Cost reduction is a top priority of executives across industries. Our 2024 “Performance Transformation Global Executive Survey” found that 35% of leaders will focus on cutting costs over the next 12 months.
While every company embarking on a performance transformation sets off with great ambitions to create lasting change, they often fall victim to a program mindset that leads them to revert to their former spending habits as soon as the initial phases of the transformation end.
How companies can ensure a consistent cost discipline culture
To maintain shareholder trust during transformation efforts, businesses must take action to ensure cost discipline becomes the dominant culture and change endures. The steps below can improve the odds of continuous cost discipline.
Focusing on tangible cost indicators to drive accountability
Companies often have strong organizational memories when it comes to wasteful spending habits. While results and savings can be achieved in the short-term, conscious effort and genuine culture change are needed to prevent the return to those habits. To ensure ongoing cost discipline, leaders should first be disciplined in how they measure waste and use this to drive accountability.
Our 2023 “The Truth About Transformation” study found that among fully successful transformations, 44% focused on tangible impact to create value for shareholders and other stakeholders. Focusing on results such as tangible cost reduction indicators enable leaders to foster accountability from each business department, function, and region. Equal scrutiny and a consistent set of rules should be applied, and each budget holder should be encouraged to treat business expenses with the same consideration as personal expenses until value-centric spending patterns become the norm.
Build a cost discipline culture through leading by example
Executive buy-in from the very top of the organization is essential to drive culture change towards cost discipline. Transformation leaders need to ensure that those at the top of the organizational hierarchy lead by example. One of our financial services clients with a large presence in Asia Pacific found during its transformation process that its use of market data services was excessive. To incentivize other executives who did not need these services to let them go, the CEO gave up his own service access, demonstrating adherence to transformation principles from the very top of the business.
When the C-suite sticks to cost rules, such as giving up certain travel privileges, company cars, or market data services, it helps to create a shared commitment to the transformation journey and generates employee trust. An ongoing internal communication campaign around cost rules as well as the long-term objectives of the transformation is essential to both showcasing executive buy-in and maintaining organizational trust.
Managing the balance between minimizing costs and maximizing value
As the transformation and spending culture change are underway, organizations should not neglect long-term thinking. Adopting three-year plans, for example, can help appease shareholder concerns and build trust in sustainability of results. While cost discipline for operational expenditure is essential to ensure spending grows proportionally to revenue, transformation leaders also need to keep an eye on value creation to drive future growth. Minimizing costs is often at odds with maximizing value, and when it comes to capital expenditure, prioritization of investments, forward thinking, and innovation are essential.
Our 2023 study cited above also found that 49% of executives who orchestrated successful transformations are prioritizing future-proofing initiatives around digital and generative artificial intelligence, product, customer, and partnerships, as well as growth strategies. Reducing costs without considering the future value proposition can set the business on the path to commoditization, jeopardize future success, and affect its ability to command a margin premium.
The difference between wasteful and value-adding expenditure is not always clear cut, but transformation leaders should look to build a culture of continuous improvement that helps to find the balance. Measuring tangible metrics and leading by example can go a long way to help foster accountability, create a shared commitment to the transformation journey, prevent recoil towards bad spending patterns, redefine the company culture, and secure shareholder trust in the sustainability of results.
