Enterprise Cost Reduction. Transforming the Cost Structure for Sustained Benefits. Based on a recent cross-industry survey of 250 global C-suite and board-level executives, cost reduction has become essential, with more than 85% of respondents citing it as a key issue in their business.
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Pressure to improve company performance may originate from changing market conditions, enterprise strategy, business model, or external factors
Cost reduction initiatives
Primary drivers of cost reduction
Headcount reduction is clearly not the primary focus of cost reduction programs
Respondents expressed common ground in factors driving cost reduction within their own organizations
Business process improvement
Supplier cost reduction
Increasing investor demand
Increasing board/audit demand
Finance infrastructure improvement
Source: The Economist Intelligence Unit, on behalf of Ernst & Young, surveyed 250 C-Suite and board level executives in September and October 2007
Sustainability of cost reduction benefits within 115 multinationals (FTSE 350)
analysis of year-on-year performance, 2001-2006
Savings leakage examples
70% of companies failed to improve their cost/ revenue ratio year - on-year for 3 years after announcing a significant cost reduction program
% of companies sustaining benefits through year 1
% of companies sustaining benefits through year 2
% of companies sustaining benefits through year 3
Total cost reduction programs
Source: Ernst & Young analysis
Why are cost reduction efforts failing to deliver or sustain the intended benefits?
How can costs be reduced without compromising our competitive advantage?
How do we sustain our cost reduction efforts?
How do we establish ongoing monitoring of benefits realization that is in line with our BPM system?
Have the opportunities been analyzed not only for costs and benefits, but also interdependencies, complexity, timing, redundancy and risk?
Do we have sufficient program management and supporting tools?
How can an effort of this magnitude
be managed across the entire enterprise and still maintain momentum?As they become more deeply involved in cost reduction efforts, companies face these challenges which trigger fundamental questions
Low Hanging Fruit
Strategic portfolio approach to cost reduction
Difficulty to Implement
and 3rd party
cost drivers &
Reasons for failure:
“Top-down” review of the business – typically organization and process changes are required.
Slash and Burn
Business as usual but at less cost – reduces operating plans by a set target (e.g., 10% cost reduction).
Boil the Ocean
A bottom-up detailed analysis across all departments to identify potential opportunities.
Embed sustainability by reducing the right costs and redeploying expenditures to areas that drive competitive advantage
Improve pace through rigorous stakeholder engagement and project management
Identify the maximum potential and delivermore value
Technical limit of maximum potential
Actual value deliveredThe design of successful cost management programs share a focus on three primary factors
Realized by carefully examining every element of addressable spend
Established via effective project management, focus, and balancing short and longer term savings
Shift spend to activities central to performance
All cost programs should be designed with
pace, value and sustainability in mind from the beginning
Financial Performance Agenda
Grow New Revenue Streams
Reduce Value Leakage
Optimise Cost of Goods Sold
Reduce SG&A Costs
Procure more effectively
Minimise Tax Burden
Release unproductive assets
Enterprise Cost Reduction
Market Entry & Growth
Enterprise Cost Reduction
Functional cost reduction
Product cost reduction
Working capital efficiency
Realization of sustainable reductions in corporate infrastructure / G&A overhead expenses
Harness operations experience to continue to provide effective support services throughout the organization
Infrastructure platforms must be able to readily absorb an acquisition in order to realize cost synergies
Remediation of cost elements driving low profit or unprofitable products / segments (regions, channels, customer segments)
Cost base must be structured to enable lean growth, either organic or acquisitive growth, as a key driver in value creation
Improve asset performance by reducing the amount of capital tied up in net current assets
One-off cash releases from the balance sheet can be re-invested in higher return activities to create incremental value
Report status and results
Re-balance project portfolio
Identify ineffective projects or new needsGetting your own cost reduction program started
Identify end to end stakeholders of problem processes
“SWARM” workshop the process
As an enterprise develop a portfolio of projects
Identify opportunities using benchmarking
Prioritize issues based upon cost/benefit of the fix
Following a strategic transaction, this global manufacturer of mobile devices focused on significantly reducing operating expenses (>$200M in recurring annual costs) to improve its competitive positioning.
The client engaged EY to review its cost structure across functional areas and develop a roadmap to achieve the desired cost reduction, including both “quick wins” and structural cost issues.
EY utilized a team with expertise in Strategy and Enterprise Cost Reduction, and cross-functional advisors in Finance, IT, Legal, Procurement, Real Estate, and Tax
EY worked with senior management to develop a cost reduction roadmap with targeted reductions across the business, including a specific focus on achieving short-term cost reduction goals, reducing operational complexity, and increasing utilization of low-cost facilities.
More than $250M in annual savings opportunities were identified across a number of functional areas, including:
Rationalizing the facility footprint
Reducing indirect procurement spending
Prioritizing research and development activities
Moving back-office G&A processes to low-cost geographies and shared service centers
“Quick-hit” actions were also taken across a number of functional spend areas to make an immediate, in-year impact to the cost structure
Global mobile device manufacturer
Dramatically reduce operating expenses to improve profitability
E&Y measured every single employee on an analytical risk ranking model and performed substantive review of key outliers and confirmed multiple cases of policy abuse
T8 Lagged Submission Score
T6 Meals Over Limit
T9 Total Non-AMEX Expenses
T10 Non-AMEX Expense Percentage
T5 Personal Expenses %
T11 Potentially Duplicative Expenses
T3 Personal Expenses
T13 Total Expenses
T20 Round Non-AMEX Expenses
T22 Un-imported Charges
T1 Round Expenses
T24 Miscellaneous Mismatch
E&Y teamed with policy owners and business unit leadership to reduce travel cost by 20% -30% with the use of clustering identification and geographical tracking tools
Opportunity Identification and Analytical Processing
Ernst & Young leveraged data from American Express and SAP Employee Expense Management to create total cost metrics and business unit travel patterns and spending profiles.
Realization Tracking – Annual Savings of $65M
Realization is led and tracked by Ernst & Young reporting
BU Tactical Planning
E&Y and BU Sponsor review report card to isolate and drive opportunities and develop communications and tracking plan
Case Study: Accounts Payable Cash Flow OptimizationA rapid four week diagnostic review of the Accounts Payable process identified $120M+ in cash flow benefits and $8M in over payment recovery
EY analyzed paid invoice detail for 7 months and made the following key observations:
Analysis and Insight
Value obtained by our client
Recovered Duplicate Payments
Cash Flow Benefit
Improved control environment
and ongoing monitoring / benchmarking
Comparison against Leading Industry/Company Metric
1 Source – APQC Inc.; *Company/EY leading indicator where external metric not available