How companies are managing costs to transform
As businesses risk being leapfrogged by better competitors, how can they manage costs to invest in new technologies? Omar Aguilar, a partner at Deloitte, shares findings of the 2019 Global Cost Survey and the role of finance teams in enabling transformation.
What you’ll learn from this episode:
- Why many companies fail to meet cost-reduction targets.
- How companies are increasingly using savings to transform the business.
- Three main technologies that companies are investing in.
- How finance professionals can help meet cost targets to enable transformation.
Play the episode below:
To comment on this podcast or to suggest an idea for another podcast, contact Alexis See Tho, an FM magazine associate editor, at Alexis.SeeTho@aicpa-cima.com.
Alexis See Tho: As businesses risk being leapfrogged by better competitors, whether it's a big corporate player or a young and nimble startup, companies are confronted with an existential paradox. How can they manage costs, drive growth, and having to invest in technologies to stay competitive? In this episode, we dive into cost management with Omar Aguilar, the global strategic cost transformation leader at Deloitte. He will share findings from Deloitte's recent 2019 cost survey that surveyed more than 1,200 executives around the world. He will also talk about how organisations can manage costs to embark on transformation and the role of finance professionals in driving that agenda.
I'm Alexis See Tho, an associate editor at FM magazine, and here's our conversation.
So tell us a bit about what you do at Deloitte.
Omar Aguilar: Thank you. I'm a US partner for Deloitte. I'm the leader for the strategic cost transformation market offering globally, and my work is focused on multinationals both in the US and globally, and driving not only strategic cost transformation, operating model, change, margin improvement, turnaround, and also digital cost management.
See Tho: So let's start with sort of a broad brush on how cost management has changed over the past few decades.
Aguilar: At Deloitte, we've been tracking this, for the last 12 years or so since the Great Recession, and we have some more central data for the last 12 years. What we've seen is the likelihood of cost reduction since 2008, if you look at 2008 to now, 2019, it has increased from about two-thirds.
We had about 68% of companies doing cost reduction in 2008 to now almost 90% of companies doing this. We actually have 84%, so we seem to be between eight to nine out of ten, doing this. What this shows is that cost has become more of a core competency. The targets we’ve seen the last 12 years have changed. They actually have increased, but tellingly, the failure rates also have increased from about 20% in 2008 to 80% now in 2019.
To your point, given that picture of cost management, we really have seen three stages, with cost management. From the 1980s to now, what we have seen is traditional cost management — accounting, and financial reporting, and controllership — moving broadly into finance, having a procurement offering, having really cost categories and processes, activity costing, and so forth.
That really started into the 1980s and perhaps a little earlier than that.
Over the last 10 to 12 years, we've seen a structural cost management focus on operating models. That has resulted in major efficiency and major changes for large companies. What we have seen over the last two, three years is, digital cost management, especially with the advent of cloud, automation, and cognitive technologies/AI or artificial intelligence — this digital cost management is no longer linear. It means that you can introduce it to a company that's only doing traditional cost management, a company that hasn't gone through an operating model change, or a company going through that. So we are seeing an acceleration in this area that we had not seen before.
See Tho: From this year’s report, what were some of the biggest things that stood out to you compared to last year?
Aguilar: I think that the title of the report is Save-to-Transform as a Catalyst for Embracing Digital Disruption. That's a mouthful, but then it's really about the save-to-transform part. Going into the survey, and again, you got it right. I think it's about 1,200 executives that responded to this. If you look at the 2017 global report, we expected that everyone would be in the same mode that we were before, which was save-to-grow. Most companies were using cost transformation, transformation activities, cost management, as a means to grow the business and to achieve profitability.
What we also found in 2017 was the advent of digital disruption was not quite there. The only place where we saw an uptake and a concern about digital disruption was in the US. What we found in 2019 as the most significant external risk globally is cybersecurity and digital disruption. So it has exploded over the last two to three years, and then we see the advent of technologies, in particular cloud, automation, and cognitive, to have skyrocketed over the last two to three years. And what we saw relative to the save-to-grow mentality is that in addition to cost and growth, we saw technology being another transformation lever, so we have moved from a save-to-grow mode into what we call a save-to-transform. A lot of the savings are being used to really transform the business mostly through technology and digital enablement.
See Tho: A lot of the survey participants are saying that they have a 10%, or 15%, 20% cost-reduction target, but from the report, more than two-thirds are not meeting those targets. What do you think is the issue there?
Aguilar: Well, if you look at, again, by the same respondents and by the feedback that we got, the main issue on these programmes relates to implementation challenges. So we have about 65% of respondents indicating that implementation challenges are the main factor that leads to failure.
The second one relates to — and this surprised us somewhat, as well — the lack of effective ERP and financial systems. So if you remember, we've seen the emergence of ERP again in the ’80s and ’90s that we went through all the major changes in ERPs. They are now obsolete, and we're seeing now in a survey that integrity of systems, transparency of systems reporting, ERP systems are an impediment. We see about two-thirds, about 62%, indicating that.
And then the last one is really nonfeasible targets, unrealistic targets in these transformations, and in my view, this relates to aspirational goals. Companies need to grow. They need to transform. They need a lot of money, so they're sending forth these targets that really become unrealistic, and then you have the failure rates. I think that there's a reason why there's a role to be played by executives and finance executives as to how to increase that effectiveness, but the main reason for failures are implementation challenges and architecting the programme in a way that's unrealistic, and then the systems, and then you have proportional this that is not conducive to these transformations.
See Tho: Can you talk a little bit about the save-to-grow that you saw a lot in the previous surveys and this year's save-to-transform? What is it?
Aguilar: The way that we see a transformation, it relates to four priority levers, or parameters, or dimensions, and to us, those are cost, growth, liquidity, and talent. Those are the four main levers of transformation, and so this is not only about cost. Cost is a proxy for transformations.
The reason we focus on cost is we do believe that a key requirement and a best practice for transformations is for them to be self-funded. You should not embark on a transformation just for the sake of it.
Going back to the four dimensions, in the save-to-grow mentality, what we saw was companies using the two main dimensions of cost and growth to guide their transformations. They want to grow, so they want to look at profitability. They want to look at better pricing. They want to look at ways to really improve that. But the way to fund that growth and profitability was through savings, and that's been the mode over the last few years. And if you look at also some of the analysis that we've done with some academics in this area using our own data, transformations have a U shape in going from more distressed companies and companies that are doing really well.
So the companies that tend to do better in transformations are the ones that have an urgency to do something or the ones that are well funded and well positioned to even do better. So the better get better, and then what you see is the ones that have urgency have the discipline and focus to do this. So that leaves us companies in the middle that have no clarity as to why they're doing this as to more failures in the transformation.
Again, the companies that are doing this to grow and to strengthen their positions, we believe are the ones that are gaining more competitive advantage to really meet market requirements and actually excel and exceed expectations in the market. The save-to-transform takes you to a step beyond that, which is the comment that I made before in embedding technology in the transformation.
See Tho: From the survey, what are some technologies that companies are expecting to implement in the next two years?
Aguilar: Well, what surprises a lot, again, you asked me at the beginning, you know, what surprised us in the findings. We expected given market dynamics and media attention, that actually we would have a lot of activity in automation. In fact, what we found is the most used technology is cloud, so you have cloud almost 50% of the market is really embedding cloud, and this goes back to changing your infrastructure technologically to do this. If you look at automation, it followed, but then it was a distant second. Twenty-five per cent of the market is really trying automation, and cognitive AI is almost at the same level.
The big surprise for us is the advent and the use of cloud in the market, and what's really surprising even further is these technologies are working. If you look at the success rate of implementing these technologies, it's pretty high.
See Tho: You had expected companies to be further ahead in implementing technologies going to AI or automation, when in fact, a lot of companies are still implementing or moving to cloud. Is that what was in the report?
Aguilar: Well, I think so. I think the part of this is the uptake on automation and cognitive hasn't been as high yet. The focus and the journey has been on cloud. But then automation and cognitive is being used mostly in pilots, is being used, you know, not at scale yet, but if you look at the future that we expect going forward, we see two-thirds of the business planning to implement automation in the future. We see 50% of businesses planning to do business intelligence, and we see a little less. We see that cloud is going to have less of an impact because there's so much of that happening now.
So cognitive and automation are planned to be done at about two-thirds of the market over the next two to three years. That is a huge uptake to where we are right now, and the challenge is going to be moving this technology beyond pilots and beyond just experimentation, but then moving these technologies to scale to have an impact in the business.
See Tho: Do you see differences across different regions, or some countries or regions more advanced or ahead in some of these technologies?
Aguilar: Well, I think that what you saw and what we started to see two, three years ago, is the US led the charge and we saw digital disruption and so forth being the main factor or the main issue there. The rest of the world did not see it or was not reported two or three years back. In fact, we do think that it was happening, but it was not being reported.
Someone said we believe that this was happening two, three years ago. The future sometimes is here. It's just not visible to everyone. I think that the future now is visible to everyone. What we see relative to the importance of technology, cybersecurity and digital disruption are the main external risks seen in most regions with the exception of Latin America. So Latin America lags in that area. But if you look at what we're seeing going forward by regions, the US really is that high uptake on this. We see a lot of uptake in Europe in automation and cognitive.
Where we do see the highest, for example, cognitive uptake, is actually in Asia Pacific. Our report shows that Asia Pacific will be using most cognitive, and that is actually pretty telling, and the one that we see lagging somewhat, again, was Latin America.
See Tho: What about the company's growth if they are saving or doing cost reduction, cost management, in order to transform the business? Does it mean that business growth is kind of on hold while transformation takes place? What do you see?
Aguilar: That's a good question, a good clarification. No, save-to-transform doesn't mean leaving save-to-grow behind. Save-to-transform still carries the save-to grow-mantra, but in addition to that, you have the technology lever. So what we saw then now in this year's report is the following. Whereas we had seen that cost and growth were the main levers and the main factors for transformation, what we started to see is that in addition to cost management, efficiency, growth, profitability, we started to see technology implementation and digital enablement to be a high-focus area for companies.
So the X-ray that we saw, so to speak, is that the X-ray that we saw two, three years ago had only peeks and focus on cost and growth. What we saw now is a focus on cost growth and technology. So the save-to-transform carries still the priority of growing, but now you have the burden of transformation, transformation that means how is it that you're going to be changing the business to embed cloud, to embed automation, to embed cognitive technologies, to embed business intelligence, blockchain into what you do, and that becomes more complex. So the complexity of the transformation is higher; the urgency, as well, is higher, and the imperative to get it done is higher.
What we see finance professionals doing is a key as a senior executive level clearly architecting the right programme, this focus, so you need to architect this so that you have realistic targets. You're looking at this more strategically than tactically. You are providing the right resources to do this and then you can be successful. But I think there's strategic factors that you can do more tactically if you look at some of the impediments of these programmes, they relate to reporting. They relate to financial systems.
So there's a role to finance, and that actually surprised us when we saw this that improving reporting and tracking, having more effective ERP and reporting systems, those are important, and the owners of that, our financial challenge is in making these transformations tactically to be successful, but also playing that role at the executive level to architect these programs and then make sure that they get implemented successfully.
See Tho: How can finance professionals help their organisations actually meet their targets, whether it's a two-, three-, five-year transformation process? What can they do to help in that agenda?
Aguilar: Well, I think that if you look at the agenda and the problems that we have in these transformations is minimising barriers to effect the cost implementation is over two-thirds of our respondents reported that's a challenge. Any way that you can reduce those barriers becomes relevant. We talked about this before, but the enablement on the effective ERP systems, two-thirds of the market is doing that. Getting targets. Finance is key to target-setting and the targets, to be feasible, to get those going, and then improving reporting and tracking.
So 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.
So across the chain, across the function, you can look from reporting and tracking, to targets, to all those things that you can do, and the CFO being as one of the key two to three executives and officers in a company, making sure that this not only is architected right, but then are you really looking at it in a save-to-transform mode? Are you really looking to transform the business digitally?
And then the other point that we haven't touched on, we do believe that these companies that are transforming their organisation, they are embedding technologies, those are the ones that are going to be best positioned down the road for an eventual economic slowdown that we surely will have. You've seen a lot of intervention right now financially to keep the economies going. They are still growing strong, but there's a matter of time over the next two to three years or earlier, there's a shock somehow where you will move into a more defensive posture, and then the more focus you have been on a save-to-grow, or retransforming, or moving into a save-to-transform, the better off the companies and organisations will be to really respond to that defensive position that will eventually take place.
See Tho: Speaking of technology, this other question is how do you decide which one to invest in, or do you see because technology is changing at such a quick pace, companies will have to just continue adopting new technologies?
Aguilar: We saw three main threads that told us that this is beyond experimental. Those were cloud, automation, and cognitive. The uptake in these technologies far surpasses any of the other technologies.
So we see this as a business trend. It's no longer a pilot. Cloud will be a matter of fact, a matter of life. It will be changing the infrastructure. We see it now being used more tactically, but in the future, it will be used more strategically. It will allow us not only to have more efficiency, but then provide better services and be more nimble.
Automation is not being used at scale in many parts, but then the success rate of all these technologies, cloud, automation, and then cognitive, is pretty high, Alexis. So automation, we think that there will be a huge uptake, and then right now is being used mostly in transactional areas of finance, but we expect that those will be used and the adoption will be higher.
And in cognitive technologies, again, that, I think, is more nascent, but companies are starting to use those in pilots. And really the significant part about cognitive is that beyond efficiency, it starts to get to effectiveness. So a lot of the centres of excellence that you have and are used significantly in finance, planning. You can look up planning, pricing, forecasting. You can get into so effective is the role of finance and role of companies, the role of really cognitive and how a company operates through these technologies.
So I would say that those three indicate, and the results that we got from our survey, indicate that they are beyond being tested, a pilot, or whatever. These are here to stay, and we are going to see those being used and embedded more and more to scale and have more of an impact on the business.
See Tho: One more technology-related question, blockchain. What's your take on that? Here to stay or it's too early to say?
Aguilar: I think that I will go back to responses from our survey. We actually probed that. We did not get generally consistent market responses. As a result, we did not put that forward. So to me, they are not of the same level of cloud, cognitive, and automation. It has an impact in business. It is an impact in some sectors, and some functions, and so forth, but the widespread use or really cracking the code as to how it is going to have widespread use as the other technologies is still not there. I think that we need more time for me to say, "Alexis, this is going to be used in all sectors, in all areas." It is not quite there. I think that clearly there's use and there's an impact, but it is not to the same level as we saw in the other three technologies that we discussed.
See Tho: Well, Omar, thank you very much for your time and sharing on the global cost survey.
Aguilar: My pleasure. It's always a pleasure talking to you, and thank you, everyone, for listening.