Pragmatic Cost Optimisation

MORE FOR LESS
A pragmatic approach to
optimising operational costs in
times of radical change and
uncertainty
1

INTRODUCTION
As the world reels from the impact of COVID-19, businesses need to reduce
costs with great urgency. Restaurants, hotels, entertainment and transport are
the worst hit, with retail, construction and manufacturing also suffering. Almost
all other industries are likely to decline in GVA over the year, with public
administration, defence and health and social care the only sectors likely to see
significant gains over 2020.
Many organisations will find that squeezing a few FTE savings or slimming the
cost base by a few percent won’t suffice to sustain competitive relevance in
this disrupted marketplace. Bolder measures will be needed.
Still, it’s as important as ever not to overreact. Failure to understand the impact
of choices made now will squander an opportunity to add real value. It will also
risk inflicting lasting damage that will make recovery needlessly difficult, and all
amid a crisis of unknown duration.
In times of crisis, leaders often feel a need to rapidly remove costs regardless of
other considerations. However, calm, sound judgment is always highly
advantageous, and especially so now. Devising and applying a systematic
problem-solving process at pace will make it possible to harness the unusual
urgency now facing us to drive changes in an energetic, targeted way.
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3 STEPS
Informed by a robust analysis of each component of the
operating model, a holistic set of cost optimisation initiatives
can be created which shift resources away from
non-differentiating and non-value-adding areas of the
business. This provides a systematic way to optimise
operational costs.
1
ENGAGE & SET UP
● Align on the problem to be solved
● Agree measurable objectives and success criteria
2
DISCOVER & DIAGNOSE
● Create a starting hypothesis of potential cost reduction opportunities
● Define customer segments and understanding what they value
● Create a model for attributing cost and values
● Conduct a holistic analysis of the operating model
3
ITERATIVE DESIGN & IMPLEMENTATION
● Define cost improvement initiatives
● Define the value and effort for each initiative
● Establish waves to deliver value iteratively
● Realise benefits on the bottom line
3

ENGAGE & SET UP
Align on the problem to be solved
Understanding the specific problem to be addressed is a key first step. All efforts can
then be focused on solving it. A simple mantra of ‘cut costs’ is not enough. There
must be an explicit statement of the problem and goal.
For a viable problem statement, it’s necessary to know who has the problem, what
the problem is, where it arises, and above all why it’s worth solving from a customer
perspective. It might read like this:
“Reduce costs in <business unit/function> by x% by the end of 2020 without
sacrificing the customer experience.”
The input of a select group of internal customers as well as key customer
perspectives from across all segments makes it possible to understand the wants and
needs of the people to be impacted by the initiative. This enables the writing of a
workable problem and goal statement that will address vital stakeholder concerns.
“Reduce costs in <business
unit/function> by x% by the end of
2020 without sacrificing the customer
experience.”
4

ENGAGE & SET UP
Agree measurable objectives and success
criteria
Companies will need to establish holistic financial measures & reporting. By tracking
both the cost delta of individual cost reduction initiatives and absolute financial
performance metrics, correlations to bottom line and performance improvement can
be better understood.
Holistic financial measures will include cash management, headcount, operating
expenses, COGS or other metrics such as improved earnings, typically measured by
EBITDA.
5

DISCOVER &
DIAGNOSE
There are many levers organisations can
pull to reduce costs. Shifting spend and
resources from non-value-adding areas of
the business to value-adding ones is the
ultimate goal.
6

1 Deﬁne customer segments and understanding what they
value
A solid starting point to assess the value of services, capabilities and
processes is to deﬁne value from a customer perspective. Depending on
the area of business in scope, customers are either internal or external.
Organisations should also create logical groupings of customers and
personas so that demand and service levels can be assessed in the context
of relevant segments. The wants and needs of different segments will vary,
posing a more complex analytical task but also producing more nuanced
and comprehensive solutions.
Valuable insights can be gained from gathering well-chosen Voice of the
Customer (VoC) analytics. These can include interviews, surveys, live chats,
feedback forms, responses and reviews on social media and studying the
behaviour of website visitors.
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Pragmatic cost optimisation | Discover & Diagnose

Create a model for attributing costs and values
A process framework will aid in creating visibility and
transparency to the distribution of cost across the
organisation.
Pragmatism will also be needed to avoid creating process
documentation that isn’t necessary for the area of analysis. More often
than not, there’s no need to reinvent the wheel. Industry reference
models can be used as guides, and existing collateral can be reused. If a
process model is already in place, focus can move directly to deﬁning
the processes in scope for cost optimisation.
2
8
Example process framework for a Record-to-Report value stream

Conduct a holistic analysis of the operating model
With a clear view of customer needs and a model to attribute cost to, the
next stage is to conduct a holistic assessment of the various components
of the operating model. This will result in a clear picture of cost
optimisation opportunities across the following components : customer,
process, partner, organisation, locations & technology.
The approach to this assessment can be adapted to the context and
scope of the cost optimisation. Organisations can pull various levers to
identify cost saving opportunities in a systematic way. Different
approaches will be relevant depending on the problem that needs to be
solved.
It's good practice to apply timeboxing to analysis. Rather than carrying
out months of analysis before moving anything into delivery, analysis and
delivery should both be iterative, with a few components analysed and
moved into a hopper for delivery before beginning on others. The
iterative approach enables analysis to be adapted along the way to
lessons learned during delivery.
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9
Technology
Customer
Process
Organisation
Locations
VAL
UE
PRO
POSI
TION
VALUE
PROPOSITION
Partners

COST OPTIMISATION
LEVERS
A holistic assessment of the operating model will unearth a
myriad of cost optimisation opportunities. The approaches to
taking advantage of these opportunities should be considered
with a view to resolving the problem statement drawn up at the
beginning.
Technology
Customer
Process
Organisation
Locations
VAL
UE
PRO
POSI
TION
VALUE
PROPOSITION
Partners
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Shifting customers to
lower-cost channels
For customer-facing processes,
organisations can explore ways to shift
customers to lower-cost channels. The
average Cost to Serve (CTS) for
contact centre vs online self serve can
be five times higher. Tactics to shift
customers to lower-cost channels (e.g.
self serve) from higher-cost ones (e.g.
phone calls) can yield significant
returns.
The average Cost to Serve
(CTS) for online self serve vs
contact centre can be five
times higher.
By the end of this analysis, the
proportion of customer volumes
across each channel will be clear and
opportunities will be identified to shift
customers to lower-cost channels
through a combination of short-term
and longer-term interventions.
Releasing capacity through
failure demand reduction
Organisations will often assess capacity
needs based on a demand profile that
contains a mix of value and failure
demand.
Value demand is the kind an organisation
wants as it produces value for the
customer.
Failure demand is the kind the
organisation needs to address at its own
expense to rectify something that has
gone wrong. In a call centre this would be
customers calling in to chase responses
they had expected but not received.
By addressing the root causes of the
biggest sources of failure demand,
organisations can improve the customer
experience, release capacity and reduce
cost.
1
CUSTOMER

Unlocking process efficiency
The cost and value of the processes in
scope can be established by mapping
each one end-to-end and capturing
key process metrics such as process
time, lead time, value-add time,
re-work and waste. This will produce a
breakdown of where most of the work
is currently allocated and a clear
categorisation of each process.
This analysis can be carried out at
various levels. End-to-end process
analysis at macro level can be
followed with analysis at a lower level.
There may be processes that add
value at high levels yet in which
non-value-add activities become
apparent when the sub-processes are
assessed.
1
Aligning demand and capacity
Organisations can often find
opportunities to improve efficiency by
addressing a mismatch between
demand and capacity. Typically this
begins with analysing customer
demand data, split by product
grouping and customer segments, to
quantify how effectively resources are
matched to demand. This will often
highlight mismatches which cause
inefficiency.
Often, misalignments between
resource capacity and the demand
profile result from changes in demand
over a given period of time.
Organisations can respond to this by
building their workforce planning
capability, taking measures to smooth
out demand and cross-skilling staff to
provide greater flexibility to deal with
demand variation.
PROCESS

With deeper insight into the cost and value of each process,
companies can think holistically about how their processes can be
improved to contribute to cost optimisation efforts. Multiple
approaches should be considered. This avoids piecemeal solutions or
jumping to expensive technology solutions when simpler process
re-engineering efforts will suﬃce.
SIMPLIFY/ELIMINATE
Eliminate processes or activities that
are deemed non-value-add or which
don’t add value from a customer
perspective. This also includes the
elimination of waste and rework within
a process.
DIGITISE
Make use of digital tools to create
digital customer journeys or remove
manual tasks from a process.
Digitisation can unlock opportunities
to automate processes.
OUTSOURCE
Transition work to a low-cost location.
Organisations should question whether
proximity to a centralised location is
important. This approach usually works
better for transactional processes
rather than customer-facing processes
or those of high complexity.
AUTOMATE
Replace human effort with an
automated system. Organisations
can leverage emerging technologies
such as robotic process automation
(RPA), intelligent process automation
(IPA) and machine learning. These
technologies work best for processes
that involve aggregating data from
multiple systems
13
PROCESS
Simplify
OutsourceAutomate
Automate

3. Conduct spend analysis
Two types of analysis can unearth cost
optimisation opportunities: Category
spend analysis and contract spend
analysis. The following questions will
support the identiﬁcation of
improvements:
Category spend analysis
- Are there opportunities to
consolidate suppliers that provide
similar goods and services?
- Are there spend leakage issues e.g.
purchasing from non-preferred
suppliers or maverick spend?
Contract spend analysis
- Are partners/suppliers complying
with existing negotiated contract
terms?
- Is there spend leakage through
non-compliant contracts?
Reducing cash left on the table in partner contracts
The current economic situation may serve as a great
opportunity to renegotiate key supplier contracts. Also,
whether renegotiated or not, deep analysis of spend and
existing contracts can unearth cost saving opportunities
1
PARTNERS
1. Identify partners & contracts in
scope
Companies can use the process
framework to identify partners and
contracts in scope for analysis.
2. Create common spend
categories
Common spend categories can then
be grouped to understand
suppliers/partners that provide similar
goods and services.

Rationalising the application portfolio
By examining the application portfolio, opportunities to reduce
the total cost of ownership (TCO) can be discovered.
Rationalising the portfolio can also involve speciﬁcally selecting applications
based solely on their positive effects, typically judged by continuously monitoring
their value. This entails identifying a speciﬁc owner for each one, bringing
attention and responsibility to the cost which users are unlikely to pay attention
to.
1
TECHNOLOGY
1.
Optimise the use
of software
licences
2.
Optimise server
use & data
storage
3.
Retire low-value
applications
Typical approaches to rationalising the application portfolio

ORGANISATION
Simplifying legacy organisational structures
Reviewing and assessing the organisational model can reveal opportunities to
simplify it. Often, legacy structures limit collaboration and create silos, resulting in
duplication of effort and non-value-add activity. Companies should go beyond just
moving lines and boxes, ensuring any organisation design decisions are made in
the context of longer-term vision and strategy.
1
BUSINESS
UNIT
BUSINESS
UNIT
BUSINESS
UNIT
Function Function Function
Function
Function
Function Function
Function
FunctionFunction
Function
Function
Centralisation
Centralising support
functions under a shared
services model saving
costs through economies
of scale and direct labour
cost reduction
BUSINESS
UNIT
BUSINESS
UNIT
BUSINESS
UNIT
Function
Shared Service Function
Function Function
Function
Function
Function Function
FunctionFunction
Decentralised Centralised
Delayering
Removing layers of
hierarchy between
the highest and
lowest levels
Spans of control
Expanding managers’
span of control
Organisational design options to reduce costs

LOCATIONS
Unlocking efficiency through better working locations
Cost optimisation opportunities may be found by
cataloguing locations and mapping office layouts in order to
identify wasted space and unnecessary spend.
This can reveal options for reducing the amount of space allocated to each
person in existing locations or more radical shifts to promoting working at
home or working in much lower-cost locations. Flexibility in working locations
can also bypass the consideration of where talent is located.
Working from home is especially relevant in the current COVID-19 crisis, as it
has effectively been forced upon millions of employees. Organisations may
find their assessment of the value of office locations permanently altered
when government measures are lifted, as companies which choose not to
return all staff to offices stand to benefit from lower overhead costs, which
may be reflected in better value for customers.
1

ITERATIVE DESIGN &
IMPLEMENTATION
With a holistic analysis in place, the optimisation
opportunities it has helped identify can be chunked into
initiatives to be delivered.
Each will be delivered iteratively over the short, medium or
long-term. Organisations may consider using an initiative
‘hopper’ and Kanban to enable leaders to make priority
decisions and limit the number of initiatives in ﬂight.
1
8

Define the value and effort for each cost optimisation initiative
An explicit business case should be developed for each initiative with its
benefits, costs and measures for ease of implementation all specified.
The business cases will facilitate choosing and prioritising the right initiatives for
delivering the needed solutions and maximising the benefits they bring.
1
VALUE VS EFFORT
Ensuring benefits are felt on the bottom line
It is imperative for organisations to put processes in place to ensure that cost-saving
benefits are realised. This is especially true when the benefits sought relate to
productivity savings rather than direct cost savings.
For example, decommissioning application licences will deliver immediate and
obvious cost benefits, while productivity savings pose a range of options to consider
and compare to ensure that the improvement definitely reaches the bottom line.
Outsourcing can actually increase overall costs unless accompanied by efficient
redeployment of the resources originally used. Similarly, automation of activities will
only optimise costs if the resources freed up are employed well elsewhere.
Pragmatic cost optimisation | Iterative design & implementation

Companies can achieve a continuous flow of cost optimisation
by establishing increments/waves
Organisations should set up cadence and iterations for delivery to establish
commitment and regularity over time. This establishes a clear schedule for
delivering cost optimisation initiatives, realising their benefits at each iteration
and enabling agility. Quarterly wave delivery is often a sensible cadence with
fortnightly sprints used to maintain momentum.
Wave delivery also provides a structured approach for the change management
activities needed to land each solution or change, e.g. training or communication.
2
ITERATIVE DELIVERY
Hudson&Hayes sustainable operational excellence framework can be adapted
to support a continuous flow of cost optimisation
Pragmatic cost optimisation | Iterative design & implementation

MAKING IT STICK
Conclusion
Systematic cost optimisation can be highly advantageous
during normal circumstances. In the current crisis, it may be
an outright necessity. If done with the right approach, it can
turn that necessity into an opportunity.
To make cost optimisations stick, organisations must go
beyond the delivery of cost optimisation initiatives as part of
a programme or project. Improvements should be continuous
and, more importantly, a strong cost culture must be
deployed to ensure sustainable change.
To that end, cost ownership, accountability and a culture of
continuous improvement that empowers employees to
identify and implement new cost reduction initiatives will
lead to strong EBITDA improvement and increased
competitive advantage.
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1

Authors
ARRON CLARKE
Principal Consultant
Hudson&Hayes
Hudson&Hayes is a transformation and operational excellence
consultancy providing a broad range of services and solutions
from strategy to execution.
With top transformation talent and a unique and integrated
approach to Operational Excellence, Hudson&Hayes helps
organisations deliver on their strategy, unlock efﬁciency and
enable continuous improvement.
2
2
Contribution
GARETH STONE
Digital Content & Partnerships Manager

Pragmatic Cost Optimisation

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