Strengthen your business with a brave approach to costs

Business people in an informal meeting

Despite increasing consumer confidence and improving revenues for some businesses, the need to go further and faster in taking out costs remains. Organisations continue to respond to the pressures of inflation, despite recent signs of progress as food inflation drops to 11%- the lowest it has been since September 2022. But, as we saw in the 2008 financial crisis, targeting the wrong costs or cutting too deeply could impact both short-term success and your ability to compete when the economy stabilises. The braver and more effective approach applies a value test to each cost to determine the good from the bad and then dials down or unplugs the operations that cannot be justified.

With consumers having less disposable income and funding still difficult to secure, UK insolvency rates are continuing to rise. Reining in spending can be the surest way to stem losses and free up finance for essential investment.

No quick or easy wins

Key questions focus on where and how to make further cuts when all the unassailable options have been actioned.

Some sectors such as retail already operate on an exceptionally lean basis. Others have little left to cut after successive rounds of savings. If there’s no fat left, blanket reductions could either prove unsustainable or cut into the muscle needed to survive and thrive. Indeed, one of the clearest lessons from the recession of 2008-09 was that businesses who cut too drastically- often in areas such as technology - found themselves unable to capitalise when the economy began to grow again.

For many businesses there is still an opportunity to cut the fat and to challenge where costs are spent and whether they drive competitive value. But, to prepare for the future, organisations need to meet changing consumer expectations by investing in ESG and innovative technology, from frictionless retail to Generative AI.

The other main trap is a front-office versus back-office mindset that often sees support functions as first in line for cutbacks. In reality, back-office operations can be just as important as customer-facing ones in driving value and growth. The importance of retaining talent at a time of chronic skills shortages is a clear case in point.

Transforming your cost base

Rather than cutting costs across the board or attacking the same old targets, a more effective approach looks at how to pinpoint resources where they can deliver the most value (‘good costs’), while cutting out needless effort and less valuable resources (‘bad costs’).

This kind of cost-based transformation, underpinned by data and facts, requires a rethink of what areas of your business are primed for revenue generation and growth and the associated costs and capabilities needed to support this. The costs from non-core areas can be taken out and reallocated to where they can create value.

Sorting the good from the bad

So how do you determine what’s valuable and what isn’t?

Start with a clean sheet

Every aspect of spending needs to be fully justified even if this means being brave enough to cut back on cherished totems of the organisation.

To do this, think about what operations you would put in place if you were getting the company up and running now – take the principles of zero-based budgeting (ZBB), revisit the business case for spend and consider whether it still holds true. While you may want more capabilities in some areas than you have now, are there examples of your legacy operations which may become superfluous or over-specified? Just because it’s always been done is no justification.

The results of this ZBB evaluation provide a clear sense of how market dynamics have changed, what spending is genuinely essential, and what can be dialled down, reallocated or stepped up.

Understand where the money’s going

ZBB works best when there is end-to-end data on cost drivers and the value they create.

A useful foundation is considering the value derived from activities performed – who works on an activity and what value do they deliver? What this invariably reveals is where there is an overlap between departments, most of which can be eliminated so that time that was previously wasted can be focused elsewhere. Sales teams are a prime example, as they often find themselves spending too little time actually selling because they’re engaged in administrative activities that dedicated support teams may be better placed to do.

Pivot around the market dynamics

In normal times, the good costs would include the operations targeted for long-term growth but these may no longer be viable in the current market. If they are loss-makers should they be scaled back or switched off in the same way as out-and-out bad costs, even if this is only temporarily? Are they still relevant and do they align to your USP? Once funds are freed up by reductions in such spending, you can begin to increase the investment in long-term opportunities again.

Similarly, there may be operations that are essential, but not part of your business’ USP. This activity can be delivered at a lower specification or outsourced at much less cost. There may also be activity that is required such as maintenance and repairs of machinery but that can be put on hold for now.

Make cost everybody’s business

There will inevitably be pushback from within your organisation. This often manifests itself in a zero-sum competition between divisions for budget that fails to address the strategic realities facing the business.

The answer is to build a cost-conscious culture which aligns with the complementary cash culture we described in the working capital feature in this series. This encourages all staff to start thinking about how to save a little bit every day and for senior management, the mindset shift could include moving towards a more agile and forward-looking approach to expense allocation. It’s a balancing act of protecting margins in an inflationary market while also cutting costs where possible without impacting future value.

So while traditional approaches to cost management are delivering diminished returns, a rethink of costs and the value they bring can make a decisive difference. To succeed, businesses need to continue to maintain a cash-conscious culture while also being aware of all of their costs and the value they bring.

Contact us

Jeremy Webb

Jeremy Webb

Partner, PwC United Kingdom

Tel: +44 (0)7740 639976

Claire Fox

Claire Fox

Partner, UK Transport and Logistics Lead, PwC United Kingdom

Tel: +44 (0)7525 282685

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