Host:
Welcome to Insight Exchange, presented by L.E.K. Consulting, a global strategy consultancy that helps business leaders seize competitive advantage and amplify growth. Insight Exchange is our forum dedicated to the free, open, and unbiased exchange of the insights and ideas that are driving business into the future. We exchange insights with the brightest minds of the day, the most daring innovators, and the doers who are right now rebuilding the world around us.
Katya Zubareva:
Hello, everyone. Thanks for joining us today. I am Katya Zubreva, a partner in L.E.K.'s Healthcare Services practice, and I am delighted to be moderating this podcast today on this very relevant topic. I hope you enjoy it and find it useful. Before we get started, let's get some quick introductions from our guests today.
Jean-Philippe Grosmaitre:
Hi all. I'm Jean-Phillippe Grosmaitre, and I lead L.E.K. Consulting's Organisation and Performance practice in Europe.
Phil Roux:
Hi everyone, happy to be here. My name is Philip Roux. I'm a partner in L.E.K.'s Global Organisation [inaudible 00:01:12] practice with close to 20 years consulting experience. I have a big passion for organisational excellence and high performance team, and I'm excited to discuss today's topic.
Tom Marshall:
Hi all. My name is Tom Marshall. I'm a principal in the O&P team working alongside JP and Phil. I'm based in London, but support clients across Europe and globally with a focus on organisational strategy and strategies for performance improvement. It's a real pleasure for us to be here with you today, Katya, to discuss this important topic.
Katya Zubareva:
Likewise, very happy to have you here. To set the scene, first of all, it is now well-known that across the industries rising inflation is hitting the bottom line hard, and you would think that these costs could easily be passed on in price increases to the consumers, but that's not always possible. Even parking to the side, the really hard situation of operating in an environment where prices are regulated. During this podcast, we will be talking about the success factors to consider when reducing indirect costs. We'll also highlight some trade-offs between immediate savings and longer term transformational approaches.
So Jean Philippe, can I throw this to you first? You ran a recent inflation study. Could you share with us and our audience some of the insights you uncovered, please?
Jean-Philippe Grosmaitre:
Yes. Last year we conducted a study on inflation that showed that 20% of companies expect to see their EBDA shrink by more than 10 percentage points of sales, which is huge. And the rising cost of debt is putting cashflow under further pressure. As you mentioned, Katya, increasing prices and reducing direct costs will not be sufficient for many companies, and the difficulty with indirect costs is that they are very dispersed and intertwined with organisational complexity, not just tied to conception levels. Nonetheless, there are strategies companies can adopt to mitigate the effects of inflation on indirect costs.
Katya Zubareva:
All right, maybe Tom next. How would you suggest this kind of work be performed, Tom?
Tom Marshall:
You have two main approaches that should be combined. First, while investing time in constructing a cost baseline, you should look for immediate cost-cutting initiatives across all areas of expenditure. This is a great way to focus teams on the cost saving objective and help them identify opportunities by rethinking how each function supports the business. Companies need to be willing to examine every line item of current spend and really question whether this is a cost that is required to support the business, and if so, can the current level of expenditure really be justified?
Second, you apply what we call a zero based approach in which rather than starting from where you are today, you start from a blank sheet of paper and redefine the key processes that are required to support the business. This exercises three main goals aimed at reducing costs and driving efficiency gains, to stop doing unnecessary tasks or processes, to make productivity gains for those tasks that you do continue with, and to rethink the way you resource those tasks in terms of resource levels and capabilities.
Katya Zubareva:
Very interesting, but Phil maybe you next. What are the key success factors for these strategies to work?
Phil Roux:
In our experience, there are a handful of key success factors for a sustainable indirect cost reduction program. Firstly, executive leadership sponsorship. Commitment must be demonstrated at the top. You have to get leadership really to lead by example in reducing costs in their own area, not just by pushing for costs elsewhere. One of the ways we try to do this is to pair executive owners with a critical friend to ensure an objective assessment of every area of cost. Additionally, you could consider also tying incentives to delivering and sustaining that cost reduction. That usually works quite well.
The second is true cost transparency. You need to build a detailed picture of cost and try to understand the real systemic cost for each function or activity and core process. This will typically be very illuminating in terms of hidden duplication and inefficiencies.
Katya Zubareva:
Sorry, Phil, let me ask you a follow-up here. What do you mean by systemic in this instance? Can you give us some examples to bring it to life maybe a little bit?
Phil Roux:
Of course. So a good example is taking some of the key functional cost areas that touch on headquarters or central functions, but don't sit just there in isolation. A great example of this is transactional finance or transactional HR. These typically will sit both centrally and then have activity and cost sitting in divisions or business units, regional operations or however a business is structured. When you look at that in a holistic, you should see opportunities for greater corporation, collaboration, or sharing of capability, which will identify savings that you can make. Deciding where you take those savings, whether that's central, local, then becomes a debate rather than whether there's an opportunity. And then that will link back to your broader strategic objectives, growth, ambitions, or what you're trying to achieve and why you started this program in the first place. And making that connection also reinforces that impetus for driving the change.
Katya Zubareva:
Okay, thanks. I get that now. That's very helpful. And what are the other two factors you mentioned to help reduce indirect costs?
Phil Roux:
Yeah, so the other two that I'd probably highlight are, wherever possible, co-creation with a broad functional team of SMEs, subject matter experts, the people that are really deeper in the business, at the coalface, undertaking these activities on a day-to-day basis. If you want to build practical solutions, they need to be involved. And as mentioned earlier by Tom, I think it's finding that right balance of short-term cost-cutting with those longer term solutions that create scalability of your cost. So thinking through bigger structural operating model changes, shared services, process optimisation, process automation; those are critical to sustainability and the ability to absorb the growth that ultimately you will enjoy in the future that you will struggle to deal with if you purely just take costs out of the business.
Katya Zubareva:
Some of my clients have raised concerns that as far as cost reduction projects go, they tend to be very generic and not adapted to business specifics. So, "But my business is always different from any other business of course, and I would like this to be very tailored." One of you maybe elaborate on that? How specific is it or how specific does it need to be?
Jean-Philippe Grosmaitre:
I'll take that Katya, and this is a fair concern. And it is key to note that there is no one size fits all approach. While methodology can remain the same, it really needs to be adapted to suit the unique needs of the organisation and the work streams should be tailored to key steps of the value chain.
Katya Zubareva:
And JP, we've actually done a project together recently that could illustrate this approach quite nicely in Healthcare Services in particular, which is of course very close to my heart. Could you maybe share some insights on the approach we took there?
Jean-Philippe Grosmaitre:
Yes. To really address all indirect costs, we concentrated on the care delivery process for hospital group, detailing it with work streams such as attracting patients, outpatient or inpatient booking, lab testing, patient pathway, billing, et cetera. And in addition, we also cover the usual support functions such as IT, HR, but we also covered both specific functions such as regulatory or practitioner relations. Tom, we did this project together. What are your insights?
Tom Marshall:
By helping the client think through costs spent across the various parts of the value chain, that allowed them to really consider whether they were spending money in the right areas. I.E, were they spending money in those areas that really helped to drive value? This exercise was also helpful as it allowed them to think about the business by a critical set of activities rather than that traditional functional view of the world. It helped to highlight those areas that involved multiple functions of the business such as marketing, finance, and operation, and highlighted where there might be inefficiencies or duplicated efforts where they're working together.
Katya Zubareva:
And that's really helpful. I can imagine how you've mapped out all the particular work streams or initiatives or activities, but I guess the next big question would be, how do we know what good really looks like for any individual one of those? Especially considering that cost-cutting benchmark databases are very hard to combine, very quickly find their limits.
Phil Roux:
That's fair, Katya. I think benchmarks are useful, but you have to treat them very carefully. First of all, I'd say a benchmark gives you a sense of the opportunity, but they're never going to be perfect and you need to augment that insights to really give you a sense of “how do you get there?”. So typically when we do these kinds of projects, first of all, the off-the-shelf benchmarks give you a good stepping stone, but we always will try to create a bespoke set of benchmarks. So really developing a set of more insightful metrics from competitors, other relevant analogs within the industry, with outside the industry, to give a really comparable set of markers of how well they're doing. But then pairing that with, how do other companies do it; do it differently, do it the same? That gives inspiration to the solution development that you have to go through to give people a sense of both achievability, but also what the plan will be to then deliver that cost.
Katya Zubareva:
That makes a lot of sense. Just coming to the question of governance, how do you best ensure the project is successful in terms of the impact it has on the organisation?
Phil Roux:
That's another interesting topic. For me, governance can easily be fixated on who should be in the steer cone. A lot of times we find leaders wanting to be the teacher marking the homework, but not wanting to be the student doing the homework. I think for a program to be really successful, the leaders have to take true accountability for the cost, and that means doing some of the homework themselves.
Now, that doesn't mean doing it by themselves. The way you construct the program gives them the support from other people in the business, from advisors such as ourselves to build that fact base that helps them make those decisions. But they have to really understand the cost base to another level of detail. That's why we mentioned earlier, co-creating with the SMEs and people lower down in the business is a critical step to getting that robust plan that you can then execute on. The other practical aspects of governance are: focus more on defining the roles and the responsibilities, particularly for leadership, but also other critical roles, stage agents within the business, and think about how you use governance process and structure to drive transparency and accountability, but also agility. So don't make it too cumbersome. Make sure where you have meetings that they're adding value, not just focused on process.
Tom Marshall:
And it's worth highlighting the importance of creating the right governance to ensure implementation. Many cost reduction leavers can quickly be implemented as they don't require CapEx, but just a decision and some monitoring. In which case, businesses need to be prepared to move rapidly with these decisions, but progress must be carefully tracked and reported to ensure everyone is being held to account. Additionally, Exco members who signed off on their savings goals must integrate the execution roadmap into their day-to-day management. These cost saving programs need to become part of business as usual, as quickly as possible.
Katya Zubareva:
And with that in mind, would it be fair to say that our work shows that clear strategy and careful implementation can make a big difference to companies under pressure from inflation, but almost beyond just recovering the inflation?
Tom Marshall:
In the end, if we address key concerns, companies can really achieve additional benefits beyond pure cost reduction. Consider, for example, how these projects actively promote visible change within the organisation, particularly in areas that are often overlooked in comparison to direct costs.
Jean-Philippe Grosmaitre:
Yes, that's true, Tom. For example, some of our clients have reinvested some of the savings to fund automation projects, bringing up additional resources to focus on more value-adding work. So if done correctly, this sort of programs more than pay for themselves within 12 to 18 months. And a more substantial projects with larger CapEx, for example, may take longer, but it'll still have significant return on investment.
Katya Zubareva:
Brilliant. Okay, so overall, we can say that the present context provides a great opportunity to undertake projects of this nature, particularly since they serve as a powerful means to demonstrate the ability of a company to achieve cost competitiveness without impacting business essentials.
Thank you to the three of you for this very insightful conversation, and thank you to all of those listening. If any of you would like to discuss the issues and insights in this podcast in more detail or tell us about your challenges or learn how L.E.K. consulting can work with you as your strategic partner in achieving cost competitiveness, please do get in touch. Many thanks for listening.
Host:
Thank you, our listeners, for joining us today at the Insight Exchange presented by L.E.K. Consulting. Links to resources mentioned in this podcast can be found in the show notes. Please subscribe or follow for future episodes wherever you listen to your podcasts. Also, we encourage you to submit your suggestions for future insights online at lek.com.
