Managing Cost Optimization & Digitalization Concurrently
Rising costs have become a key factor for organizations at a time when most are updating their existing strategy or creating a new one. That strategy increasingly focuses on improving the organization's digital maturity, which remains one of the CEO's top priorities. However, how will the continued need to improve digital maturity now conflict with the current requirement to control costs and manage profitability? Managing cost optimization and improving digital maturity concurrently requires an increased focus on strategy execution.
First, cost optimization can be handled in two ways when it comes to making it part of the overall strategy:
As a pillar of the strategy, a strategic initiative, or
as a cross-functional strategic project.
In the first approach, cost optimization is a separate program managed as any other strategic pillar (priority). In the latter approach, it is still managed as an initiative but integrated into all the pillars of the entire strategy. Traditionally, strategy and operations have been separate activities, often to the detriment of the overall implementation and success of the strategy. Cost optimization has often been seen as an operational activity. This must change. Strategy in times of VUCA (Volatility, uncertainty, complexity, and ambiguity) will have to combine the two aspects, daily operations, and change, in one comprehensive set of objectives and plans. It isn't how an organization manages cost optimization as part of the strategy, but that it is. The intensity or importance of it will depend on the importance of managing costs. Still, achieving the strategic intent within the same budget will become an essential element of the strategy when costs are rising. How cost optimization is implemented in the strategy planning will impact the success of the efforts to increase digital maturity or said, in another way, impact the digitalization part of the organization's strategy.
Cost optimization consists of three main activities: cost cutting, cost optimization, and value creation.
Actual cost cutting would be eliminating costs, renegotiating agreements, and optimizing the cost base. The time horizon for such efforts tends to be less than a year to a maximum of two years.
Secondly are activities that are about optimizing the costs through improved productivity, changing where spending happens, and areas where efficiency can be improved.
The third area is where the focus is on enhancing the value of what the organization delivers and, through this, increased revenue from existing products, services, or newly introduced services. In this third category, the time to impact is generally 2-3 years and may require initial investments.
Far too often, cost optimization initiatives are launched in a rush, with limited focus on organizational governance, the timeline for the activities, and clearly defined objectives. Cost optimization is a multi-year effort, but most organizations must follow through on the activity in years two and later. It is therefore not surprising that often the benefits of cost optimization are centered around the short-term and less impactful cost-cutting activities and fail to generate longer-term, more substantive cost-optimizing or value-improving benefits. More importantly, cost optimization displays the same challenge as other strategic initiatives: a failure to execute. As with other strategic initiatives, over three-quarters of cost optimization initiatives fail to achieve the desired objectives. The reason is insufficient focus on execution. Furthermore, if cost optimization is not managed and executed well, it will negatively impact the organization's efforts to improve digital maturity—something the organization can’t afford right now.
Increasing the digital maturity of organizations can equally be divided into two distinct categories, both of which can coexist.
And Digital Transformation
The first is about optimizing processes, work, relationships, and existing products and services, whereas the second is about business change and new business models or products using technology. As with cost optimization, improving digital maturity can either be an initiative or pilar of the strategy or a cross-pilar activity part of all strategic initiatives. Increasingly organizations mix both since digital is fundamental to all parts of the strategy. Still, the organization might have a unique digital initiative, often a transformation initiative or project meant to drive significant change.
With economic uncertainty and other disrupting factors, such as energy price variations and supply chain optimization, cost optimization must be integral to every organization's future strategy. Cost optimization cannot be executed in a vacuum independent of the other elements of an organization's strategy, particularly digital transformation. And given that an actual cost optimization effort is a 2-3 activity, it must be part of the strategy. Either as a separate pillar or as a horizontal effort across all pillars of the strategy. In either scenario, managing the execution of the measures will determine the outcome.
This is where a software platform such as that of DecideAct becomes critical. As with every element of a strategy, cost optimization will be successfully executed provided transparent governance exists, clear and measurable objectives, KPIs or CSFs, and an ability to continuously assess the project's status and risks or inhibitors. A software platform such as DecideAct ensures precise, continuous, and immediate communication. While this will not replace the need for a communication plan, it will substantially augment a more traditional leadership verbal, written, and video-based communication. And it will ensure that overlaps, critical path issues, and conflicts between the cost optimization activity and improvement of digital maturity are transparently managed.
As executives contemplate their actions caused by rising costs, they will need to see cost optimization as an element of their strategy going forward. Manage this as cross-functional-strategic initiatives, projects, or independent strategic initiatives. But ensuring this does not negatively impact the efforts to improve the organization's digital maturity. Using a software platform such as the DecideAct platform raises the probability of success through faster execution and great transparency across projects, initiatives, and strategy elements.