Transformational cost reduction: beyond mere cutbacks

Economic instability and geopolitical volatility are here to stay in the short term. With high inflation rates and slower economic growth anticipated in the coming years, businesses are looking at a scenario of rising costs and increased pressure on operating margins. In recent discussions with business leaders, it's clear that these uncertainties are prompting a shift in their approach to managing costs. Rather than merely reducing costs, the focus has shifted toward cost transformation, with an emphasis on creating more flexible and variable cost structures that are aligned with what costs should be.

While this shift is promising, it presents significant challenges. Achieving true cost transformation—establishing sustainable cost behaviors—requires deep visibility into all spending. This visibility is crucial for identifying opportunities to reduce or reallocate spend, fostering cost-conscious behaviors, and enabling new ways of working. However, achieving such a level of insight is nearly impossible with fragmented data and simple spreadsheets, which remain common in many organizations today.

Now, more than ever, finance and procurement leaders need to apply advanced intelligence to cost management. Accenture research reveals that generative AI could potentially impact up to 43% of all working hours in the end-to-end supply chain. Specifically, 29% of these working hours could be automated. However, early adopters of generative AI tools are achieving as much as 13% additional cost reduction improvements than their peers.

Despite widespread recognition of AI’s potential, many companies still struggle to scale AI adoption and extract measurable value from their data. While 97% of executives believe generative AI will transform their enterprises and industries within the next 3-5 years, only 31% have made significant investments in AI initiatives. This underscores the urgent need for businesses to embrace and effectively implement AI technologies to drive growth objectives and optimize cost structures to remain competitive.

Igniting change: Fostering visibility and nurturing new behaviors

Cloud-based data lakes make it secure and easy for companies to collect data and transform it into actionable insights by leveraging advanced analytics tools. This closes the knowledge gap between what companies are actually spending versus what they should be spending. Here’s how this can facilitate cost transformation:

• Analyze operations and define the ’right cost’ structure: by leveraging advanced AI and machine learning tools, companies can gain a highly granular view of activities that drive cost. For example, AI can be used for SKU rationalization, analyzing product performance, demand patterns, and profitability to optimize product portfolios. When paired with internal and external benchmarks, these AI-driven insights help identify opportunities to unlock trapped value across their supply chain.

• Develop ‘X should-cost’ and driver-based models: these models enable companies to quickly spot outliers and patterns that don’t align with the high value for the spend. They can forecast the right values for cost centers and track actual performance.

• Leverage advanced scenario modeling tools: that can help inform decision makers of the expected business impact in real-time, resulting from their buying decisions and predict future cost implications more accurately. With the right insights, employees can understand the key cost drivers of every activity, allowing for better planning and spending decisions. This is crucial for materially changing a company’s cost structure and ensuring sustained change.

• Adapt to shifting external conditions: advanced analytics enable companies to adjust operations in real time as market conditions evolve. For example, during recent geo-political unrest, Accenture has leveraged its patented AI-based store cluster analytics to help multiple retail clients to dynamically adjust operational costs based on various factors including changing import tariffs and ports impacted by disruption in real-time, rather than relying on historical data.

• Evaluate the impact of spend decisions on sustainability: responsible sourcing tools and sustainability dashboards, enable companies to monitor sustainability metrics across their value chain. For example, they can track their carbon footprint to see what activities drive carbon emissions and adjust spending accordingly to help meet their net-zero carbon emissions goals.

• Drive new ways of working: to build a sustainable cost culture, employees need access to tools and insights that are consistent and provide a single source of truth across the organization. For example, an oil and gas company developed a platform with customized widgets to align operations, finance and procurement, fostering more collaborative and efficient ways of working.

Beyond cost-cutting: Embracing cost transformation

Recent supply chain disruptions, from geopolitical tensions to rapid technological advancements, have underscored the importance of forward-looking cost strategies to maintain a competitive edge. Instead of only relying on historical spending patterns, companies need to reassess their investments with a fresh perspective.

With advanced analytics platforms, companies can access and analyze what they’re spending at a forensic level and model an optimal cost structure as if starting from scratch. This approach not only reveals opportunities for cost reduction but also fosters a new cost mindset and innovative ways of working.

We would be delighted to speak to you about some recent examples of how we are helping clients to adopt this new mindset and leverage the right tools to achieve more than just cost cutting; they’re achieving true cost transformation that enables more sustainable, long-term success.

Solvay – The chemistry behind cost transformation