Strategic Cost Management in the New Normal: Five Steps to Business Success and Growth

STRATEGIC COSTMANAGEMENTIN THE NEW NORMAL5 STEPS TO BUSINESS SUCCESS AND GROWTH Companies should strive to be as granular and methodical in their budgeting as possible. Traditionally, the different cost components — direct costs, Cost of Goods Sold (COGS), salaries and wages (S&W) and indirect costs — are lumped together in the budget. While this gives finance the flexibility to manage the overall budget, it hampers visibility into actual costs across components, making it difficult to monitor and take timely actions when there are instances of price non-compliance or process inefficiency. Therefore, it’s advisable to budget for each cost component separately. Forging Ahead With Cautious OptimismThe Western economies are expected to return to pre-pandemic levels by 2022. Enterprises can now look forward to revenue growth after more than a year of unprecedented disruptions and challenges. However, the need for caution remains. Businesses can retain their competitive advantage in this unpredictable climate provided they can avoid financial stress. An effective strategic cost management program is a powerful defense against economic uncertainty. It will enable enterprises to become agile, meet business challenges head-on and thrive over the short to medium term.5. Leverage Digitalization SolutionsFor effective strategic cost management, cross-functional collaboration and regular monitoring of costs are essential. The data needed to monitor cost performance against budgets may be located across multiple systems: Actual costs incurred are maintained in the finance ERP systems, while records of purchase order commitments and purchase requests are in the procure-to-pay system. To add to this challenge, team members are now working remotely, leading to challenges in cross-functional collaboration. Under such circumstances, it can be complex to initiate and execute a strategic cost management program. There is a pressing need for a cloud-based, unified software solution that provides spend visibility, variance reports, cost analytics and value delivery metrics on user-friendly dashboards that can be easily accessed and reviewed by business, finance and procurement teams. The ability to monitor budget consumption on a real-time basis and trigger actions, such as additional approval mechanisms for PRs when budget consumption is over a certain threshold, would be an added advantage. A budget-to-pay (B2P) digital solution can simplify collaborative cost management initiatives managed by procurement and finance and provide fail-safe mechanisms necessary to manage costs, covering all stages, from budgeting right up to payment. B2P is a framework that will enable finance and procurement to work closely during the annual budget-setting process. Once the budgets for the different cost categories are aligned, every purchase request can be tracked against a specified budget. Translation: no budget, no purchase.STRATEGIC COST MANAGEMENTIN THE NEW NORMAL5 STEPS TO BUSINESS SUCCESS AND GROWTHEconomic forecasts are “cautiously optimistic” as we get deeper into 2021. Optimistic because vaccine rollouts in the major economies have triggered economic recovery. Cautious because the threat of new, more powerful coronavirus strains looms large. The European Commission’s Spring 2021 forecast estimates the European Union GDP to grow by 4.2% in 2021 and by 4.4% in 2022, bringing it to pre-pandemic levels by mid-2022.1 The forecasts for U.S. GDP recovery are also positive, with an estimated growth of 6.7% in 2021 and 3.7% in 2022.2 Today’s scenario is dramatically different from 2020, when the U.S. GDP contracted by 3.5% and the European Union GDP by 6.2%.3 In the 2020 recession, most companies switched to survival mode to see through the pandemic-induced challenges. To maintain financial health, organizations deployed programs to mitigate supply risk and manage costs.The positive economic outlook for 2021 and beyond comes as a relief after more than a year of struggle, as the economic growth will undoubtedly translate into expanded revenue opportunities. Historically, during periods of revenue growth, cost management gets deprioritized as focus shifts to driving growth. However, considering the current circumstances, organizations should not take their eyes off the ball — cost management should not be limited to periods of crisis. This white paper examines how companies across industries will be better positioned by implementing a robust, sustainable strategic cost management program. It discusses the areas companies should focus on in the new normal and the true value of a well-implemented strategic cost management program.2How Strategic Cost Management Will HelpRecalibrate Costs to the New Normal: The key objective of strategic cost management is to improve competitiveness through cost base optimization. The new normal has led to changes in the cost base resulting from revisions in market dynamics, consumer behavior and new ways of work