Cash flow management and rapid cost reduction

Rowena Morris (RM): Welcome to the latest episode in COVID-19 Business in Focus, where we explore the business impacts of coronavirus. I’m Rowena Morris, a director at PwC, and I help clients prepare and respond to crisis situations, and I’m your host for this series.

Many businesses are experiencing cashflow difficulties as a result of coronavirus. In recent weeks, the government has announced generous support packages to help businesses address these challenges. But even with this support, many businesses could soon be forced to make some very difficult decisions.

In this episode, we’re going to be discussing the steps businesses can take to manage their cashflow and reduce costs in a fast and sustainable way. Today I’m pleased to be joined in our virtual studio with Tim Allen and Zubin Randeria. Tim leads PwC’s operational restructuring team, and Zubin leads our cost-based transformation team.

Zubin Randeria (ZR): Hi Rowena.

Tim Allen (TA): Hi, thanks for inviting us today.

RM: No problem, thanks for joining us both. So Tim, to kick things off, can you give us some examples of how coronavirus is impacting organisations?

TA: Yeah, sure. So, COVID-19 has impacted sectors and businesses in very different ways. We’ve seen companies seeing extraordinary falls in volumes – if you look at the airline sector, casual dining, the fashion retailers, oil sectors where prices turned negative in April, whereas others have seen equally dramatic increases in volumes: online entertainment companies – look at Netflix: their share price has surged this year to the point that it’s now greater than ExxonMobil. Food retailers, parcel delivery companies, and what people are describing as other stay at home stocks, are doing very well.

RM: And there are a number of levers that organisations can pull to boost both cash and reduce cost quickly.

TA: Yeah, that’s right, and frankly many are pulling ever lever they possibly can. But again, it depends on the impact and the severity of the impact. And as we hopefully come out of lockdown and in certain countries – China, they’re coming out of lockdown, parts of Europe are now turning their attention to that – businesses are looking at how their cost bases will evolve to what some describe as the ‘new normal’ post lockdown.

In the short term, as I said earlier, everyone’s looking at all levers that, particularly a zero-based budgeting approach, removing any non-essential supplier spend, typically achieved by just cutting budgets and removing delegated spend authorities, effectively putting the chequebook in the drawer, and where necessary though, for example in the retail fashion sector, we’ve seen in early April some retailers are even saying committed orders, we’re going to have to retract on those, and increasing use of force majeure clauses.

In terms of people costs, clearly the action taken by most governments has provided some much-needed breathing space. Recognising there is a consequence of taking this funding, which businesses are actively evaluating. But we’ve also seen a lot of businesses realising perhaps what was once previously considered essential activity isn’t so essential, or a good-enough service can be delivered in a cheaper way, remotely or using technology to reduce the cost.

Finally, just quickly on cash and working capital, clearly a lot of focus there, trade debtors and trade creditors, debt arrears are already growing, and I’ve seen examples of that, in the personal debt side of the utilities sector. Trade creditors, again, it’s back to that it depends on the impact on the sector. We’ve seen Unilever and other consumer packaged goods business supporting and, in a way, effectively financing some of their key suppliers. At the other end of the spectrum we see businesses prioritising payments based on the criticality of the supplier, where they have to, and agreeing to payment deferral plans, particularly in relation to property costs and with the landlords bearing the pain of that.

RM: So lots and lots of different things to think about. So if you’re trying to take out costs quickly, what are the key things to think about?

TA: Yeah so look, for many things, leadership is critical. A line on the savings targets, and the difficult choices to be made at the exec and top of the house, up front and clear communication of this to your employees and also the broader PR, that needs very careful management. And then empowering someone to really hold the business to account to deliver these savings, clearly targeting costs which are discretionary or variable as much as possible, you don’t want to weaken your core customer proposition or your capabilities, and equally as quickly as we’ve got into this, in some territories, they will come out of this pretty quickly as well, and no one knows whether it will be a V-shaped recovery, or, I heard someone describe it, as a bathtub recovery the other day. But the key thing is to retain as much flexibility as possible to allow for rapid changes in demand going forward. And also, it’s an opportunity to address some sacred cows as well, and other politically protected spend areas if you will, which perhaps previous excuses for are no longer valid.

ZR: From my perspective, often when people are thinking about taking cost out, they look to make efficiencies, for example, you might look at tightening supplier pricing or cutting deals with your landlord, or cutting your headcounts so fewer people have to do more, and certainly these are areas that you need to focus on, but in my experience, the biggest impact one can have on cost base is going to the demand for those costs, and cutting that demand, rather than making your costs more efficient.

So for example, by stopping doing things, you then open up the possibility of cutting 100 percent of a cost, whereas if you try and get some efficiencies out of something, you might be able to get five, 10, 15 percent. So a practical example of this recently is that we are working with a client who had a function in their organisation producing analytics and reporting for the rest of the organisation. And we went back to who in the organisation was asking for the reporting, and what do they do with it, and we quickly were able to eliminate over half of the activity which was not being used. And we would have never been able to get that type of savings if we had looked at the efficiency of the reporting process in isolation. So this lens can also be used to ask which customers or markets do we want to serve, and which do we not want to serve, or which products do we want to produce, and which products do we not want to produce, and this lens of looking at what you don’t do – and in my mind strategy is as much about what you don’t do as what you do do – then looking at what you don’t want to do going forward and demand cutting in your organisation, then you can cut out 100 percent of what you don’t want to do. And from my experience, looking through that demand lens can be incredibly helpful.

RM: that’s really useful, thanks Zubin. I think it would be helpful to expand a little bit more in, if you’ve got any other examples of where this has been done really effectively.

ZR: Yes. When it comes to implementation, we often see businesses run a cost programme by appointing someone internally, a cost czar, who is a programme manager, who then goes to the functions: finance, HR, for example, manufacturing, and asks for a costs-out target, and then the functions come back and the costs czar challenges them. But most effective cost programmes actually span functions. To bring this to life, for example procurement may sit in the finance function, but if one asks the finance function for savings then you may get a better deal out of your existing suppliers, but it won’t, for example, consider whether you should even be in that market that requires that product that is manufactured from product that is produced by those suppliers. So looking at the organisation much more holistically allows you to capture bigger savings. We worked with a travel company which had started down the functional cost saving route, with a cost czar, and we helped them look at cost horizontally across the organisation, and that took out much more significant cost than they could have otherwise done.

TA: Yeah, and you know, if I may, just picking up similar vein from Zubin there, I was working with an automotive supplier earlier this year, who effectively was implementing an overheads cost reduction programme, and beyond zero based budgeting, a key driver for them in delivering the savings were, in most simple terms, was making sure they’re doing the right activity in the right place. And so what that meant for them, they had a customer support shared service centre in Poland, they had a product design centre of excellence in India, and they took a real zero-tolerance approach to any deviation from this, and making sure any activity which wasn’t in those centres was removed, and the activity then re-engineered into those, and that drove out significant savings.

With another client, what was very powerful for them was the way they talked about corporate myths and how they could debunk corporate myths, and it goes to the point I made about sacred cows and political protected spend earlier. And for them, it was ranging from exec decisions about some of their expensive London property footprint, and making sure the exec really understood the costs of that properties, and whether they were really justifiable for a business of its nature, right down at a very operational level. One example is with uniforms, and a particular myth again there was that more expensive safety boots would reduce accidents and the cost of these accidents in terms of compensation payouts to the business. On one level you think, OK, that’s smart thinking about the total cost, but actually, when you looked at the data, what it showed was yeah, the first 10 percent of safety boots issued did reduce accidents, but after that, and obviously compensation claims related to them, but after this, the other 90 percent of safety boots were going to people who were not performing high-risk duties which were likely to result in accidents and essentially was wasted cost.

RM: Really interesting, and really good to hear some of those practical examples. So with some companies reducing their costs recently by for example moving to virtual working, Tim, how do you see organisations managing their cost base as they start to emerge from lockdown?

TA: Yeah, so I think it’s the Churchill quote isn’t it, ‘don’t waste a good crisis’. It’s a cliché, or it’s become a bit of a cliché, but it’s true. I mentioned earlier the zero-based budgeting approach businesses are effectively being forced to take, and the sacred cows being attacked, if you will. But businesses ahead of the game are already ensuring that they make the informed choices about what costs come back: setting up additional governance and control to review the value of spend and thinking about a better way to delivering that service for less. It could entail more remote working, it almost will entail using technology much much more.

VR: So certainly I can bring it to life with a number of clients that we’re working with. We’re working with a financial services client at the moment, which is clearly had to shut its retail footprint because of the COVID crisis, and its customers forced by necessity to move to its digital-only channel, to move online. So we’re helping them rethink now their transformation journey. Originally this was going to take over three years, and using this current COVID crisis as a way of accelerating their transformation from over three years to just one year. How are we going to do this? For example by not necessarily going back to the retail footprint that they had before, and more heavily investing in those digital channels which are allowing them to serve their customers better and more effectively and cheaper.

Another example at the other end of the spectrum is a utilities client we’re speaking to which had very few of its staff being able to work in its contact centres because of the crisis. And again, necessity has forced it to direct its customers online and the website is their primary route of engaging with customers now rather than the contact centre which was their primary way of engaging with their customers. So the conversation we’re having is about how it can keep its customers online and not revert back to the same level of activity in the contact centres as existed pre-COVID. In circumstances like this we are certainly seeing examples of necessity being the mother of invention.

RM: Thanks Zubin. You touched on earlier a little bit around the government funding scheme playing a part in helping organisations manage their costs and liquidity. Can you expand on that a little bit more just before we move on to some practical top tips for people to take away?

ZR: Sure. The scheme has certainly taken a bit of time to bite and actually get cash in the hands of those businesses that need it. But the scheme will certainly help handle liquidity in the short term, particularly for example the furloughing scheme that can help reduce staff costs, and that is a good thing. But let’s be clear that the government scheme by and large is a loan, not a gift, and therefore companies need to think about how they’re going to pay it back.

So businesses need to ensure that their cost base is appropriate for their revenue going forward, and which in many industries, that is likely to be a lower level of revenue tomorrow than it was before this COVID crisis broke, and therefore resizing and reshaping your cost base so you are competitive and generate an acceptable level of return in this new normal, to be able to be competitive, trade and win in the marketplace, and also repay the loan that you’ve taken from the government.

RM: OK, that makes sense. So say someone listening to this is thinking of beginning their rapid cost out programme, Zubin, what would be your key pieces of advice for them?

ZR: Well Tim touched upon this near the beginning – I’d say getting commitment at the top of your organisation is absolutely critical. In all of these cost out programmes, particularly the rapid ones, the organisation will naturally fight back and run to the top, and therefore you risk going round in circles if you haven’t got full commitment from the top of the organisation.

Also I’d encourage you think beyond the short term. What are the core capabilities you need to succeed and be competitive tomorrow? And think of the costs associated with your future successes as good costs, and protect them, and potentially even invest further in them, because no company ever cut themselves to greatness – you do need to be able to compete and succeed in the future and that will require some capabilities that will have a cost associated with it. But the flipside of this, and I touched upon it before, is looking critically at your products, your markets, your customers, your locations that don’t play a part in your future success and then look to take all of those costs out, either to make you more competitive or to reinvest in the good costs that you need to succeed in future.

TA: Yeah, and just to sort of build on what Zubin said there, and again we’re back to the leaders, it’s important not only that they buy into it, but the P&L holders own the savings targets. Without their commitment it’s pointless almost as an exercise. A programme can help support them, it can connect activity across the business to maximise savings, but it’s not accountable to deliver the savings itself. The next thing I think is crucial and often overlooked is make capacity. Think about your best people across the business who can help be part of the programme. Costs are not going to come out with people doing it on the side of their desks. And then finally, end again on leadership, leadership needs to walk the talk – what measures can they take which will really get people’s attention and buy in to doing their bit.

RM: Some really good practical tips there, thank you so much Tim and Zubin for sharing those insights. And of course, thanks to everyone for listening.

TA: Thanks.

ZR: Thanks Rowena.

RM: So if you’d like to know more about the themes we discussed in this episode, visit our website at pwc.co.uk/covid19. We hope you’ll join us next time, where we’ll focus on accessing government funds, so please do subscribe to keep up to date with all of our latest episodes. Thanks everyone, and until next time, stay safe.

Participants

• Rowena Morris, director, PwC
• Zubin Randeria, partner, PwC
• Tim Allen, partner, PwC