A volatile macro environment and threats of a recession have prompted many companies to cut costs aggressively. Leadership teams are scrambling to adapt to high inflation, supply chain disruptions, ESG commitments, changing customer needs, and a higher cost of capital. All face uncertain economic growth.

Continual cost and productivity improvements can address those challenges—and they remain fundamental to any firm’s success. A low-cost position wins in nearly every industry, as it allows a company to outearn and out-invest its peers for growth. Bain & Company analysis shows that top performers in total shareholder return focus on productivity, not just revenue growth, in all phases of the economic cycle (see Figure 1).

Figure 1

Yet all too often, urgent cost-cutting programs are too blunt, limiting a company’s chance for recovery and future growth. Clumsy cost reductions treat all functions and activities as equal, even if some activities are more critical to the firm’s strategy. As a result, these programs inadvertently cut organizational muscle, not just fat. Companies that slash customer service, for example, risk increasing customer churn. Leadership teams focused on a cost target can overlook the chance for productivity gains, such as getting more out of existing equipment or processes by clearing bottlenecks.

Companies beginning a transformation, whether prompted by distress or the desire for future growth, need more than a blunt cost program. An accelerated transformation requires careful planning and a cross-functional approach to balance short- and long-term objectives. The benefits are cost and cash savings, topline growth, and sustained value. Above all, top-performing companies make organizational agility a key goal to ensure managers have the skills to adapt to ongoing change long after the transformation ends.

Behave like an owner

Most companies seeking to improve their performance apply more rigor to quantifying efficiency than to increasing effectiveness. Anyone can cut 10% from a department’s budget, but to design intelligent and sustainable cost reduction measures, executives need to understand which activities are critical to the business and which add little or no value. Complicated trade-offs require deeper analysis.

The most successful transformations are those in which leadership teams adopt an owner-activist mindset. They focus on productivity improvement and growth, as well as cost reduction. That means identifying the costs that contribute to the firm’s competitive advantage so those leading the change effort can prune in the right areas and reinvest for revenue growth in others. We are not advocating an investor-activist approach, which tends to exploit volatility for short-term gain. Owner activists usually want to build the best business possible for the short and long term, because they intend to retain ownership. That leads to more reasoned, sustainable decisions on resource allocation.

An owner-activist mindset increases the odds of sustained results. It focuses on quickly lifting the business on all fronts: customer advocacy, core revenue growth, and efficiency. That unifying objective informs every part of the transformation.

Using that strategic lens, owner activists manage operating expenses with the same level of rigor as capital expenditures. They view opex as the funding source to build human capital and analyze the return on these investments. They also see such expenditures as a multiyear investment in an asset that can help a firm execute its strategy better than competitors.

Take the example of a European e-commerce platform that aimed to reduce its packaging costs and improve its environmental performance by shipping goods to customers in a single box instead of one box inside another. Since some customers value the additional box to provide a layer of privacy, the e-retailer invested in the capability to allow customers the option to select additional packaging, satisfying the needs of customers while meeting cost and environmental targets.

Shape the organization from the future back

Basing a transformation on a detailed assessment of the company’s current state is useful, but it’s far from sufficient. Focusing on today’s business tends to promote incremental adjustments, one cautious step at a time, and can overlook bold changes that are more effective.

Successful leadership teams imagine the future state of the market and the company’s desired position in that market, anticipating customer needs and growth three to five years from now. That approach forces management to consider all the activities and conditions that must change for the company to thrive in the future. A future-back view combines external benchmarks with other determinations of cost, notably what activities should cost given their role in the company’s strategy.

Of course, no one can predict what the market will look like in three to five years. The most agile companies focus on the vital few uncertainties that matter, lay out the possible scenarios that could develop, and identify the critical trigger points or signposts that indicate swings in direction. Planning becomes a cycle of “execute, monitor, and adapt” that dynamically redirects the company to the best opportunities over time.

An Australian radiology company used a future-back approach to assess major market forces and trends over the next 10 years. The process helped the leadership team identify new opportunities, test them in future scenarios, and prioritize 20 major initiatives. It also helped the company develop a strategic roadmap for delivering those initiatives.

Redesign how the work gets done

Complexity is at the core of high costs and ineffective decision making. To permanently reduce costs, managers often need to change what and how work gets done (see Figure 2). Leaders look for opportunities to redesign or automate processes using digital or artificial intelligence (AI) tools. This could involve the use of advanced analytics to understand how to serve customers better and more efficiently. Another option is deploying generative AI to improve the frontline customer experience, reduce cost, and increase productivity. 

Figure 2

An Australian airline identified opportunities to improve its ground operation efficiency by automating certain tasks. Its flight dispatchers were reviewing automatically generated calculations and tweaking plans based on factors such as timing, weather, runway, and restricted airspace. The team responsible for creating flight plans configured a new system that could automate flight plan calculations to a greater degree. The change would increase capacity for more than half of the flight desks from 40 to 100 flight plans per day.

Often the greatest opportunities are found in the seams between functions or departments. Why? Business units tend to optimize their own operations without considering the impact on other parts of the organization. One department’s effort to save costs may trigger higher costs in another, undermining efficiency. The most efficient companies find large sources of potential value by scanning the seams for duplicated work or inefficiencies and taking an end-to-end view of a process or product.

At one specialty chemicals company, cross-functional initiatives generated about 30% of the overall value of its transformation program. To sustain the benefits, the company ensured a comprehensive view of operations across functions, including monthly reviews of costs. A transparent view of benefits helped protect the savings of one function from being offset by increase in costs from another (e.g., headcount savings being whittled away by the hiring of contractors).

Move fast even if you lack decimal-point accuracy

Time is a precious currency. Companies that fail to manage transformations well risk spending months identifying and launching the right initiatives, especially those that require changes to IT systems. And competitors are not standing still. Owner activists know the virtues of moving quickly. They’re willing to test promising new ideas and scale them up or kill them quickly depending on the early results.

For example, a global beverage bottling company launched a transformation by piloting process improvement initiatives on a single production line at one plant. When the pilot proved successful, the leadership team scaled it across other facilities. Despite uncertainty in how much value changes would create at scale, the company pushed ahead. One initiative focused on setting standards at the backend of the production line, so it ran with the same specifications. That meant operators could easily audit the line and adjust standards if required. The pilot delivered $1 million in annual EBITDA improvement and generated $8 million at full scale.    

Change the culture to keep costs from creeping back

An accelerated transformation should ultimately build the organizational muscles to manage ongoing change (see Figure 3). A one-time, blank sheet realignment of the operating model and core processes can reduce cost and simplify the organization. But cost leaders change their culture by adopting continuous cost-management improvement. That includes installing repeatable budgeting and performance management processes and instilling a zero-based mindset. Tools and incentives make it easier for employees to consistently do the right thing when weighing cost and value. Top-performing companies provide their people with cost visibility across the whole organization and hold individual owners accountable for results. Training plays an important part too.

Figure 3

Cost leaders make visibility a basic element in how the company does business, as it helps ensure continued change after a transformation program wraps up. At a Japanese automotive parts supplier, a multiyear transformation program recently ended, but the company plans to continue using digital project management tools for target setting and initiative approvals to make progress, approvals, and benefits tracking more transparent.

Change programs with a beginning, middle, and end are poorly suited to an increasingly volatile business environment. Most companies are (or should be) in a state of constant transformation. Successful change efforts today deliver breakthrough improvements in performance while building the capability to remain highly competitive in a turbulent landscape.