and automate.”
The best way to eliminate work is through automation. Machine Learning (ML), Artificial Intelligence (AI), and robotics are all options to reduce costs and uplevel the work employees are performing. To be successful with digital transformation, you’ll need to have an onboarding plan to support your technology investments.
Cost management systems can enable stability in uncertain times. Being proactive may give you the competitive advantage you need. If you’re in need of executive leadership to implement or manage through this process, our executive recruiters can help.