Rapid cost reduction and strategic planning to emerge stronger

Oct 02, 2020

How can companies survive the inevitable recession? It isn't just about cutting costs, argues Darren O'Neill. Businesses need to look at every aspect of their organisation to see where they can become more lean and agile.

The coronavirus has had dramatic and sudden impacts on Irish businesses and the Irish economy. Both have experienced significant declines in consumption, investment and exports of goods and services. To survive this time and succeed amid the uncertainty, organisations need to assess and adjust their cost base and reshape themselves to deliver returns that will be sufficient to see them continue to operate.

When COVID-19 took hold and started to erode the economy, many business leaders acted quickly to reduce costs and conserve cash. In PwC’s May 2020 CFO Pulse Survey, implementing cost containment measures was the highest priority action that Irish companies were considering as a result of COVID-19. In most cases, rapid cost reduction activities gave them an advantage when facing the economic and organisational impacts of the crisis.

While cost-cutting is necessary, it won't be enough in isolation to help a company to emerge with confidence. Costs must be cut in ways that don't harm the business and funds should be redirected to areas that will drive efficiency and growth. COVID-19 has made business leaders rethink their beliefs around costs. Things the business considered not being able to function without, like office space, are now recognised as variable, and things that were on the long-term agenda for businesses, like automation and remote collaboration, have become immediate necessities.

With economic uncertainty compounded by factors such as Brexit and changes in international taxation, businesses need to look at every aspect of their organisation to see where they can become more lean and agile. It is not just a case of cost reduction. There needs to be an equivalent strategic reset and reinvestment for future growth. And they need to bring their people with them, and get their engagement and support for the plan for the future. Let's look at those key actions in more detail.

Revisiting strategic priorities

Companies that thrive after recessions are not those that cut faster and deeper. To emerge stronger, costs need to be redirected to the right growth drivers. Step one in achieving this balance is to answer some simple questions about your current strategy:

  • How has your market changed? What's happened to your customers, suppliers and competitors? What market trends or disruptors have accelerated?
  • What value propositions look promising in a post-COVID-19 world?
  • Can you articulate the few things your organisation needs to do better than anyone else to meet those value propositions? What will your competitive advantage be?
  • Are you investing enough in those few things? Where do you need to spend less so you have the funds to redirect costs to value-creating differentiation?

This exercise should help you identify the must haves for your business.

Reset your cost structure

At a time of significant cost pressure, corporate vision can become very narrow. Often, a playbook based on belt-tightening and across-the-board cuts gets deployed. Standard actions include cutting from project or functional budgets, reducing vendor spends, and shuttering underperforming locations. Each of these cuts may be necessary, but they should support more than just a cost objective. Instead of just looking at where you can make savings, combine steps to get lean and make it possible to reinvest and grow.

Where to take action? How fast to push? Leaders should assign these decisions to teams that can look across the value chain. Work together to identify what's changed for good in your business and how it should respond. You'll need to solve the immediate problems, while keeping the ever-changing future in mind.

Bring your people with you

Disruption makes people question what they are doing, and it also makes them more willing to change. In the recent crisis, we saw people rally together in real time. They connected more frequently, cutting through bureaucracy to share information, make decisions and get things done. Departments that normally thrive on friction came together naturally with a common purpose: to serve customers and keep the business running. In some cases, rigid rules fell away.

Business leaders need to act if these behaviours are to last. Isolate the few behaviours you want to promote and sustain, the ones that have allowed your teams to solve problems quickly. Build them into your new way of operating and promote them rigorously to maintain the level of energy and effort you'll need to make them tentpoles of your operations.

The coronavirus crisis resulted in many changed behaviours, including:

  • giving teams autonomy to solve problems;
  • collaborating across the boundaries of hierarchies and functions;
  • showing empathy, express gratitude and place value on learning;
  • taking accountability for decisions and raising the tolerance for imperfection.

Darren O'Neill, Partner, Advisory Consulting, PwC Ireland