What is Strategic Cost Takeout?

What is Strategic Cost Takeout?

Strategic cost takeout involves reassessing a company's cost structure and making necessary changes to it. The changes are brought about through a business transformation driven using modern technologies. It is long-term effort that aims to reduce cost for an organization without compromising on the quality of the product or service that the company provides, or on customer satisfaction. It strives to achieve the lowest cost structure possible for a business to have while aligning itself to the organization’s strategic objectives.

The costs that come under review during a strategic cost takeout can include those related to the supply chain, software, hardware, and marketing activities. The resulting savings are redirected into growth initiatives. Strategic cost takeout looks beyond making temporary operational changes to decrease costs through downsizing staff gradually, revoking offers, or opting for less expensive vendors. It also examines how feasible the cost reduction is, and the benefits and risks that can arise from it.

How is cost takeout different from cost reduction?

Cost reduction is a short-term activity executed by a small group of people. It can involve continuously and gradually improving efforts to reduce the expenses in a company. The gains are short-term.

However, strategic cost takeout occurs over multiple phases and involves making major changes to the business structure aimed at reducing costs. Change management is used to arrive at changes in organizational design. It demands participation from the C-suite of a company throughout the entire process. It involves identifying the problems that need to be solved as well as the desired outcomes that define success. It uses a methodology or a framework to manage costs to achieve those goals. The gains are long-term.

What is Strategic Cost Takeout?

Why is cost takeout important for businesses right now?

With the prevalent inflationary conditions, companies can use cost takeout to pare down their costs and strategically decide which costs they should reduce and which they should not. It helps leaders make well-informed choices about the areas to cut costs in, while maximizing business growth.

There is intense competition in the market among businesses. They can manage costs to drive profitability and growth to gain an advantage against competitors.

It is important for organizations to zero in on a methodology for permanent cost reduction which can improve incrementally in the long term to sustain them during unstable economic conditions. Creating a cost takeout strategy will help them stabilize their business performance regardless of the market conditions.

What are the benefits of cost takeout?

Cost takeout can be used to reduce cost for the business as a whole as opposed to disparate projects. It helps businesses improve productivity with what they have. It allows them to assess their processes and streamline them to make them more efficient, as well as less time-consuming or expensive.

Managing costs allows organizations to have better visibility of their present and future finances. It helps them identify the cost drivers in business, monitor them, and adjust the factors to increase cost saving opportunities. This helps them make informed decisions about their spending and avoid a debt scenario. It helps them channelize existing funds to the areas that matter the most, to meet their business goals. Observing the trends in the long term can reveal patterns that provide valuable insight into the dos and don’ts of their cost takeout strategy.

What is Strategic Cost Takeout?

What are some effective approaches to cost takeout?

  • An effective product cost optimization (PCO) strategy allows organizations to examine every aspect of the product development, production, and service life cycle from a cost perspective, to optimize costs and increase savings.
  • Companies must consider vendor consolidation which involves combining vendors and collaborating with vendors who meet their lower cost requirements the best while delivering quality.
  • If their operations have become too expensive to maintain, they can outsource from companies that possess the scale and buying power, and leverage their skill, partnerships, and exclusive hyperscalers with ready-now assets and platforms to win in the marketplace faster and with less costs involved. This helps reduce their software, hardware, and resource spend, apart from operational overheads.
  • Location rationalization helps companies retire offices and centers that are not in use, and consolidate their activities into key locations, cutting business expenses.
  • Training and reskilling are important tools for increasing retention of employees. Retaining talent through reskilling initiatives can help companies reduce the cost related to hiring new talent.
  • Executing ESG effectively helps companies reduce operating and infrastructural costs. ESG provides visibility into the types of expenses and their movement, so they can get rid of costs that are avoidable.
  • To reduce the total cost of IT infrastructure, companies must change to a pay-on-subscription model. Instead of spending on a one-time purchase of a software, cloud service, or infrastructure, they can subscribe to it on a need basis and pay accordingly. This proves less expensive than purchasing it. Companies can reduce legacy cost and resource investment on assets such as mainframe, servers, network devices, and laptops, by subscribing to a managed services model where costs are lower.
  • Investing in revenue growth management capabilities such as predictive analytics helps businesses better understand customers, reduce supply chain costs and losses, and deliver value during inflation particularly. Many organizations use historical data from internal sources, resulting in reactionary cost reduction initiatives with short-term effects. A data-driven system that provides insights into competitor pricing, sales velocity, consumer data, and retailer partner data helps them make pricing and price pack architecture-related decisions with lesser guesswork involved and reduce costs responsibly.
  • License compliance management also helps companies reduce unnecessary costs. When there are gaps in the license due to erroneous usage, it can result in hefty compliance penalties for companies. Keeping an eye on license compliance can help them avoid these costs. Leveraging license compliance management, consolidation, pass-through and use of Open-Source adoption can reduce license cost and increase savings.

What is the role of technology in cost takeout?

Applying technology smartly helps businesses drive cost transformation and profitability even in an unstable economic condition. Technology use reduces costs by streamlining business processes and helping achieve desired outcomes in lesser time.

  • Effective cloud finance management helps businesses monitor how much is being spent on their cloud, plan future budgets, and control their cloud costs. This helps them make changes in their operating model to rationalize costs. Making a shift from legacy applications that are outdated to cloud-based software helps businesses enable their users to work remotely, more quickly, and more securely, while reducing the operating costs associated with legacy applications. Leveraging cloud migration and cloud subscription services further helps with cost takeout.
  • Internet of Things (IoT) helps create a smart space where there is a sync between the various activities taking place and an improved visibility into them. In a factory, it can be used to improve resource usage and save costs by reducing resource wastage. The visibility into the various processes helps streamline them to save time and improve efficiency. It also helps keep an eye on the supply chain footprint and make changes necessary to reduce costs.
  • Using a combination of first-party and third-party data service providers helps organizations get hold of the right kind of data that they need to reduce costs. It can help them understand who their consumers are and where they are so they can invest more against that consumer and the digital channels on which they are most reachable. From marketing strategies to customer service, properly leveraging analytics and swaths of data can help organizations glean better insights to cut down on operational costs and increase revenue. Businesses can also use retail analytics to assess where frauds are happening, and reduce them, subsequently reducing costs. Predictive models help forecast demand and supply, and organize inventory to avoid shortfall or excess, thus reducing unnecessary costs.
  • Artificial intelligence and machine learning-based automation help avoid human error, quicken the pace of work done, save time, and improve cost efficiency.
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