How cost cutting initiatives can significantly be supported by digital technologies
In the midst of the COVID-19 crisis, business leaders are focusing on firefighting to keep their business running and prepare for the ramp-up after the shutdown. But what comes next? Since massive revenue loss and liquidity issues abound, the need for cost reduction on the short- and medium-term horizon is high.
Digitalization may not be the first topic that comes to mind when thinking about cost reduction, but it provides effective opportunities that can also yield short- and medium-term cost benefits. Combined with classical IT measures it covers a wide range of options:
- Cost excellence in the IT function
- Business cost savings and ops excellence through digital
1. Cost excellence in the IT function
Before approaching business with digital cost saving measures, the IT function needs to put its own house in order and initiate a strong cost saving program. Only by demonstrating the willingness to optimize its own spending IT can ask the business to follow.
There is a large variety of measures available. However, to attain quick results the focus should be on measures that can be implemented within 12 months, like the following:
Intelligent demand management: The crisis has changed priorities with business value requiring a redefinition of criteria for project evaluation. Hence, an adjustment of the project portfolio is necessary. Running costs must be considered as well. Revalidate service levels, assess the level of user support, and check whether all software licenses are required.
Optimized sourcing model and state-of-the-art supplier management: Typically, there is significant cost saving potential in sourcing activities. This starts with renegotiating contract terms, including pricing, and lasts up to the exchange of suppliers.
Selective insourcing of critical skills: To avoid paying high prices for external knowledge and support, it’s essential to reduce dependence on suppliers by insourcing, upskilling employees, or hiring. Especially at times like these, it might be possible to replace long-term externals, who are quite often treated as sacred cows.
Project delivery excellence: For projects kept alive this means focusing on the right scope and streamlining project organization to ensure fast decision processes. Furthermore, optimizing the organization, using standard processes and project setups reduces complexity and increases delivery efficiency.
Optimized E2E processes: A strong impact on delivery cost can be achieved by continuously automating delivery pipelines, small task processes, and incident and problem management. Not only would the average costs be reduced, error fixing costs decrease significantly as well.
2. Business cost savings and ops excellence through digital
Besides the application of well-known cost reduction approaches, it is definitely worth investigating the application of digital technologies. Many of them can be implemented with limited investment and relatively short payback time:
Some of the most effective examples include the following:
Robotic process automation (RPA): Highly redundant, manual processes can be automated within a few weeks, freeing up employees’ time, which can be spent more effectively in other ways or replacing external services.
Self-service solutions: Enabling customers to trigger processes digitally and automatically process requests is another way to reduce back-office effort.
Augmented reality: Augmented reality can be used to allow employees to get a clearer picture of product details or to provide step-by-step work instructions. Therefore, significant process efficiencies can be achieved and training efforts considerably reduced.
Computer vision: The human brain has natural limitations in checking and interpreting images. Removing those limitations through computer vision reduces manual effort, enables 24/7 processing, and increases quality and efficiency.
The application of these digital technologies needs to be assessed along the entire value chain. For each business process it needs to be identified whether digital technologies can aid in reducing costs.
The figure above illustrates a long list of potential savings from digital along the value chain. A more detailed view on some of these long-list items can be found in the following:
Flows and delivery—augmented reality for warehouse navigation: Warehouse employees are guided through AR glasses to the right shelf, saving time for the search and reducing errors. At the same time, the need for training new employees is significantly reduced and efficiency increased right from the start.
Store operations—replenishment optimization via computer vision: High-resolution cameras in stores or robots scan the shelves continuously and identify products requiring replenishment. This allows store personnel to invest their time more effectively than regularly inspecting shelves themselves.
Sales/aftersales—digital self-services for customers: Customers can file complaints 24/7 providing all required details including uploading supporting documentation. This speeds up back-office processing or allows for automatic decisions based on a rules engine.
Finance—RPA in accounts payable and accounts receivable: RPA replaces manual bank account checks by automatically processing incoming transactions. This reduces errors and limits the number of employees with access to sensitive accounts, resulting in a positive impact on operational risk.
Funding the journey
Every cost saving program and every measure will require a certain level of liquidity at least. The financeable scope may be limited and only small steps possible. Therefore, it is all the more important to define a well-thought-out implementation roadmap. It is wise to start with measures with limited investment needs, short implementation times, and immediate payback (e.g., RPA initiatives). The realized cost savings might be invested in funding the next measures. Additionally, changes to pricing models, such as success-based variable payments, pose a viable option for overcoming liquidity constraints.
Summing it all up, digital can be a significant lever for achieving business cost savings and ops excellence. Many technologies are available that can be deployed fast, and immediate impact can be achieved. In order to get the buy-in of your entire organization, it’s crucial to set up strong cost reduction programs within the IT function in parallel. Initiating these measures will help your company to strengthen its cost position immensely.
Authors: Joachim Engesser, Anette Ritter