Organisations that achieved unexpected cost efficiency gains as a result of operational constraints due to the pandemic risk losing these gains needlessly, said Gartner recently.
That’s because the traditional approach of reintroducing costs after a business downturn based on recovered revenue fails to account for permanent shifts in the business environment, the advisory firm observed.
There have been numerous efficiencies discovered as a result of increased use of technology, changing customer preferences and a significant move towards permanent remote work, the company noted.
Some organisations discover that there’s a beneficial side to the extreme budgetary discipline and constraints they have been operating under for the past 12 months, said Dennis Gannon, vice president, advisory for the Gartner Finance Practice.
Functions across the organisation have found cheaper and more efficient ways of operating through digital investments that enable remote work and customer engagement, many of which will remain permanent ways of doing business, he added.
“For CFOs, this means costs need to be examined differently before being reintroduced, to ensure they are still relevant in this environment,” Gannon pointed out.
The most common approach to reintroducing costs after a downturn relies on matching new costs to recovered revenue in order to preserve profit margins, according to Gartner.
Reintroduced costs are pressure-tested to ensure they are in line with previously established profit margin structures, helping to ensure that new spending maintains margin in the short term, the firm noted.
Gartner said it has identified a more effective “constraint-informed approach” to reintroducing costs from polling data of nearly 100 finance leaders and additional qualitative interviews in the summer of 2020.
This approach focuses on identifying and leveraging the cost gains made during the past year as a result of organisations reimagining how they do business, Gartner added.
The ways CFOs can maintain cost efficiency
The first step for CFOs seeking to maintain cost efficiency gains is to determine which cuts made during the pandemic are truly sustainable, said Gartner.
While many of the most severe cuts, such as factory closures and hiring freezes, could result in permanent damage to the organization if extended indefinitely, Gartner suggested that other risks are often overstated when executives attempt to recover costs back into their function.
Taking a risk management approach to understand which areas of the business are under more or less stress in this environment can help CFOs better allocate resources from low-risk areas to higher-risk ones,” Gannon advised.
“Following this approach for sustainable cost optimisation, and maintaining visibility into cost optimisation initiatives, will help CFOs gain a clearer understanding of COVID-19’s long-term impact on the overall business,” he observed.
After the sustainability of cost reductions is clarified, CFOs can then better align functional spend to strategic differentiation, he added.
Gartner recommends segmenting costs into three buckets to accomplish this:
Differentiating. Unique costs that create a point of strategic advantage and cannot be easily replicated by competitors, such as proprietary technology.
Enabling. Costs that help achieve mission critical operational outcomes but are not necessarily differentiating or unique, such as data science talent.
Commoditising. Costs that any competitor tends to occur and are unrelated to the organisation’s unique value proposition. Organisations often incur such costs inadvertently when responding to a competitor’s actions. Previous Gartner research has examined this category of spend and how CFOs can minimise it.