How to cut business costs and use savings to grow

Many companies have hit the pause button on their transformation goals as businesses across the globe respond to the human and economic loss of the COVID-19 pandemic.

It’s an enormous challenge, but one finance leaders need to meet in order to usher their respective companies through these uniquely challenging times.

“We need to show leadership, we need to show empathy, and we need to humanise what this is,” said Omar Aguilar, a Philadelphia-based partner at Deloitte Consulting who specialises in strategic cost transformation.

Deloitte recently surveyed organisations about the impact COVID-19 has had on cost activities and found that about 40% of respondents are planning to resize their organisations through labour reductions over the next several months.

In addition, according to preliminary results of the study, which has not been released, 40% of respondents expect a decline in revenue over the next 12 months, with 10% reporting declines of more than 20% and the worst-hit businesses (a minority of respondents) reporting declines in revenue over 75%.

Several sectors have seen dramatic reductions in revenue, primarily for two reasons.

First, there are those such as retail stores, car rental companies, hotels, oil industry, etc. that are fundamentally impacted because of demand patterns and need for customer interactions. Second, macroeconomics play into demand for different industries — for example, the price of oil/lack of purchasing.

Meanwhile, companies that had already embraced a “save-to-transform” model and invested in technologies that streamlined their operations were better positioned when the COVID-19 crisis hit, Aguilar said. He believes these companies will bounce back faster when the economy begins to recover.

Move to reduce costs

Pre-pandemic, finance professionals and CFOs were increasingly looking at using their savings to invest in technologies to streamline operations and reduce future costs. Those same strategies can be applied now as the world grapples with the effect of COVID-19 and its accompanying economic challenges.

Deloitte research has found a significant increase in the number of companies implementing cost-reduction strategies over the last 12 years since the Great Recession. And companies are using those savings not just to manage margins in the immediate present but to invest in a way that will grow the business over time, Aguilar said.

“The companies that are doing this to grow and to strengthen their positions, we believe, are the ones that are gaining more competitive advantages to really meet market requirements and actually excel and exceed expectations,” Aguilar said.

Finance professionals play a critical role in this as they are the people improving the tracking and reporting systems.

“Our financial challenge is in making these transformations tactically to be successful, but also playing that role at the executive level to architect these programmes and then make sure that they get implemented successfully,” he said.

Levelling up by investing in technology

During this pandemic, companies that already had a handle on remote working and digital operations were quicker to adapt to the pandemic restrictions. For example, there has been a huge demand for online grocery shopping and order services, as well as online distribution and automated customer service responses. There’s been an increase in demand for online commerce.

“Companies that had the ability to go online with automation were more scalable,” Aguilar said. “They are going to be able to power up faster and in a different way than other companies, and some winners and losers will come about as a result of that.”

When the recovery phase of this pandemic begins, those are the companies that are going to be able to adapt faster and be more flexible, he added.

There also have been digital distinctions within industry sectors between those who were able to adapt and those that could not, said Kuttayan Annamalai, value creation services lead at Deloitte Consulting.

For example, many healthcare providers quickly transferred to seeing patients online through telemedicine when the stay-at-home orders were first issued. This has worked really well for mental health providers, but dentists are more limited in what they can do given the nature of their work.

This experience will change the way health providers and insurance companies look at technologies like telemedicine from now on, and Annamalai expects to see more telehealth options. And companies that had already invested in telemedicine platforms before the COVID-19 crisis were able to adapt more easily to seeing more patients virtually.

From previous survey responses, Deloitte found that the biggest external threat to companies was cybersecurity and digital disruption. Aguilar said organisations are still reporting cybersecurity as a top external challenge globally, together with a drop in consumer demand and a shift in consumer behaviour, likely the case since the pandemic began as even more organisations move more of their operations online.

At the same time, investment and growth in technologies, such as robotic process automation, cognitive technologies, business intelligence, and cloud-based enterprise resource planning (ERP) systems, have “skyrocketed” in recent years.

It’s likely only a matter of time before investments in automation and artificial intelligence (AI) cognitive technologies explode as well, Aguilar said.

“What’s really surprising even further is these technologies [cloud, automation, and AI] are working,” he said. “If you look at the success rate of implementing these technologies, it’s pretty high.”

Reasons for missed targets

Deloitte’s prior surveys about the cost reductions showed that more than 80% didn’t meet their cost-reduction goals even as revenue was going up.

The biggest reasons for missed cost-reduction targets were implementation challenges, ineffective ERP and financial systems, and unrealistic targets.

These are all areas where finance professionals can help those systems run smoother. Companies need to grow and transform. And they need money to do it, he said.

“There’s a huge impact that finance can do as a function to enable this, and CFOs and finance executives can also do more strategically to enable this,” he concluded.

Making adjustments

As companies begin to recover from this pandemic, many will alter their business models dramatically. After working remotely and moving more operations online, there could be some resizing or decisions to do away with real estate holdings given a more remote workforce, Aguilar said.

Those companies and organisations that weren’t adequately digitised before the pandemic have been forced online to continue operating. For example, institutions of higher learning managed to put the bulk of their courses online.

“Everyone is realising that we can work more virtually. Technology is an enabler,” Aguilar said. “So the silver lining is that we may be able to power up and move forward optimistically in a different way.”

Since every country is in a different place in their recovery process, some are further along and offer hope to those just beginning the process. Aguilar spoke with business leaders based in Asia who are beginning to thrive again.

As for finance professionals, Aguilar said they need to be ready for scenario planning as we enter the new normal.

“So now is the time to rethink some things under a new paradigm,” he said. “If you didn’t embrace save-to-transform models before, now is the time to do that.”

— Taylor Knopf is a freelance writer based in North Carolina. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.