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What are the good and the bad costs in your innovation agenda?

When introducing a cost-cutting strategy in your innovation agenda, you should first have a clear view of your company’s strategy and map out good and bad costs for programme intervention, at macro and micro levels. Both macro- and micro-level-oriented strategies have value and they often make more sense combined.

At a more tactical level, and in line with your strategy, you need to look at your whole organisation and differentiate between the critical ‘good costs’ and the non-essential ‘bad costs’:

  • Bad costs are those not aligned with the overall growth strategy of the company;
  • Good costs support the business capabilities needed to achieve the overall growth goals.

In an online article in Forbes, PWC’s strategist Rodger Howell says that ‘once a company’s costs are classified, strategic cost-cutting and improvement become a process of minimising exposure to bad costs and maximising investment in the best ones’. He adds that this practice helps to ‘create a more resilient growth model’, which is ‘particularly important during times of uncertainty’.

These bad and good costs can happen at both micro and macro level, as the figure below shows. It is key that you keep this matrix is mind when defining your strategic cost-cutting and its goals, and how to address each quadrant.

Strategic cost-cutting matrix

Overall, the bad costs are waste and an outcome of inefficiencies, which can and should be reduced. Do not underestimate them. Even micro-level bad cost-cutting, such as reducing power and resources use, can have tremendous impact on your balance account. Not only are these costs easily identifiable by your employees, but they can also be incorporated into your incremental innovation agenda in ongoing challenges, so that you are always capturing and addressing new and existing inefficiencies.

Measures to cut bad costs at a macro level (such as closing units or laying off people) may, however, have a stronger, higher and more immediate impact on your financial balance. But is it the way for your growth? We are not saying it isn’t part of it, but there are other ways you should always consider as well. These costs are better leveraged by external teams carrying out a strategic analysis to understand which costs are no longer aligned with the organisation’s strategy and can therefore be eliminated without negatively impacting core business.

On the other hand, good costs are those that support business capabilities to achieve growth goals. They may be, in consequence, worthy of more investment, so that in the mid to long term you end up saving more or increasing return.

At a more macro level, they will likely imply some investment and a more disruptive transformation, but can also have a larger financial impact. For instance, if you decide to redesign a profitable business area, you can open doors to new clients and markets and to higher returns.

At a more micro level, for example, by changing a product material or a method of doing things, you can also pave the way for an unexpected internal revolution. Here again your internal workforce can provide useful insights to redefine current products, services and processes. There is always space for improvement, and including this quest in your innovation agenda will help you structure and centralise the process, thus reducing investment in external advisory services and bringing interesting and relevant inputs for your business aligned with your needs.

There is no magic formula and no equation to tell you how and where to cut exactly.

The main message is: remember to look at the bigger picture and understand which methods are more efficient in which situation, so as to develop an effective strategic cost-cutting and improvement strategy.

This process of employee engagement and empowerment will also make your organisation more future-fit and will create a cost-conscious culture, essential to creating a sustainable cost-cutting and improvement strategy.

READ MORE:
For step 2 in cost-cutting within your innovation agenda, you will need this

FROM THE START:
Strategic cost-cutting and improvements in the innovation corporate agenda

Andreia Agostinho Dias, Sales Executive
Diana Neves de Carvalho, Exago’s CEO

How to introduce a cost-cutting strategy in your innovation initiative: Step 1

To introduce a cost-cutting strategy in your innovation management initiative, and ensure that your business remains relevant and able to maximise its potential under less favourable circumstances, you should take five major steps.

Get started with STEP 1: Define your strategic cost-cutting goals, which can be incorporated in your innovation agenda

In other words, you should first have a clear view of your company’s strategy and map out good and bad costs for programme intervention, at macro and micro levels, within your innovation agenda. The starting point for any strategic cost-cutting initiative is therefore a clear understanding of a company’s strategy – of where you want to go to and how you believe you can get there.

You will need to determine priority areas and find the right cost-cutting structure, given the strategy you want to pursue in the near future, but also in the mid to long term. Some cuts are fundamental and highly advantageous but more difficult to make, and imply structural change and preparation for that change physically, technically, and even mentally.

 

From strategy to specific cuts 

Having in mind your company’s vision and strategy, you can then set your programme’s specific goals. The cuts you may want to make and the ideas you may implement to meet those goals should position your organisation for growth, and can be done at both macro and micro level.

The nature of macro- and micro-level cuts

 

Innovation management platforms are particularly useful for companies to identify relevant cost-cutting or cost improvements at micro level. These tools give voice to employees from different departments and across borders. They leverage the cumulative business knowledge and allow voices and ideas to surface and reach management in an effortless and efficient way.

Nevertheless, let’s not oversimplify the subject – that’s exactly what you should avoid. Both macro- and micro-level-oriented strategies have value and they often make more sense combined.

READ MORE:
What are the good and the bad costs in your innovation agenda?

FROM THE START:
Strategic cost-cutting and improvements in the innovation corporate agenda

Andreia Agostinho Dias, Sales Executive
Diana Neves de Carvalho, Exago’s CEO

How to map costs for your innovation path to growth

We’ve seen why leaders with a clear vision connect innovation and strategic cost-cutting. In our economic environment, this becomes relevant for all companies, both incumbent and challengers.

At the top of the CEO’s agenda, we find over-regulation concerns (79%), geopolitical uncertainty (74%) and exchange rate volatility (73%), according to PWC’s 19th Annual Global CEO Survey. CEOs are not putting faith in global growth during these times of uncertainty.

In 2016, only 35% of CEOs believed that their own companies could grow during the year, as the figure below shows.

CEOs’ confidence in global economy and business growth prospects 

This was the lowest percentage since 2010 and, as the political agenda unfolds, optimism has likely fallen again in 2017. Prospects for 2018 are just as cheerful.

 

Blind cost-cutting is never the answer

Political instability, North Korea-US tensions, terrorist acts across continents, the refugee crisis in Europe, the BRIC’s slowing economies, stock market volatility, the Brexit process… Frantic news is putting CEOs on guard.

In such an edgy environment, management is naturally driven to use cost-cutting to align costs with business strategy. Strategic cost-cutting becomes a path companies take to resist hardships, become resilient and prepare for more solid growth opportunities. It focuses efforts on business areas that can be controllable, freeing up resources for transformation and future growth.

All companies have encountered this reality in the last decade. However, blind cost-cutting, not aligned with strategy and sustainability concerns, may be dangerous. An arbitrary, opaque and misunderstood corporate cost-reduction policy will alarm employees and disengage them from business strategy and leadership’s main goals.

Cost-reduction programmes have time and again failed in the past. In its 2012 report, ‘Stop cutting and start optimizing IT spend’, KPMG says these initiatives flop due to unclear cost drivers, overly cautious cost strategies and the fact that cost discipline is not embedded in a company’s culture. Success depends on cost discipline as well as on changing behaviours.

 

So what should you change?

Where exactly should you cut? And how can you do it to make sure you move forward, finding new and better products and services and building a company fit for any future scenario?

To help you establish a strategic cost-cutting strategy within your innovation management initiative, we will share five major steps you can take to ensure that your business remains competitive, relevant and able to maximise its potential in the face of less favourable circumstances.

READ MORE:
How to introduce a cost-cutting strategy in your innovation initiative: step 1

FROM THE START:
Strategic cost-cutting and improvements in the innovation corporate agenda

Andreia Agostinho Dias, Sales Executive
Diana Neves de Carvalho, Exago’s CEO

Ten years building the future together

In 2006, an IT visionary, an innovation hunter and an algorithm doer met for coffee and an idea came up. In November 2007, Exago was born.

Now, on our 10th anniversary, we celebrate the results of our brilliant customers and the over one million users who have taken part in building their organisation’s future.

From the thousands that have come to life, we share 10 simple yet impactful ideas to stir us all.

We challenge you to pick (at least) one!