Everyone knows the magic formula to running a successful business: Increase profit by growing revenue and managing costs. Easy, right? While this may be the case for a lucky few, this notion serves as a fundamental challenge for most companies as complexities evolve alongside their core business.
Activities such as market expansion, new revenue streams, mergers and acquisitions, responses to changes in supply and demand, talent management, regulatory changes, and environmental impacts all increase this challenge.
Whether emerging from an economic downturn, maintaining stability, or scaling the business, establishing a plan to balance cost against strategic investment during a transformation of the back office will lead to improvements in both efficiency and effectiveness, and help prepare companies to rapidly adapt to environmental changes. To establish this balance, leaders must examine several types of benefits that would contribute to ROI and ultimately serve as the impetus for embarking on a transformation journey.
How should companies evaluate the benefits of their transformation?
Upon identifying non-value add spend, one of the easiest benefits to measure is through direct cost elimination. Managing to do the same or more without additional or even lower cost is perhaps the most straightforward measurable form of return. To identify these opportunities, companies can assess areas such as third-party spend, labor, overhead, and real estate.
- Third-Party Spend: Reviewing third-party spend to identify vendors or categories with savings opportunities is one of the most effective ways to find cost reduction opportunities. Consolidating vendors and using preferred pricing, eliminating unapproved spend, and conducting sourcing events for significant contracts are just a few of the ways to reduce these expenditures. For example, a medical device company with plants around the country has hundreds of employees that regularly travel, but without negotiated partner rates or firm travel policies in place. Negotiating preferred pricing and establishing and enforcing a travel policy (including the use of a corporate card) could yield a direct cost savings through both spend reduction and rebates.
- Labor Arbitrage and Overhead: Companies who transform through upfront investments such as automating manual activities, eliminating time spent on non-value-added processes, and migrating required processes to locations with lower labor costs, can realize long-term and hard-dollar savings.
- Real Estate: Recently, many companies have re-evaluated their office space needs and ancillary in-office services amidst the COVID-19 and digital work era. Companies such as Facebook and Twitter have realized their workforce can remain productive in a remote environment and publicly announced policies allowing for permanent work-from-home options. While lease and real estate assessment strategies are typically seen as more of a long-term opportunity, those companies exploring alternate working arrangements and being more open to a remote workforce are likely to see significant reductions in their spend, including property maintenance and other facilities overhead.
Opportunities to eliminate specific costs have a direct impact on the bottom line. It is important to consider contractual obligations, operational risks, potential restructuring charges, process redesign efforts, and change management needs as these additional costs and impacts can overshadow the savings.
Avoid Additional Future Cost
There may be times, especially in a lean organization, where the benefit does not correlate to an immediate savings, but enables a company to avoid costs in the future. Companies should carefully evaluate the technology landscape to select the right system architecture to meet business needs. This will allow companies to avoid unnecessary technology spend on customized infrastructure and applications when out-of-the box solutions would serve short- and long-term needs.
Designing an operating model and processes that are forward thinking is another way a company can consider cost avoidance. For example, a mom-and-pop hotel group with three locations employs a finance team at each property. Centralization of this team today would only provide minimal value and savings. However, if this same hotel group is seeking to expand to 20 properties, having the ability to avoid hiring an additional two staff members per property would have a significant cost avoidance benefit.
Recognizing benefits related to cost avoidance requires companies to have foresight into where they believe their business is heading. The cost impact will be different for every situation, but the better a company plans for scenarios around their medium- and long-term strategy, the more successful they can be in creating a scalable cost structure to support growth.
Improve Quality and Reduce Risk
Another method for evaluating the benefit of a transformation is to consider how well it will lead to a reduction of errors, rework, risk, and overall quality issues. Benefits associated with reducing costs will only take companies so far. When they do not make the right level of investment (under staffed, underutilizing technology solutions like robotics process automation [RPA], and cutting corners) process effectiveness can be sacrificed and can lead to errors, rework, and financial risk for the company. For accounting and risk compliance, errors can also lead to higher audit fees and control deficiencies.
For example, a major entertainment company doubled its customer base following a merger, but made the decision to forgo the investment of resizing the billing department and only made minor changes to the process that still required manual support from the team. After a short time, new customer setup process implementation was delayed, invoices were issued late and with frequent errors, status inquiries and requests for correction began piling up. Ultimately, customers began turning to competitors. Here, an investment in determining the right staffing level and supporting technology could have helped to prevent lost business.
Establish Flexibility and Adaptability While Planning for the Future
In an ever-evolving world, most businesses would like to position themselves to be able to adapt. For example, when establishing a Shared Services Center, companies evaluate locations according to immediate resource availability and skillsets. However, best practice looks beyond immediate needs and considers that its scope may evolve over time. Finding an office in a location that has an ample and well-educated workforce allows for adding additional resources if needed and ensures that the Shared Services Center can scale to respond to business changes.
Establish the Foundation that Enables Transformation
The final and perhaps most critical consideration for a transformation effort is to ensure that it has a strong and well-supported foundation. Investments in fundamental pillars such as governance, interaction models, frameworks, training, process documentation, change management, data management, and reporting are components of many transformations that do not yield direct cost reduction, but are foundational to their success. For example, while data and analytics tools may not provide direct cost reduction, using clean data to develop accurate reports and dashboards enables leaders to make sound and timely strategic decisions. In most cases, these decisions pertain to both revenue and cost and often require real-time views of activity.
Companies who do not establish a foundation for their transformation run the risk of having adoption issues, increasing manual efforts to answer key questions, and negatively impacting the transformation.
When evaluating a transformation opportunity, companies should evaluate not only what is important today but also where the business is heading to determine the expected benefits of the investment. At first glance, the paradox of spending money to reduce costs may be a hurdle for many to overcome. However, holistically demonstrating a balanced ROI related to management efficiency and operating effectiveness will help leaders make more informed budgetary and funding decisions. Those companies that are most successful identify those benefits up front and continuously measure and evaluate throughout their transformations. This way, companies position themselves to continuously improve and achieve the return on their transformation investments.