“Managing costs is a prevalent theme in recent earnings transcripts, and many large companies have already launched significant cost-reduction programs,” said Mr. Boldt. “While, on average, 81% of a company’s costs are defined by the industry they are in, the remaining 19% are largely determined by executive decision-making, and this is where high-performing CFOs — who deliver the best return on capital — are making their impact felt.”
Four “Cost Anchors” Drag Down Earnings
The research showed four key “cost anchors” — or negative management behaviors that drag down earnings — that most companies suffered from. Eighty-seven percent of companies suffered from poor cost visibility, 89% from cost equivalence, 84% used outdated cost models and 90% suffered from business resistance.
To overcome poor cost visibility, companies should employ multiple budget models that provide a more flexible approach for identifying good costs from bad. A mix of rolling forecast, driver-based budgeting and zero-based budgeting provides CFOs with a clearer analysis of the relationship between costs and revenue.
To overcome cost equivalence, or the perception that all costs are the same, companies should separate costs into transactional and value-add categories.
Companies can update their cost model approach by using a service-based view of costs.
Overcoming business resistance is a matter of helping business partners focus on controllable factors.
Raising “Cost Ladders” That Positively Impact Earnings
Leading cost management executives also encourage four positive cost behaviors, or “cost ladders,” that contribute to positive shareholder return. However, fewer than one in three companies Gartner studied exhibit any of these positive behaviors.
- Encouraging transformational bets: Companies with this positive cost management behavior have mapped their previous investment and clearly categorize between transformational and iterative bets. By doing this, CFOs can better decide how to allocate funds to transformational bets that will have the most impact on achieving the company’s overall investment criteria.
- Increasing cost agility: Less than one in four companies display the cost agility needed to positively impact earnings. Cost management leaders employ “proof of concept” financing that investigates uncertain variables underpinning a growth investment’s chance of success. If a proof of concept test reduces uncertainty, CFOs release full funding to complete the growth investment. This uncertainty-reduction process gives management teams an edge on competitors in taking on risky growth bets with more confidence.
- Detecting early cost warnings: Most companies don’t have a clear mechanism to flag when costs are likely to spiral out of control. Cost leaders in this area operate from a forecast model that identifies cost headwinds and tailwinds, which can be assessed on a quarterly basis, and considers factors such as foreign exchange rates; selling, general and administrative (SG&A) costs; pricing; volume; and productivity.
- Rapid reallocation from losers to winners: Reallocating funds from losing to winning projects can have a very positive effect on overall company performance, but only 15% of companies actively manage projects in a way that makes this possible. An in-progress initiative review can provide the data needed to make such decisions. Evaluating projects that are in progress, based both on current performance and leading indicator trends, can help CFOs identify opportunities to provide additional capacity and funding to projects that are outperforming.
The findings will be explored in more detail in the Gartner presentation “The Three Habits of Elite Cost Cutters,” which will take place at theon June 10-11 in Washington, D.C.
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