Fit for Growth* cost transformations disrupt organizations from top to bottom, requiring people across the company to change their thinking, work habits and priorities. Such sweeping initiatives rarely succeed without strong leadership. Executives beginning a cost transformation journey often have three fundamental questions:
While answers will differ for every organization, we have distilled a set of ten guiding principles for delivering a successful Fit for Growth cost transformation. Here's how these principles answer the three basic questions:
QUESTION I: How do I energize my organization for transformation?
Principle 1: Make the case for change. Start with a clear, candid assessment of business conditions and the challenges facing the company. Take a market-back perspective, connecting transformation objectives to customer needs and marketplace dynamics. Describe the company's differentiating capabilities, and underscore the importance of channeling resources to these critical sources of competitive advantage. Conclude with an inspiring vision of the company's potential if it becomes fit for growth.
Principle 2: Align the top. Cost transformations don't succeed unless senior management is aligned and committed to the goals. Yet the more revolutionary the change, the more likely it is that those with power and status in the old regime will resist it. Move quickly to align these key influencers behind your transformation. Give every executive a stake in overall transformation objectives, not just activities affecting his or her area. Finally, remember to link incentives — financial and otherwise — to key transformation milestones.
Principle 3: Declare a "new day" and grant amnesty for the past. Along with an unflinching view of threats to the company, offer a positive, strategic vision highlighting the upside of cost transformation. Declaring a new day also conveys the message that old arguments against change no longer hold water and that you’re not interested in blaming past administrations or criticizing past decisions. Instead, paint an inspiring picture of a leaner company poised for faster growth.
Principle 4: Showcase quick wins. Nothing succeeds like early success. Look for areas where you can rack up meaningful savings rapidly, without significant transaction costs. Highlighting quick wins builds confidence and momentum while showing you're serious about driving out costs that don't support differentiating capabilities
Question II: How do I achieve cost fitness while also enabling growth?
Principle 5: Put everything on the table. A credible, effective cost transformation scrutinizes every expenditure. Putting everything on the table signals the urgency of strategically realigning costs, while dissuading individual managers from lobbying for special exemptions. It also sends a message that "we're all in this together."
Principle 6: Challenge the what, how and how well. Big cost improvements arise from a deep analysis that questions not only how or how well a company performs various activities, but what it does in the first place. Assess your business portfolio, product line-up, customer base, operations and administrative footprint from a strategic perspective. Seek excellence only where it bolsters a capability that sets your company apart in the marketplace.
Principle 7: Balance cost cuts with capabilities investments. Early in a transformation, many companies prioritize cost-cutting over capability-building. This approach undermines transformation goals by demoralizing employees and limiting growth. Successful transformations build capabilities as they cut costs, using the savings to fuel step-change improvement in returns.
QUESTION III: How do I manage the transformation and make it enduring?
Principle 8: Set up a parallel organization to run the transformation. You need to keep doing business while you change your business. Don't ask managers and line workers to do both. Establish a project management office (PMO) with responsibility for achieving transformation goals, led by a respected senior executive.
Principle 9: Communicate before, during and after the transformation. Timely, frequent and consistent communication is a hallmark of successful transformations. Skillful messaging that conveys a strong strategic vision helps to win support from key constituencies inside and outside the company.
Principle 10: Keep the weight off. Completing a punch-list of cost adjustments and strategic course corrections doesn't mean a transformation has succeeded. Far more important are changes in behaviors, attitudes and work habits throughout the organization. If those don't stick, neither will the transformation.
These ten principles reflect our best advice, based on years of experience, for senior leaders seeking to radically realign costs to support strategic goals. Those who follow these principles will strengthen the capabilities that create sustainable competitive advantage.
* Fit for Growth is a registered service mark of PwC Strategy& LLC in the United States.
Answer: Focus on what to keep
Put all spending on the table, and assess each expenditure in terms of its strategic relevance. This approach differs from traditional cost-cutting methods, which tend to focus on where to cut, often resorting to across-the-board percentage reductions that ignore strategy and cut into competitive muscle along with administrative fat. A Fit for Growth* transformation forces leaders to re-evaluate every expenditure, based on its connection to the differentiating capabilities that underlie their company's competitive advantage. This approach reassesses the entire business portfolio, product line-up, customer base, operations and administrative footprint. Throw your costs out into a metaphorical parking lot and make them earn their way back into the building: list all the costs related to the activities of the enterprise, and then, one by one, decide whether to let them back in. Distinctive capabilities will get the resources they need to realize their full potential. You'll pay for them by cutting everything else.
* Fit for Growth is a registered service mark of PwC Strategy& LLC in the United States.