How do you take your enterprise cost reduction strategy from alienating to engaging?

Transcription

1 How do you take your enterprise cost reduction strategy from alienating to engaging?

2 5 minutes READING TIME 1the elephant Every boardroom has an elephant... or two They re the looming issues everyone would rather discuss another time. The questions yet to be asked by a person willing to ask them. Where s the elephant? focuses on vital business issues that are not being openly discussed in terms of their urgency and impact. Whether in the room, on the horizon or thundering in a massive herd toward the C-suite, this is where elephants get talked about. Want to know where the elephant is when it comes to enterprise cost reduction? Look at how you are engaging and mobilizing your workforce. In the Transformative Age, sustainable enterprise cost reduction (ECR) is an ongoing strategy that needs to positively impact every aspect of the organization not just the bottom line. Your people can be the secret weapon of your success if you practice the art of engaging rather than alienating. Everyone knows about the challenges related to sustainable cost reduction. We ve been talking about them for years. According to a costbenefit analysis 1 EY conducted ten years ago of year-on-year performance for cost reduction programs implemented from 2001 to 2006, 70% of organizations were unable to sustain their cost improvements over a three-year period. Not much has changed in almost a decade since that report was published. In a 2017 EY global survey of financial services institutions around cost allocation, Cost excellence: viewing costs from a new perspective, one of the key issues raised was that cost reductions are typically pursued as one-off exercises to meet top-down targets. We often hear from clients that different functions, business units and divisions put forward their own ECR initiatives and they may actually offer some large cost reductions but the ultimate result and impact are disappointing. Either the overall costs don t go down or they are only realized in one area of the enterprise. At the same time, the organization s responsiveness, either to customers or the market, declines. This is especially true when organizations focus on reducing headcount as a means of cutting costs. Headcount, of course, refers to people. Rightsizing the workforce is a favorite target. And it s easy to see why: overall, people-related expenditures represent about 80% of organizational costs. 1 EY, Enterprise cost reduction: Improving cost reduction program results, 2008.

3 80+20+X Yet, it s people upon whom organizations must rely 80% to help design, implement and sustain their cost reduction programs. There are a number of steps you can take to develop a structural process for enterprise cost reduction. The question, however, becomes how to introduce and implement an ECR program in a way that positively impacts every aspect of the organization not just the bottom line. This is the elephant you need to address. Your people can be the secret weapon of your success if you practice the art of of organizational costs engaging rather than alienating. go to people-related Costs come back. It s a fact of life. A cost reduction isn t a silver bullet about how best expenditures. to save money today and then never have to think about it again. Sustainable ECR is about acknowledging costs as a part of organizational life and establishing the best strategic frameworks in which to address them. Trent Tishkowski EY Americas Leader for Enterprise Transformation

4 the urgency 3 In the Transformative Age, the status quo could lead to extinction. For decades, organizations across all sectors have been working to reduce enterprise costs. It s a never-ending battle. Low growth, saturated mature markets and rising commodity costs were some of the initial drivers. As time wore on, digital disruption, changing consumer preferences and fierce competition from new market players entered the mix. These issues conspired to erode margins and profitability. Today, rapid advances in technology are propelling organizations to undertake enterprise-wide transformations to remain agile and flexible in a time of constant change. Some organizations are choosing to acquire as a means of streamlining and optimizing. Others are choosing a path of innovation. Still others, however, are choosing the status quo. These are the organizations for which there is the most urgency. Strategic and organizational stagnation invites competitors from within and outside the industry to leapfrog organizations that choose to stand still. Similarly, cultural stagnation can result in resistance and resentment toward change. If organizations aren t disrupting, they re being disrupted. Some of that disruption could be coming from within. And it could prove deadly. Level of urgency by sector Financial services, technology, media and entertainment, and consumer products and retail sectors have been addressing this issue for some time. For others, such as health care, power and utilities, oil and gas, and industrial products, it s on the horizon. They know there s something amiss, but haven t quite put their finger on it. On the horizon In the room Sustainable cost improvements Health care Power and utilities Oil and gas Industrial products Financial services Technology Media and entertainment Consumer products and retail

5 the impact Structural changes only matter if your people are on board. In today s fiercely competitive environment, organizations are competing against their peers for customers and market share. They are focused not only on growth, but profitable growth. And that comes from tackling the cost challenges. But at a time when most of the low-hanging fruit has already been picked, the next 10% to 20% of cost savings will be much harder to achieve. There are a lot of things organizations can do to improve operational and capital efficiency, and deliver more sustainable value to customers and shareholders. But only if people are part of the equation. Without the right people in the right places at the right times, organizations will fail to remain competitive in a world where being uncompetitive has dire and fast hitting outcomes. Further, a new breed of worker is demanding that an ECR strategy focus on delivering value and meaning for employees. Otherwise, they re on to new jobs someplace else, and you re facing the possibility of having invested in a portfolio of ECR initiatives without the people to implement them. There s a generational change in what employees expect from management. Rising leaders don t want to hear about working more for less or working more for the same money. Today s employees are expecting more from their work experience ranging from workplace flexibility, new technology use to a sense of purpose and satisfaction. And a sustainable ECR program must fulfill these needs. Igor Boldyrev EY Americas Advisory, Emerging Markets Leader

6 the solution 5 Focus on the fundamentals to achieve cost reduction targets. Focus on your people to sustain them. A sustainable ECR initiative starts with a structured process that focuses on reducing average or total costs in key areas. But it centers on creating a culture of engagement among your people. A plan to transition from execution to steady-state A benefit tracking process that drives accountability A vision aligned with corporate strategy and supported by leadership Sustainable ECR program A dedicated team to execute the program A hypothesis & analytics driven approach to identify improvement opportunities A thorough change management program within the portfolio of initiatives Here are three steps you can take to develop a sustainable ECR program: 1. Have a purpose and live it. It s not enough to say your organization is purpose-led. You have to communicate it and live it. In a recent survey, 91% of respondents identified that their organization has or is working on developing a purpose, while less than half believe their strategy is aligned with the purpose. Further, only 37% believe their operating model and operations are aligned to their purpose. 2. Put the right ECR foundational components in place. ECR programs are most successful when they are rooted in a foundational framework that focuses on six components. 3. Consider the impact of the workforce of the future. In addition to implementing an experienced program management and change management initiative, which we identify as a foundational component of ECR success, we also believe that organizations need to commit to a broader HR transformation that considers the workplace of the future. Employees younger employees especially are expecting more from their work experience, from workplace flexibility to a renewed sense of purpose. At the same time, the gig economy has created a new definition of who employees are and how and where they work. In keeping pace with the workforce of the future, organizations need to be purposeful about creating an inclusive environment for all workers. However, given the substantial source of cost savings leveraging the contingent workforce can generate, organizations need to create a contingent work environment that stimulates engagement during, and loyalty after, the contract. Otherwise, organizations will find themselves back to square one with their ECR initiatives and joining (or rejoining) the ranks of the 70% that were unable to sustain their cost savings longer than three years.

7 the bottom line A successful ECR initiative doesn t happen in a vacuum. Sustainable ECR initiatives in the Transformative Age start with having a structural process at its core, but centers around your people. Any ECR program you develop needs to include change management that engages and mobilizes your people across the organization. A younger generation of workers is demanding that an ECR strategy focus on delivering value and meaning for employees. The old top-down, one-off approaches to ECR just don t work anymore. And organizations that continue down this path will be cost-cutting themselves right out of existence.

8 Authors EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Trent Tishkowski EY Americas Leader for Enterprise Transformation trent.tishkowski@ey.com Igor Boldyrev EY Americas Advisory, Emerging Markets Leader igor.a.boldyrev1@ey.com Nam Luu EY Americas Advisory, Strategy and Enterprise Transformation nam.luu@ey.com 2018 EYGM Limited. All Rights Reserved. EYG no Gbl CSG no ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. For more information Consulting Hub ey.com/consulting EY Advisory