With retail and consumer goods companies experiencing immense pressure on revenues, protecting the profit and loss (P&L) statement puts more emphasis on tight cost management. When looking at recent sector dynamics, we see companies making progress compared with prior cycles. Still, for almost 40% of retailers and almost 30% of consumer packaged goods (CPG) companies, operating cost as percent of revenue was higher in 2023 than in 2019, pointing at structural challenges for a significant segment of companies.

In our executive surveys, we have been seeing sobering results of transformative cost reduction programs. For example, up to three-quarters of these programs failed to deliver the expected value, and only 6% obtained higher-than-expected results. On average, the programs that failed to achieve targets missed by 36%.

There is a clear mismatch between intention and reality. Why? Our analysis points to a clear culprit: Traditional approaches to cost management and transformation increasingly are proving inadequate. The tools that executives have used to address cost in the past, such as budget tightening and spending freezes, no longer can produce the results needed. Getting results in the future will require new thinking and fresh approaches, including looking at levers across organizational silos and considering a complete service model redesign.

Fortunately, new models are emerging that can drive dramatic improvements for those willing to view cost in a fundamentally different and more holistic way. This can apply to all cost categories and types, ranging from the manufacturing operating model to advanced indirect spend procurement models.

In our work with clients, we have found three major success factor areas to achieve a sustainable step-change in the cost base:

Act now, think big — how to stay focused on cost management

Many clients express that cutting costs significantly feels uncomfortable and risky, which can cause them to hesitate in initiating such efforts to avoid jeopardizing sales and employee morale. As a result, substantial cost programs are frequently postponed until market pressures make them unavoidable, which is often too late.

When companies do proceed, they tend to set conservative targets. Half of the executives we surveyed reported establishing cost reduction targets in the single digits or low double digits. Our experience, however, shows that a lack of ambition at the outset is a recipe for disappointment. In contrast, setting "unreasonable" goals that necessitate fundamental business transformation can drive ultimate success, alongside other factors:

Be proactive about timing for effective cost reduction

Choose your starting point rather than having it dictated by external factors. Self-initiated cost programs with a focus on long-term outcomes are more effective and sustainable. This approach shifts the narrative from a reactive stance to one driven by a proactive CEO/CFO agenda aimed at business transformation.

Encourage broad thinking to maximize cost transformation opportunities

The primary goal of cost transformation should be margin improvement. While initial efforts may focus on costs, analyses should not impose artificial limits. For instance, examining salesforce efficiency could uncover opportunities for higher margins through better customer selection and pricing rather than merely reducing workforce size.

Adopt a customer-driven approach to cost optimization

Though it may seem counterintuitive, maintaining a customer focus is crucial, even during aggressive cost-reduction initiatives. A "customer lens assessment" can prioritize and redesign services, both internal and external. Customers’ preferences for simple products and services, a declining interest in hardcopy marketing brochures, or openness to smart compromises such as callback buttons instead of hotline waiting times are just a few examples where factoring in the customer angle can help optimize costs.

Successful strategies for effective cost management — a more horizontal perspective

In our experience, many companies still operate in highly siloed organizations. Analyzing these structures from an activity and cost perspective reveals decentralized approaches that hinder the realization of achievable economies of scale. Even after centralization and efficiency initiatives, “shadow services” often emerge. For instance, while the central sourcing team may negotiate frame contracts with temp labour providers, actual spending often remains at the discretion of each profit centre operator, only reported as miscellaneous expenses.

The lack of transparency can undermine effective cost reduction. Another example is the internal cost on controlling activities and reporting, which is often distributed across various functional silos, such as HR controlling, procurement controlling, and sales controlling. In one company, we found that although such activities made up 3%-12% of costs in each function, they were not holistically aligned. Different reports, tools and processes undermine greater efficiency (Exhibit 2).

In our work, we have identified common patterns for preventing such difficulties:

Specify relevant cost and activity types up front for better transparency

Instead of striving for “total transparency” through overly granular analyses, establish strong initial hypotheses about which costs and activities need to be more transparent across silos. This typically includes external services like maintenance and cleaning.

Track and trace key cost drivers for effective management

Transparency efforts should extend beyond understanding spending details to include key cost drivers. For example, cleaning costs should be linked to floor space and other relevant characteristics, while research and development costs should relate to the number of projects. This level of transparency enables internal benchmarking and tighter control over future cost levels through automated KPI dashboards.

Leverage AI to enhance cost management across silos

Depending on the data model, AI can be a powerful tool to identify and connect common tasks across functional silos, from harmonizing controlling reports from the same data to leveraging marketing insights more efficiently across different market and channel teams.

Redesign the operating model for sustainable cost reductions

Creating transparency should not be viewed as a one-off project. Companies with a clear vision of their future “transparency operating model” — encompassing systems, processes, and people — can sustain and build upon cost reductions over time. For cost management leaders, the new transparency is often reflected in the existing company environment, such as through enterprise resource planning (ERP) systems with explicit ownership in the controlling department.

Why empowering leaders to run cost programs is key to successful transformation

Cost programs are often a necessary “reset” for significant future investments. However, they risk being viewed as negative and backward-looking. Overcoming these challenges requires the right people, messages, and tools to create sustainable momentum and impact.

Select leading program drivers rather than controlling project managers

When selecting leaders for cost programs, prioritize soft skills and leadership potential over mere functional expertise. For example, one of our clients, a leading multinational, appointed an emerging regional sales manager rather than a traditional project manager to lead its cost program. Her deep business understanding, empathetic style, and strong communication skills outweighed her lack of project management experience, enabling her to effectively drive a successful cost reduction transformation.

Communicate transparently from day one for cost program success

Cost programs without thoughtful communication often fail. For instance, one company framed its initial cost initiative as a performance improvement program without mentioning job cuts, leading to protests when layoffs were announced later. In contrast, a subsequent program under new leadership embraced transparency from the start, garnering broader support.

Celebrate progress and reward leaders for more effective management

Identifying and celebrating “quick wins” early in the project is essential, supported by strong communication and feedback from top management to project leaders.

Retain project management office for sustained cost transformation

Retaining the project management office (PMO) beyond the project phase is key for cost transformation. One of our clients, for instance, maintained its PMO for 12 months post-project, securing P&L benefits and achieving additional savings.

Orchestrate a seamless integration of project metrics into finance processes

Finally, ensure a smooth transition from project responsibilities to line managers, with close collaboration between top management, finance, and HR. One of our clients, a CFO of a European multinational, mandated that all project metrics integrate into regular finance processes, resulting in significant measurable cost impacts.