Video
In challenging times, many executives look for dramatic cost transformations. Yet most cost-cutting programs rely on a blunt approach that can limit chances of recovery and growth. Lodewijk de Graauw, a partner with Bain's Transformation practice, discusses how companies can take several steps to mitigate risk and achieve a sustained cost transformation.
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Read the transcript below.
LODEWIJK DE GRAAUW: We've come upon challenging times in a number of industries, whether it's the price collapse in natural resources, technological disruption in financial services, or simply intense competition in consumer products. We increasingly see companies needing to make dramatic cost reductions, and by dramatic, I mean anything between 20% and 50%.
And these kinds of efforts are exceedingly hard for two reasons. First, obviously, there's the challenge of getting to these large percentages. But then secondly, there's also the risk of destroying the company in the process.
So on that first one—the challenge of getting to full potential—a key design principle is that the 80/20 rule here doesn't actually apply. Of course, we do typically see three-to-five major cross-company initiatives that deliver a large share of the value, but that only gets you probably half way. Which could be sufficient for less-ambitious programs, but in these situations we also need to deliver the long tail of much smaller initiatives that happen at a grassroots level in the company. And that requires an entirely different approach.
So rather than having cross-functional, centralized teams delivering detailed plans over a long period of time, in these cases, what needs to happen is individual initiative owners all throughout the company need to be supported and empowered in their efforts. And a process needs to be put in place that allows them to escalate any roadblocks that come up and resolve them as they do.
The second challenge around protecting the long-term viability of the company is not always fully appreciated. In these kind of situations, and with cost-reductions of this scale, there is always a real risk of sending a company into a death-spiral. What tends to happen is that the best people leave, the remaining staff becomes demoralized, revenue starts dropping, triggering the need for more cost reduction, etc., etc.
So to prevent this from happening, a couple of things are essential. First, identify the key talent in the company from the outset and make it clear to them that there is a place for them at the end of this. Second, cut hard, cut deep, but do it quickly and do it once. Invariably, we see half-baked efforts that don't go far enough in the first instance, resulting in second and third waves of cuts, which can paralyze a company over time. And then finally, perhaps most importantly, make sure that 90% of staff stay focused on their day jobs and keep looking outwards, especially activities that generate new business for the company and need to be protected.
And so for example, blindly cutting travel costs, if that prevents sales agents from seeing their clients, just doesn't make sense. So in these kinds of situations more than any other, I would say, it is essential that executives keep a cool head and stay focused on what's driving revenue as they address the cost.
Read the Bain Brief: With High Stakes, Accelerate the Transformation