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Five ways to transform costs to create value

August 2021

The world has changed. Your business is changing. Is your cost base keeping pace? The answer has critical competitive implications following the lifting of lockdown restrictions in England, and at a busy time for strategic M&A activity across all sectors. The evolution of cost bases is a critical factor for businesses to continue to drive value.

So why is it time to rethink costs? When people think about costs, the first priority is how to get them down. However, as crucial as this is, it’s only part of the story. As your business changes, you need to think about whether resources are being targeted where they can deliver the greatest return – ‘good costs’ – or being wasted – ‘bad costs’.

‘Good costs’ enable businesses to move closer to customers, differentiate their capabilities and develop new value propositions. Right now, this includes directing spending towards digital transformation and the transition to a low carbon economy. In firms we’ve worked with, typical examples of good costs include funding the shift from bricks and mortar sales to online engagement and next day home delivery. Other examples include stepping up investment in fast-growth ‘green’ opportunities.

Sorting the good from the bad

Cost-based transformation (CBT) seeks to identify and optimise the good costs, while eliminating the non-essential ‘bad costs’ to free up capital for investment. The bad costs include operational inefficiencies that need to be tackled in areas such as IT, customer care and compliance. The bad costs also include low- and no-value overheads that should be eliminated altogether, from surplus office space to legacy IT systems.

Based on our experience, we find it useful to look at costs and the choices driving these, through three lenses:

  • What you do – exploring market, customer, and product choices to judge what services are justified and what should be stopped or reduced
  • Where and how you do it – considering design considerations in your organisation, technology and processes to judge what could be done differently or more efficiently
  • How well you do it – driving productivity and performance to deliver your goals with less wasted effort

Coming out of lockdown with eyes open

One benefit of the turmoil inflicted by the pandemic is that businesses have a much better idea of what costs deliver real value. It’s important that we keep hold of the processes and techniques that reduce costs and increase productivity.

After lockdown restrictions were lifted in England on 19 July 2021 (and have begun easing in other parts of the UK), it’s both unsafe and unsustainable for businesses to go back to spending as they did before. Starting with the ‘blank sheet’ of Zero-Based Budgeting (ZBB) would help to distinguish what is immediately critical from what can be turned back on cautiously, and what can be switched off once and for all.

The starting points for this ZBB evaluation are a clear sense of how market dynamics have changed, what spending is genuinely essential as a result, and what can be reallocated. Running through ZBB is the need for end-to-end data on cost drivers and a readiness to challenge assumptions even if this demands tough decisions on legacy commitments.

Deal value boost

While Cost Based Transformation (CBT) can benefit all businesses in this time of rapid change. It’s especially applicable for acquirers, whether they are looking to create value through scale and synergy plays or more ambitious transformational deals.

Particular sectors are likely to have different CBT priorities. For example, while a logistics business might be looking to CBT and ZBB to deliver more goods for less, the main focus for a technology company would be how to sharpen the targeting of resources for growth.

Realising the potential

So what are the starting points for effective CBT? In our experience, five key priorities stand out:

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Target for growth

Look at where growth and returns are strongest and make sure available funds are targeted towards these good costs.

Look across the business

Cost-cutting should be holistic. Rather than focusing on particular functions in isolation, it’s important to look across the organisation and challenge what the business does, how it does it and whether it is aligned with growth plans.

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Look to self-fund

Target quick wins that can release cash and help to fund further efficiency savings and good cost investment.

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Be open-minded

Rather than simply tweaking existing processes or trying to deliver the same output with less input, it’s better to reduce low-value activity and challenge whether outputs can be achieved in more efficient and sustainable ways.

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Learn from other sectors

Insights from other sectors can bring innovative thinking, new technologies and new forms of best practice.

Find out more

We work with businesses from across all sectors to help them better understand and transform their cost base. If you would like to know more, please feel free to get in touch. To find out more about the deal drivers in your sector, see our latest M&A Industry Trends.

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Tim Allen

Tim Allen

Operational Restructuring Leader, PwC United Kingdom

Tel: +44 (0)7702 697612

Christopher Temple

Christopher Temple

UK Value Creation leader, PwC United Kingdom

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