The broken link: Why cost reduction efforts fail to fuel growth in AustraliaLuca Martini and Olaf Schatteman

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The rules of competitiveness are changing—and businesses must fire on all cylinders to keep pace with the unprecedented demands for speed, scale and flexibility in today’s marketplace. Since 2000, 60 percent of Australia’s top ASX 200 companies have ceased to exist due to liquidations, mergers, acquisition or other factors. And 73 percent of the ASX 200 companies are no longer in the top 200 companies today.1

In such a disrupted market, organizations need to identify future growth sources and create cost reduction programs to free up cash, assets and capital for reinvesting. This volatile environment demands business leaders rethink their cost structure.

Australian businesses have enjoyed a solid trajectory of earnings growth over the last decade, so there wasn’t acute pressure to optimize the cost structure. However, given the change in our economic climate, the managerial agenda has now pivoted to focus on cost reduction and productivity to be able to fuel growth.

Accenture Strategy research found that Australia’s top 20 companies from the ASX 200 have referenced cost reduction initiatives as an area of focus over the last two years. Programs have largely been driven by a desire to achieve operational and productivity

improvements. With the ongoing slowdown in Australia’s economic growth forecasts, Australian organizations need to continue with such cost redesign programs. The key will be for organizations to take a different approach. To be sustainable, this will require rebuilding costs from the bottom up annually.²

Accenture Strategy research³ across 700 executives found that most businesses have made both cost reduction and growth a priority, but the critical link between cost reduction and growth strategy is broken. Why? Because executives are unclear on where to best invest, are juggling too many cost reduction initiatives and execution is lagging. Leaders are misaligned on where to invest for growth, and in some cases, operating models are too inflexible to fuel growth initiatives.

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Connecting the dots to increase competitiveness

(57 percent), improving competitive advantage (54 percent), improving financial performance (53 percent) and reinvesting cost savings into growth initiatives (49 percent).

And while the intentions for cost reduction programs are good, executing them well is very difficult. The reality is that most programs are not aligned closely enough to the business strategy or are often the “Plan B” reaction to failed growth initiatives. Only 23 percent say they have optimized their process for identifying and removing business activities and investments that do not add value.

Leadership is missing the mark on sources of growth and misaligned on where to invest

Businesses fail to execute growth strategies and they are not optimized for value creation because executives across titles and levels have competing priorities.

Specifically, CEOs, CFOs and vice presidents (VPs) are not united on where to invest and how to align cost savings initiatives with business strategy. Only 36 percent of the C-suite believes their reinvestment prioritiesare aligned to the business strategy—andonly 25 percent of VPs do.

What are the weaknesses that businesses face on the journey to growth? There are several, but most important is the fact that businesses aren’t grasping the critical interdependencies between cost reduction efforts and growth strategy.

Accenture research shows the importance of sustainable cost savings to fuel growth. In the coming year, Australia’s top 50 ASX 200 companies would need to increase their earnings by approximately AUS$12 billion— AUS$15 billion to sustain past earnings performance in the predicted economic environment. Interestingly, 27 of the ASX 50 companies have a reduction in forecast earnings per share (EPS) performance.⁴

To capitalize on new opportunities and position for long-term growth, focused cost reduction strategies will need to be put in place to fuel the necessary earnings growth.

Weak execution dilutes fuel for growth

On a positive note, executives have big plans for cost reduction programs, aiming to fuel growth and competitiveness for the long term. The top outcomes driving cost management activities are simplifying and increasing the flexibility to respond to market changes

Accenture Strategy research found that 82 percent of companies are focused on cost reduction to free up funds to invest in growth initiatives, yet only 36 percent strongly agree they are able to sustain benefits of cost reduction programs.

82%

36%

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Automating for savingsIn Australia, more than half (54 percent) of executives can already report cost savings of 15 percent or more from automation over the past two years. This is driving greater investment, with 44 percent reporting a mandate to use automation to cut overall costs.⁵

Many businesses also have too many growth initiatives and they can’t decide where to invest. Only 30 percent of executives say they prioritize the reinvestment of cost savings in alignment with business strategy. Instead, they are taking a diversified—or shotgun—approach. Budget holders are reinvesting savings across their own initiatives, yielding smaller growth, versus funding two or three winning initiatives that will lead to game-changing paybacks. Inconsistency at the top puts businesses at risk for cutting the wrong costs and reinvesting in the wrong areas, or worse, achieving poor valuations.

Operating models don‘t flex for cost reduction—or for growth

Rigid operating models and a lack of visibility/insight into what creates value for the organization is exacerbating the problem. What’s even worse: Executives are aware of the problem but unable to solve it.

Consider the fact that only 22 percent of executives say their company’s operating model is aligned to fuel strategic growth initiatives.

Executives would not argue that operating models should align with how a business wants to profitably grow. Yet, only one-fourth of companies surveyed have a

flexible operating model that can adapt to consistently deliver on strategy and execute activities that drive value for the organization.

Businesses are gaining agility through new operating models. One food company designed and built a new operating model to increase the company’s efficiency and agility. This global business services platform is delivering key functions including supply chain, finance, human resources and IT. The value generated through the program—an expected $100 million in recurring savings—will enable the company to fuel its growth strategies.

To identify the right operating model that will fuel growth, companies must decide on which axis they are going to manage their business. For example, one axis is national or global/regional or local. Does the business want to balance national or global with local to take advantage of scale while reducing local service and effectiveness? Or should the business pass on some benefits of scale in order to enable better local support and performance?

Digital is the direction

One thing executives agree on is the importance of investing in digital to increase competitiveness. In 2015, Accenture Strategy estimated that 29 percent of Australia’s GDP can be attributed to some form of digital skills, capital and intermediate goods and services used in production. That equates to AUS$462 billion.

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Fixing what’s broken

Businesses must better connect cost reduction efforts with growth strategy and business strategy to increase competitiveness and fuel profitable growth. Here’s how:

1. Organize for growth

First, identify sources of growth. In a disrupted market place, where will your future growth come from, and what does your growth strategy look like? Create a sustainable, ongoing cost redesign reduction program that will free up large amounts of non-working cash, assets and capital that can be reinvested in line with your growth strategy. Connecting cost reduction and growth strategies—in line with the business strategy—will deliver long-term growth and competitiveness. But companies need to do this in a smart way

and not just use a blunt instrument to cut costs. They need to focus on identifying and eliminating “non-working money.”

Rethinking the cost structure from zero each year helps remove unnecessary costs and create a detailed forecast. This process allows spend visibility at a forensic level. Savings can be earmarked and assigned to activities that ultimately boost growth.

Many Australian organizations have already reduced costs from business operations that have been traditionally characterized as “low-hanging fruit.” To remain competitive, it is time for a new approach to rethinking cost structures for identifying non-working investments. In a slow growth environment, identifying growth areas of the business to redirect these non-working investments, will be key.

If the Australian economy were to improve its digital density through an optimal combination of improvements in digital skills, capital and other enabling accelerators, it could enjoy a higher boost to GDP, adding an additional AUS$44 million to the 2020 GDP. This equates to a 2.4 percent uplift to GDP beyond current forecasts.6

Accenture found that 54 percent of executives cite digital technologies as the most common direction for reinvesting cost savings. Digital investments boost competitiveness because they enable new business models that allow unprecedented speed, agility and scale.

Forty-two percent strongly agree that digital business is an enabler of strategic growth. Using digital, companies get ahead of industry disruption, accelerate innovation, fuel more efficient operations and deliver personalized experiences. With the right digital strategy, many operating model choices move from “and” to “or.”

Businesses are digitizing the front office—using analytics, the cloud and other Internet of Things-enabled innovations—to get closer to the customer, among other benefits. Companies are also taking non-traditional functions and digitizing them to reduce costs and improve efficiency and scale.

Cost reduction unlocks funds that can be reinvested in growth. But without a cohesive, strategic plan—and people to support the plan—those efforts will fail. In today’s climate of unprecedented competiveness, failure is not an option.

2. Manage the journey

Rather than scattering reinvestment dollars across multiple initiatives, place big bets. Map out the journey to growth, prioritize the scope of the effort and split it into manageable phases.

Align leadership and people on the “big ideas” and create a culture that is centered on continuous cost management. Communicate to all stakeholders the strategy, the value drivers of change, the phases of the journey and the expected outcomes. Demonstrate success through validation points along the journey. To sustain growth and guide all future cost takeout initiatives, institute a governance program that helps identify what initiatives will (or will not) contribute to growth. That way you can quickly abandon the moves that do not add value.

3. Digitize to fuelsustainable growth

New digital technologies allow organizations to rethink operating models in a very different and “fresh” fashion. Digital business models and strategies help increase organizational agility, flexibility and sustainable growth. Businesses that commit to building digital capabilities and digitizing traditional processes are most likely to manage disruption and grow.

For example, use digital to interpret signals of disruption and determine which disruptions will impact the business, and when. Strongly consider digitizing traditional functions and capabilities to increase speed and agility, and work across your partner ecosystem and invest to acquire “missing” digital capabilities or digitize your company’s non-core activities. Take advantage of digital to cost-effectively experiment at speed and scale to solve customers’ problems and bring new products to market faster.

Design and embed the right digital capabilities across robotics process automation, cognitive computing, cloud and next-generation outsourcing. Be a leader that can withstand change. Build CEO-level support and drive new growth through a team of leaders who are laser-focused on digital—and digital “fixers” who can draw on the right skills at the right time. By adopting new digital technologies, Australian business leaders are better placed to execute with pace and certainty, and achieve sustainability in an era of digital disruption.

54 percent of executives cite digital technologies as the most common direction for reinvesting cost savings

54%

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About Accenture

Accenture is a leading global professional services company, providing a broad range of services and solutions in strategy, consulting, digital, technology and operations. Combining unmatched experience and specialized skills across more than 40 industries and all business functions—underpinned by the world’s largest delivery network—Accenture works at the intersection of business and technology to help clients improve their performance and create sustainable value for their stakeholders. With more than 375,000 people serving clients in more than 120 countries, Accenture drives innovation to improve the way the world works and lives. Visit us at www.accenture.com.au.

About Accenture Strategy

Accenture Strategy operates at the intersection of business and technology. We bring together our capabilities in business, technology, operations and function strategy to help our clients envision and execute industry-specific strategies that support enterprise wide transformation. Our focus on issues related to digital disruption, competitiveness, global operating models, talent and leadership help drive both efficiencies and growth. For more information, follow @AccentureStrat or visit www.accenture.com/strategy.

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Contact the authors

Luca Martini luca.martini@accenture.com

Olaf Schatteman olaf.schatteman@accenture.com

Notes

¹ Accenture Strategy analysis

² Accenture Strategy analysis

³ Increasing Agility to Fuel Growth and Competitiveness, Accenture, January 2016

⁴ Accenture Strategy analysis

⁵ Accenture Technology Vision 2016: Is Australia at a technology tipping point?

⁶ Accenture; “Digital disruption: The growth multiplier,” page 2