As they assess the impact of the COVID-19 pandemic on their companies, many executives inevitably will put performance improvement higher on their corporate agenda. Bain research shows that even in better times, the best-performing companies are those that lean in with productivity programs. When they succeed, cost productivity efforts not only improve margins, revenues and employee engagement, but also influence shareholder gains. For example, companies with the longest period of sustained productivity during 2012–17 achieved 25% annual growth in total shareholder returns—twice that of the average company (see Figure 1). The link between cost productivity leadership and shareholder returns holds across industries as diverse as aerospace and retail.
Companies with consistent productivity have the highest TSR
However, only the top companies achieve those results. While 90% of executives we surveyed have a cost program in place, 75% report failing to achieve cost productivity targets—with 44% of those companies missing their targets by more than 50%.
If the odds of success are so low, what are cost productivity leaders doing right? For one thing, they excel at setting a clear direction while acknowledging that they need a program to deliver real structural and sustainable change. They also shape their strategy and investment posture in an industry and market context, differentially investing to become “best in cost” for low-value-added capabilities and “best in class” for capabilities that can give them a competitive advantage.
In addition, they take a today-forward/future-back approach, optimizing current operations while also developing future productivity applications. They embed new technologies early and use a zero-based mindset, continually rethinking processes and costs from scratch to generate efficiencies. Finally, they build the organizational capabilities to sustain results—empowering talent, harnessing a productivity-conscious culture and aligning incentives.
This comprehensive approach to cost optimization, so critical in industries that are responding to the biggest turmoil in their history, is embedded in Zero-Based Redesign (ZBR), a practical yet game-changing way for companies to radically reform their cost structures, particularly fixed overhead costs, as they fundamentally redesign how work gets done. ZBR delivers speed to value and creates long-term structural change. Companies use the process to envision and design the ideal state of the functions that will support the strategy (we refer to it as the “what”) as well as the way those activities can be performed in the most effective and efficient way (the “how”).
In our experience, companies quickly cut as much as 25% of spending on overhead and support functions with ZBR, while boosting efficiency and competitiveness. It comes with huge benefits over other programs. ZBR allows companies to fine-tune their efforts to adapt to today’s and tomorrow’s strategy. It gives them the ability to adjust the cost optimization as required, making incremental improvements in some areas, for example, and step-change improvements in others (see Figure 2).
While Zero-Based Redesign is meant to be a journey, value-capture starts on day 1
The process starts by reenvisioning the business and asking what activities and resources are needed to compete under current and future market conditions (for three to five years), as opposed to what needs to be trimmed or removed. ZBR examines every area of spending with a more complete set of tools than with targeted cost-cutting. The approach also analyzes which activities should be performed and at what levels and frequency, as well as how they could be better performed—potentially moved offshore, outsourced, streamlined, standardized or automated with refined organizational structure and responsibilities.
The ZBR approach strengthens capabilities in ways that provide true competitive differentiation, while intentionally downgrading other areas that overdeliver on noncritical functionality. When a company uses ZBR to redesign the pared-down activities, the risk of unintended consequences is lower because the approach is so complete. For example, executives can be confident that they are not cutting costs in one part of an organization only to find that the root cause was somewhere else.
Finally, ZBR is a comprehensive effort that defines a clear future-state point of arrival, rather than successive rounds of targeted cost-cutting that can drain employee morale. There is no doubt that any clean-slate approach can be daunting. However, we have found that companies that transform their cost structure through ZBR generally follow a common set of actions (see Figure 3).
The critical elements of Zero-Based Redesign
1. Align leadership around a bold ambition. A ZBR program is effective only if it is tightly linked to strategy. It starts by understanding the basics. What’s the rationale for the program? A C-suite leadership team clarifies the company’s two- to three-year strategy and aligns high-level ZBR objectives to that strategy. The leadership team also tunes the dials of the program—its objectives and appetite—adapting the level of aggressiveness to suit the company’s ambition and unique culture. For example, when considering the scope of the effort, the company can choose to attack only selected functions and spending areas instead of addressing costs on a companywide basis.
Once such decisions are made, a core team is formed, comprising experienced project leaders from various parts of the organization. That team reports to a corporate steering committee and an executive sponsor. As the program gains momentum, more people take part in initiative teams, with as much as 5% of staff providing input on the work.
2. Identify sources of value and set direction. The new ZBR team begins the process of identifying the sources of value by collecting data to create visibility, benchmark opportunities, understand complexity and assess the company’s digital capability. That effort generates a cost map of the existing state by activity and functions as well as benchmarks, complexity scorecard and digital readiness scorecard.
A big part of this step involves comparing the current state with external best practices, then redefining a function’s mission and orienting the function to up-to-date objectives and current business challenges. For example, a finance function’s mission might shift from “provide world-class financial support to management” to “provide efficient, low-cost transactional support while providing top-quartile decision support services.” Having identified the new mission, the team then sets a direction to support it—the perimeter, investment posture, design principles and cost targets—and mobilizes the organization for the change.
3. Design ideal state that will best support the company’s strategy (the “what”). Having set the bold ambition, the company begins the process of designing for the future. Putting aside the existing state of the company, the team envisions each function in an ideal state with a blank sheet of paper. It is an opportunity to explore which activities are truly required and which can be removed, or which service levels can be reduced to match evolving company needs. This task allows the team to describe the activities that can be eliminated, become more efficient and update the organizational structure to match those changes. This is redefining the work that is essential and truly needs to be done. It’s a focus on the work that customers (internal and external) care about, and on eliminating the unnecessary and non-value-added work that provides limited return on investment.
In traditional cost-cutting exercises, most companies skip this step (and go straight to step 4). They largely just squeeze their existing set of activities into a new budget envelope without challenging the “what.” They go straight to the “how”—trying to make their existing activities more efficient without challenging whether or not they add value by being truly important to customers.
4. Design the future state (the “how”). Once you’ve defined the required activities you want to keep, you then determine how those activities should be performed in the most effective and efficient way. As a next step, companies reimagine the end-to-end processes and run analytical simulations of new processes. This is an opportunity to review the integrated operating model—to define new structures, accountabilities, ways of working and cost envelopes. Company leadership takes all the data and analysis collected by the various teams and designs the organization needed to support the future state. The leadership must ensure that the design is consistent with organizational best practices for spans, layers and effective decision making.
5. Define a holistic blueprint. A blueprint integrates the what and the how and translates that strategy into future state organizational requirements. It provides sufficient detail to guide more distributed design by a broader set of participants and defines the mobilization plan for the next phase.
6. Detail design. With the overall blueprint in hand, the next step is to complete the design and deliver results. Companies launch cross-functional Agile teams to redesign, prototype and test. They reprioritize the initiative backlog based on the impact each initiative will have on overall effectiveness and value.
7. Scale and deploy. At this stage, companies translate changes into units of activity that can be implemented, prioritizing initiatives in the backlog, sequencing deployment waves and training additional teams on Agile methodology. The Results Delivery office trains, deploys and monitors scaling teams. That requires developing a risk mitigation plan, an implementation roadmap and an updated sprint backlog.
8. Manage the change. As a final step, companies need to deploy the Results Delivery office to monitor line implementation teams, communicate achievements, track savings, embed new capabilities and sustain the cultural change.
When companies follow these steps, they gain the full benefits of ZBR in breakthrough changes to what work is done and how it gets done (see Figure 4). Companies eliminate unnecessary or “nice-to-have” services or activities, reducing service levels and the frequency or number of deliverables. They adjust how activities are performed, embedding automation, centralizing and consolidating processes, standardizing activities and rationalizing procurement. They increase spans and reduce layers, clarifying roles and responsibilities in the process.
Figure 4: Bain ZBR encourages breakthrough changes to what work is done and how it gets done
The scale of the effort may sound daunting, but in practice the actions build on one another in a systematic way, resulting in a focus that typically achieves a dramatic transformation for the business.
One manufacturer’s experience with ZBR
To see how it works in action, let’s look at the recent experience of one manufacturer.
The company had been struggling to contain overhead costs and operational complexity that was hampering its ability to respond to customer and stakeholder needs. Nowhere was that more clear than in its IT department. During the boom years, as the size and global reach of the company grew, so had its IT spending. The IT department created a ZBR team to lead the program. In workshops, the team examined the strengths and weaknesses of the current IT department, comparing its efficiency and effectiveness with peers. The company set the ambition of reducing IT costs by 25% after taking into account industry benchmarks, future needs and the revamped strategic agenda. The company dissected its entire IT function, ultimately halting some activities and projects, decreasing service levels on others and redesigning processes that helped it reach maximum efficiency.
Along with a revised mission statement that now highlighted cost advantage and innovative use of technology, the ZBR team identified six areas of focus: IT’s service offerings, capabilities, processes, application and software management, organization and governance. The team analyzed costs of the existing state, created an ideal state and compared them with estimated top-down cost savings for 24 existing activities in application development, maintenance and infrastructure. The team then used these estimates to identify the largest savings opportunities and build future state designs from the bottom up.
Two large opportunities were third-party maintenance contracts and PC support and management. As the team learned, the company was frequently paying for higher service levels than were actually needed. For example, after upgrading its enterprise resource planning software, the company was able to lower the maintenance tier from premium to standard, generating savings of more than 15%. At the same time, many full-time employees had multiple and often redundant computers. Scaling back both of those areas helped IT pare down costs without compromising service and still deliver fast, tangible savings. In two years, the IT department had completed its plan and reduced spending by 25%, freeing up resources and improving effectiveness in critical support areas.
The company also brought its quality function through the ZBR process. The quality function’s costs had grown beyond peer benchmarks. Leadership was ready to scale back but needed to do so without compromising service delivery. They found opportunities to automate customer complaint functions and move some work offshore, as well as quick results gained by streamlining and coordinating audits, meetings and approval processes. In the end, the company realized savings of more than 20%.
Why might your company pursue Zero-Based Redesign?
Companies can ask a number of questions to determine whether ZBR is an appropriate approach:
- Has your company grown through a series of acquisitions, resulting in unnecessary overhead costs?
- Is your company the product of a recent merger?
- Have industry dynamics (such as regulatory reform) caused profit pressure?
- Is your overhead unnecessarily complex? Are your overhead costs significantly greater than benchmarks? Have your function budgets grown without achieving significant economies of scale? Do you need to recession-proof your company against macro growth headwinds?
- Are you struggling with process complexity and slow decision making?
Jason Heinrich and Bradford Martin are partners with Bain & Company’s Performance Improvement practice. They are based in Chicago.