The Art of Cutting Costs, While Growing Revenues

Can companies cut costs and still grow revenues? CFOs and chief marketing officers (CMOs) believe these seemingly incongruent needs can and must be aligned, according to a recent Accenture study. In fact, 85 percent of the 1,000 participating CFOs and CMOs from eight industries and a dozen of the world's leading economies indicated that, while they expected their company to grow at a rate equal to or significantly greater than most economic growth forecasts, they have embarked on a renewed focus on cost-cutting. Yet how they cut costs, what structural changes are required longer-term, and the role of pricing are all in play in an unprecedented fashion.

The challenge: 90 percent of these executives said price competitiveness remains a primary strategic issue, even in a period when there is heavy focus on innovation and a stated commitment to drive top line growth. In fact, over two-thirds of these executives said they would have to maintain pricing or even drop prices due to the economy, clearly leaving them unable to pass higher commodity prices through to customers. This means growth by stealing share, and that means either sacrificing margins or figuring out a better, faster way to achieve cost-effectiveness. Clearly, the latter is preferred.

So one might ask: How can companies move ahead full throttle, with one foot on the gas and the other tapping the brakes?

The truth is that, despite the significant cost cutting that has occurred at corporations, further cost reductions are needed. More than 80 percent of those we surveyed said they had launched cost cutting programs in the last few years, but less than half of them thought such cost cutting was successful, much less sustainable. Getting this right going forward will require surgical precision -- cutting too deeply or in the wrong place endangers a company's top-line, and not just in the near-term, but also in the future. On the flip side, without systemically driving out further waste and inefficiency, costs will squeeze margins and corporate profits to the point of damaging financial market performance.

Getting it right is less clear cut now than it has been for most companies in decades past. Today's multinationals are responding to a business environment that is much more complex and global -- not to mention inherently volatile -- a world that may have permanently changed. As such, companies must respond differently than they did in previous economic cycles.

Unlike in the past, when markets for everything from products and commodities to currency and labor were largely siloed and slower-paced, the high-speed, interdependent global nature of today's marketplaces has forced companies to operate in environments defined by continual mini "booms" and "busts," where market opportunities are defined in quarters, months, and even weeks, not years.

Trend forecasting, by definition, then becomes increasingly less reliable. Industry players must be able to adjust and respond quickly. Operating models must become increasingly dynamic, and pricing capabilities will be crucial to address imbalances that supply chains just cannot fulfill. More sophisticated, dynamic, and granular pricing will be required to optimize the balance of supply and demand across products, channels, and geographies, at a frequency unheard of in the past.

A company's portfolio of products must be improved with great precision while recognizing market-demanded changes in product lifecycles. As in the past, most executives in the study expect to achieve major growth impacts from product development and marketing: 88 percent expect improved competitive positioning from product value, 85 percent from innovation, and 69 percent from improved promotion. Yet the majority of these executives expect the outcomes of these actions to yield increased volume, not macro lifts in pricing position.

Viewed from the perspective of a world turned on its axis, this now makes sense. Whether it's cautious consumers in the debt-laden developed economies, or rapidly swelling middle classes in emerging markets, lower-cost innovation is the key to thriving in turbulent markets. The willingness-to-pay of these demanding yet thrifty customers must be understood and acted upon systematically.

Pricing should be based on continuously optimized segmentation, relying on robust analytic and execution capabilities, across an ever-evolving mix of customer channels, product mixes, and geographies. The old, broad-based approach to price raising or lowering simply does not apply any longer. Nearly limitless combinations, permutations, and frequencies require not only more sophisticated systems, but also more sophisticated professionals.

Meanwhile, only 27 percent of companies use predictive analytics, putting the majority at a disadvantage as they lack these insights that could be derived to help inform pricing decisions. And, only about half said their companies understood cost-to-serve in great detail, representing a huge opportunity to effectively target and optimize cost by customer type or segment.

Fortunately, many companies are awash in cash. Over two thirds of participants in the study indicated that their companies have optimal to excess cash positions to respond to current business demands as well as to make necessary investments to upgrade their capabilities to drive growth.

However, the key is how companies choose to deploy that cash while continuing to replenish it should the proverbial "rainy day" turn out to be just around the corner. How much should be banked versus invested? Short-term opportunity versus long-term structural change? Building capability versus partnering for it? There is no static, "right" answer per se for the long haul, only options which are more or less likely to insulate a company from key volatilities over time. Over 90 percent of study participants said they had teams actively work to balance the trade-offs on these ever-changing capital priorities.

Over time, the companies' best positioned to maintain growth and weather future economic storms will be those that use demand-side insights to capitalize on market opportunities, wherever they arise in a particular region, offering, and/or demographic segment, while keeping one hand on the cost management reins. They will use price as a "sensing" mechanism, while being the most cost-effective at rapidly responding (and even promoting) to those opportunities.

There's an old saying, "Half of my advertising spend is wasted. I just don't know which half." Today, you have no choice but to know about any costs that are wasted, and ruthlessly drive out those inefficiencies, all while being prepared to quickly pounce on those fleeting opportunities for growth wherever and whenever they arise.

Greg Cudahy is the managing director for the North American Operations Consulting practice at Accenture, a global management consulting, technology services and outsourcing company.

Don't miss Greg Cudahy's video interview Integrating Cost and Price to Drive Growth and Q&A: The Role of Price and Cost in Driving Growth.