What is cost optimisation?

Cost optimisation isn't just about cutting expenses; it's about making smarter decisions that drive sustainable growth.

What is cost optimisation?

Business leaders need to manage a company's expenses, minimising unnecessary costs while maximising the value derived from spending to achieve long-term efficiency and profitability. Effective cost optimisation can lead to major benefits for an organisation, enabling a business to generate large savings year-on-year. But get it wrong, and the result can be dire for the business.

Good utilisation and control over financial resources results in maximum returns by increasing the productivity of capital funds. In comparison, idle or improper usage of existing resources can often play a major part in the downfall of a business.

As accountants, our role is to guide businesses towards an all-encompassing approach, that levers both operational and technology activities, if a business wants to meet its cost-saving and efficiency ambitions. Rather than just simply cutting costs, effective cost optimisation involves identifying areas for improvement through process streamlining, technology adoption, and data analysis.

Identifying cost-cutting areas

It is important to know where to cut costs and redirect investment, and this needs insights from a granular view of the business. Profit and loss (P&L) categories such as selling, general and administrative (SG&A) costs will not give granular per-unit insights to help cut things such as travelling and client entertainment expenses on the business units who can best afford to cut them.

By taking a granular view and mapping costs against business units across the whole organisation, it shows where the return on invested capital (ROIC), and the growth of the markets in which the business operates, are at odds.

Cost optimisation enables accountants to identify areas of wastage, such as where business units are receiving marketing investments, despite having ageing growth and technology profiles, or where the interactions between business units creates costs. For example, when high costs within the back-office stem from overly complex front office operations.

Getting everyone onboard

Overcoming the short-term resistance often associated with cost cutting, relies on delivering a consistent message on how cost reduction can help make a company stronger, but this can only be achieved if all business units are inspired to support the effort.

For the business, driving day-to-day efficiencies is important, but for shareholders looking to make effective investment and transformation choices, strategic cost optimisation needs to be a core discipline of the business. This, in turn, drives material shareholder value.

However, many of the barriers to successful cost optimisation relate to leadership, and accountants may find completing cost programmes challenging, despite short-term energy bursts from senior executives. These are often unsustainable and driven by strategic refreshes and benchmarks that lead to low morale, with employees seeing it as just being another "done to" project with which they have had no engagement.

Cost optimisation initiatives ultimately fail when baseline costs are incorrectly measured, communication is not prioritised, lessons from past failures are ignored, and an unbalanced focus on reducing headcount and procurement undermines future growth. Additionally, severe financial impacts may force the company to renegotiate its debt during rising interest rates.