Many CEOs delegate responsibility for cost reduction to other leaders within the business. However, that hands-off approach could be costing their companies a lot of money and strategic opportunities.
According to our Deloitte 2019 Global Cost Survey, which included more than 1,200 executives and senior business leaders directly involved in cost management, cost reduction remains an essential business practice all around the world, with the vast majority of surveyed companies (71%) planning to cut costs over the next 24 months.
Among those companies, nearly one-third (31%) aim to achieve cost savings of more than 20%, while more than two-thirds (68%) are targeting total cost savings of 10% or higher. Unfortunately, 81% were unable to fully meet their cost targets — with nearly two-thirds (65%) falling short by 25% or more (achieving less than 75% of their targeted cost savings). Only 4% surpassed their cost targets.
The good news? When CEOs and presidents are directly involved in cost management programs, the savings targets are typically much more aggressive, with roughly half of such programs (49%) having targets greater than 20%, nearly double the 26% rate for cost programs where involvement from the top is less clear.
Even better, despite the higher bar, the success rate for programs with direct involvement from CEOs and presidents is 31% higher as well.
More than just cost savings
Cost management is no longer simply a way for companies to improve margins and save money. It is now a key enabler of digital transformation and digital disruption.
For the past several years, our biennial cost surveys have found companies around the world were “saving to grow,” using cost reduction to help fund their growth initiatives. Now, many companies are taking the strategy a step further, using cost reduction as a powerful lever for digital transformation − an approach we refer to as “saving to transform.”
In particular, businesses are starting to recognize the need to transform their operations and capabilities through infrastructure investments in key digital innovations such as robotic process automation, cognitive technologies, and cloud-based ERP systems. These digital technologies can deliver dramatic improvements in competitiveness, performance, and operating efficiency − as well as additional cost savings − while positioning a company to withstand adverse future events such as economic downturns and digital disruption. Global success rates for these technologies are very high, with 85% of cloud implementations meeting or exceeding expectations, followed closely by cognitive at 83%, and automation at 76%.
How CEOs can make an impact
Break down implementation barriers. According to our survey results, implementation challenges are consistently the biggest barrier to successful cost reduction. One key reason is that leaders tasked with reducing costs often have a sphere of influence that is limited to a specific functional area or business unit. This can handcuff a cost program’s overall success rate and savings level, particularly in cases where the biggest cost reduction opportunities span organizational boundaries. Other key reasons include lack of resources, and lack of visible support from the top. CEOs have the clout and broad organizational reach to make these kinds of implementation challenges go away.
Elevate the thinking from tactical to strategic. Traditional cost reduction approaches, such as simplifying business processes and reducing external spend, tend to be tactical in nature and, according to our survey, are the most commonly used in cost programs. This limits the potential for savings. By bringing a more strategic perspective to cost management, and directly encouraging teams to think bigger, CEOs can enable breakthroughs that are more impactful, such as reconfiguring the business or changing the operating model. These strategic cost management approaches offer potential savings that are much larger − and much more sustainable.
Make digital innovation a priority. Digital transformation and digital disruption have emerged as critical strategic issues for business leaders in every industry and region, especially at the highest levels of the organization. In this year’s survey, CEOs and presidents cited digital disruption as a key external risk 29% more often than did other business leaders, making it their top external risk. They were also 18% more likely to view digital enablement as a high priority over the next 24 months. By placing more of an imperative on digital innovation, CEOs can help their companies harness the full power of digital technologies, delivering new levels of cost savings while at the same time positioning the organization for long-term success in an increasingly digital world.
Given the rising strategic importance of cost reduction in a “save to transform” environment, and the major positive impact of direct CEO involvement, the message is clear. As a CEO, if you want your company’s cost management program to be as successful as possible, you must be directly involved.
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