Cost Optimization

Coronavirus cost optimization strategies

After leaders have ensured the safety and health of their organization’s employees, partners, and communities, it’s time to turn to looking after the organization itself. The disruption to industries, markets, and businesses from the coronavirus means that yearly revenue is likely to be down—significantly so—in 2020. And, for many organizations, that means that leaders will have to consider various cost optimization strategies, including cost cutting and pay cuts, as a result of the coronavirus.

But this crisis is also different from those we’ve experienced before. The recession in 2008 was a financial crisis, when investment dried up and banks stopped lending. But in 2020, we face a human crisis. Although our way of work has changed, we don’t expect it to last forever: it’s a disruption, not an enduring reduction in economic activity. Eventually, we will find ways to contain the virus and move ahead. Organizations should thus carefully evaluate cost optimization tools and consider strategies, such as coronavirus pay cuts and other cost-cutting measures, that may have an undesirable long-term impact.

COVID-19 cost optimization measures to respond to four potential economic scenarios

The potential impact of the COVID-19 outbreak on businesses depends on two key dynamics:

• The pace and depth of change in demand: How quickly and how much will demand disappear in your industry? Demand is generally weak, but it’s uneven across industries. Some industries, such as airlines and hospitality, have hit bottom, while others have had minimal disruption, and a few have even experienced a boom.
• The time it takes to contain the virus: How will the virus respond to our social distancing and other countermeasures? How long will it take to develop a vaccine? Will the virus resurface and force another round of triage and response?

Looking at the crisis from a high level, these two dynamics will lead to four potential COVID-19 cost optimization scenarios for organizations to consider:

• Ride out the storm (short-term and minimal revenue loss): The leadership team in these organizations has a relatively optimistic view of containment, and they’re going to focus on people and operations and avoid doing too much coronavirus cost cutting. They’ll look at options such as capturing variable cost savings; delaying new hires, new spending, and raises; and canceling events, low-priority meetings, and travel.
• Pare and protect (short-term and greater than 50% revenue loss): The impact on the business is severe enough to warrant furloughs, hour reductions, voluntary leave, and executive pay reduction.
• Get lean (long-term and minimal revenue loss): For these organizations, the impact may not be dramatic, but the longer it goes on, the more it will affect other sectors of the economy, including their own. They’ll need to implement a longer-term coronavirus cost optimization structure if the disaster persists, including near-term efficiency measures, targeted layoffs, and prioritization of strategic initiatives.
• Restructure (long-term and significant revenue loss): This crisis is already having a big impact on the organization, and the pain will continue even after the virus is contained—and may permanently affect demand to the point that drastic measures such as layoffs, divestitures, reorganization, outsourcing, and capital expenditure cuts become necessary.

Leaders will need to decide which of these scenarios are the most likely to occur in their organization and a strategy and a metrics dashboard to address them with the right measures and cost optimization tools.

In all four scenarios, organizations should be wary of COVID-19 cost-cutting strategies that reduce their capacity: there are ways to counter declining revenue other than a matching reduction in headcount. And those that immediately pull the layoff or furlough trigger may find themselves lagging behind when the economy recovers.

Instead, organizations need to approach the COVID-19 pandemic creatively, seeking ways to trim costs and address the impact that coronavirus may have on pay without having lasting effects on capacity. Here are some cost optimization tools and other measures that may help.

The first wave of coronavirus cost-cutting tactics

Organizations may first want to consider these coronavirus cost optimization strategies that are designed to deliver one-time, near-term expense savings.

• Deploy take-out tactics: These are the things are easy for organizations to eliminate from their budgets to maximize short-term savings. They’re low-hanging fruit such as eliminating travel, cancelling an event, and skipping an annual conference or program.
• Delay activities: To soften the earnings impact of COVID-19, organizations can postpone costly activities, such as new hires, product launches, and office openings.
• Capture variable expense savings: As revenues decline, so will variable expenses, such as sales incentives, bonuses, and materials spend. Organizations should consider how much of these savings from coronavirus pay cuts they want to capture to help absorb the short-term shock of this pandemic.

Depending on the severity of the impact on your industry and market, and the length of time it takes to battle the coronavirus, these measures may not be enough to protect your organization, despite the severe impact they may have on pay and employee morale. As leaders evaluate how to balance protecting their capacity with the need to limit costs, they will have to implement additional, more stringent cost optimization tools.

The second wave of coronavirus cost-cutting tactics

During the second and third month of the crisis, we expect that many organizations will begin to deploy additional coronavirus cost optimization measures to increase their efficiency. The cost optimization tools listed below will help organizations deliver the same level of output at a lower cost and allow them to save money in this calendar year.

• Optimize rewards spend: Most organizations don’t understand the value they’ve created in their investments in employee pay and benefits. Now is a good time to review your investments to determine whether they’re optimized for your workforce. Most organizations that run this exercise save at least 5% in compensation spend and increase the value they deliver to employees, reducing the coronavirus pay impact.
• Stop grade and title inflation: Few organizations have a clear job taxonomy or career framework. As result, organizations often promote high-performing employees into more challenging roles where their pay or title far exceeds their level of accountability. Establishing a formal framework can ensure proper employee growth and oversight and yield marked savings in employee compensation.
• Adjust management spans: Many organizations have underused management capacity: managers often aren’t responsible for an adequate number of direct reports. Organizations can consolidate manager roles to take advantage of a quick source of lasting savings.
• Audit your organization’s operating model for redundancy: Over the last five years, the volume of mergers and acquisitions has skyrocketed. But these transactions haven’t been accompanied by a corresponding volume of integration work. Organizations are likely to see opportunities to consolidate leftover redundancies from acquisitions into shared service centers or centers of excellence, which can be a highly effective coronavirus cost optimization tactic.
• Optimize processes: In many organizations, costly and complex processes are often overlooked simply because it’s easy to keep doing things the same way. Now is a good time to give these processes a fresh look, determining whether it’s possible to either deploy new technologies or restructure and redeploy the roles involved in these processes.
• Conduct a targeted headcount reduction: Second wave tactics may reveal an opportunity to reduce the number of employees at the organization, which can lead to significant savings: most large organizations spend 60% of their expenses on labor. These reductions in force will likely be smaller than if the crisis continues to deepen.
• Request supplier concessions: Organizations can seize the coronavirus as an opportunity to trigger clauses in their contracts that allow them to renegotiate supplier agreements and obtain more favorable terms.
• Engage in targeted facility closures: If a company has an operation or plant that is underperforming, now is a good time to consider whether to shut it down.

The third wave of coronavirus cost-cutting tactics

Some organizations will find that the first two sets of tools are not enough to allow them to survive the coronavirus crisis. For these organizations, it may be prudent to consider a more foundational restructuring. Organizations should carefully weigh these coronavirus cost optimization tools, as they may result in near-term cash flow declines because they are costly to implement.

• Rightsize layoffs: Companies will implement coronavirus cost-cutting measures out of line functions (such as sales, manufacturing, or service) across the board at a level based on their expected revenue.
• Cut capital expenditures: Organizations in hard-hit industries will need to protect their cash flows and start cutting their investments in capital projects.
• Divest underperforming entities: Organizations may look to spin off divisions and subsidiaries that are draining their cash flows. We anticipate a significant flurry of merger and acquisition activity that will reduce capacities in significantly affected industries.
• Outsource work: To cut ongoing operating expenses, many companies may outsource existing functions that don’t differentiate the company’s offerings in the eyes of customers.

What your organization can do now to minimize COVID-19’s impact

Your organization’s success depends on how well it maintains its cash reserves and preserves its capacity, so it can hit the ground running once the coronavirus threat passes. Now is the time to take four critical actions as you consider your coronavirus cost optimization strategy:

1. Monitor leading indicators: Make sure you have a dashboard that measures the right metrics—not just supply and demand. Study real-time economics and health data and consider the nuances of how your local government and communities are responding to the crisis.
2. Create an action plan around different scenarios: Identify two or three likely scenarios of those listed above (ride out the storm, pare and protect, get lean, and restructure) and choose the coronavirus cost-cutting measures most likely to lead to your organization’s survival and, ultimately, success.
3. Engage a diverse group of stakeholders: When considering which coronavirus cost optimization tools to employ, make sure you have a diverse group of people from across the organization and from different levels sitting at the table.
4. Communicate: Coronavirus cost-cutting measures are going to be hard on your employees, who will be worried about coronavirus pay impact and job security, on top of their anxiety about their health. Help your workforce by communicating about the context for any coronavirus cost optimization measures that you undertake, so they understand the reasoning for and effects of coronavirus cost-cutting measures, including employee displacement and coronavirus pay cuts.

For more tips, strategies, and cost optimization tools that will help your organization weather the coronavirus crisis, contact us.