Cost and value transformation in an economic downturn
On March 15, the Dow dropped nearly 3000 points in a single day; the worst day of trading since 1987. Since then, the global economy has come to a near standstill and has been on a steep economic downturn after years of strength. What can companies can do today to focus on cost transformation while many industries face upheaval?
In this quick Q&A, two leaders in IBM Services, Eric Pilkington and Lucas Manganaro, articulate how companies should improve and automate workflows, which can lead to an upskilled workforce and better efficiency, and how prioritizing customer needs and transforming the way companies generate value can have positive impacts to overall company cost transformation strategies.
Question #1: In response to the economic downturn, there has been a lot of discussion on enterprise “cost transformation.” What does this term mean to you?
Eric: Every business wants to strike a balance between cost, price, efficiency, and elasticity. The ability to automate certain tasks that will enable a company to deploy less human capital holds value for companies. When it comes to true cost transformation, we need to discuss cost and value transformation – a way to cut costs without negatively impacting the customer experience. In this case, value is defined as value to the business and value to the customer. Often, I have seen leaders engage first on cost cutting and second on value while undergoing a digital transformation. For example, if a company over-automates and solely relies on technologies and data without accounting for upskilling or reskilling their employees, the value to the business and customer experience could actually decrease in the long run.
This downturn is already causing layoffs, which will drive further investment in automation, which will reinforce new ways of working, all in an effort to cut costs. As we embark on these cost cutting exercises so necessary to many companies today, we should remember to strike the balance between value and cost transformation.
Question #2: What is top-of-mind for clients today with regards to applying cost transformation and intelligent workflows in an economic downturn?
Lucas: In the wake of this economic downturn, companies have changed the way they do business, with most employees working from home. Despite this, most clients that I’m speaking with are focused on maintaining business continuity as much as possible. We should remember to lead with Emotional Intelligence and then follow with IQ, since individuals are now packing in additional work into a less efficient working situation.
In this rapidly changing environment, CEOs are shifting their attention to prepare for revenue contractions, and therefore focusing on using data to understand the pieces of their business that remain core vs. not core to their bottom line and customer value. Leaders want to use data from their digitization initiatives to inform their decision-making. However, they’re quickly finding that while the data exists, it is not readily available to drive real-time action. This only further stresses the need to intelligently digitize data in a way that can be impactful and available to business leaders across the organization.
Question #3: What steps can companies take to reduce cost and improve process efficiency during this new economic environment?
Eric: First, as a leader, ensure that you have created and communicated an organization-wide “North Star” and confirm that all parts of the business effectively map back to that instead of perpetuating existing siloes. If this is done effectively, we can then look across the organization, understand how different pieces interconnect, and identify gross inefficiencies to improve end-to-end processes and ultimately begin the cost transformation. Equally importantly, we will also be able to identify opportunities to improve the customer experience.
Lucas: The first thing I advise: conduct an initial analysis to understand where your company spends money and what is currently in your contracts. From there, you can decide what work is critical vs. not critical. You can then determine secondary and tertiary levels of criticality when it comes to delivering your product from a value and cost perspective.
Some companies are currently facing a spike in demand in the wake of this pandemic (think delivery, Amazon, food retail). These companies face challenges in meeting that demand with the right mix of inventory. In this example, leaders should focus attention on understanding the pivot required in inventory planning and look further upstream and downstream in the supply chain to ensure that customer expectations are met.
Alternatively, many other companies are seeing a complete drop-off in demand, and therefore should take a different approach in the immediate term. Leaders must make difficult decisions to know what pieces of the business can be shut down to minimize costs, and they must ensure that the final finished inventory of product is excellent to maintain customer value. Access to intelligent data is critical during this exercise to ensure that leaders create some financial stability for their companies and for suppliers.
Bottom–line: What do you need to do today?
Recognize that as a business leader or as an employee, you do not need to solve for everything tomorrow. We are in unprecedented times, and while we may be doing internal ‘rocket science,’ we do not have to build the entire rocket at once; we still build it one bolt at a time. So, the next step is to pick up the hammer and start chipping away, beginning with understanding your data and making tough decisions.”