Capgemini : Why cost reduction is just one piece in the post-COVID-19 cost resilience strategy

Yet, as organizations look at how to restructure their cost bases toensure their long-term profitability, they must also look to maintain cashflow and liquidity todayto supportrapid recovery.

Three guiding principles

In this context,business and IT leaders should adhere to the following three guiding principles:

Principle #1 - Cost resilience is about more than just cost reduction

One of the biggest economic impacts of the COVID-19 pandemic is on the nature of global business markets. They are no longer stable. While this makes cost reduction a vital strategic priority, thereisanother way to manage the peaks and troughs of this market-cost variabilization. This is the transformation of fixed costs and charges into variable models, often by reshaping operating model partnerships so that they become more adaptable to your business.During the current crisis, those companies with a strong hold over their profit and loss (P&L) position and utilizingvariable models before COVID-19have managed better than many of their peers.

Principle #2- Liquidity is vital to immediate survival

The huge decrease in the markets has turned the spotlight on cash positions, with boards and shareholders recognizing the criticality of liquidity. This has been especially evident in the aircraft manufacturing sector. Some of the best-known companies in this sector have even expressed uncertainty about their futures as their economic models struggle to contend with the complete shutdown of the industry. This demonstrates just how important it is to include 'What if…?' questions in the planning ofinventory and cost optimization strategies. For example, what if your production line stops in three days and you no longer have products to sell?

Principle #3 - Avoid over-reliance on just one supply chain center

Over recent years, organizations looking to transform their economic models have shifted production centersand supply chain networks, someto low-cost countriesand others to single geographies. As borders closed and global travel almost disappeared during COVID-19, this over-reliance on just one or two centersbecame a significant supply chain risk. The crisis showed that the companies best equipped to flex their operating models and adapt their supply networks had a more diverse supply chain strategy. Alongside their global supply chain partnerships, they had built relationships and networks closer to home to better manage their risks andensure long-term cost resilience.

Cost resilience opportunities

While the cost constraints emerging duringCOVID-19 are clear, there is no doubt that the quest for cost resilience also brings new opportunities, for examplewith: New ways of working; automation and robotics; and new consumer behaviors

New ways of working

Companies were quick to implement new, agile ways of working to keep operations runningat the start of the pandemic. In the financial services sector, for example, one French financial institutionrealisedevenbefore the end of lockdown that new ways of working had the potential to yield between 20-40% process productivity gains.Automation, workflows and approval level rationalization significantly sped up processes, while the introduction of customer self-carefor certain activities freed up staff for more complex customer interactions. Largely, these new ways of workingremain an opportunity, rather than an actuality,andorganizationsfirst need tounderstand what has changed and whatcost reduction opportunities this change brings.

Automation and robotics

There arecompelling use casesforrobotics and automated processes. Some enterprises have already begun to reprioritize their digital roadmaps with a focus on implementing more automated and robotic processes as quickly as possible.Interestingly, this reprioritization is business-case driven, which it wasn't prior to COVID-19. Companies have recognized that automation is not simply a cost reduction measure but is now a matter of business continuity. Organizations more advanced in using automation and roboticsfor key processes appeared to manage their business continuity better than othersduring the pandemic.

New consumer behaviors

A Capgemini Research Institute surveyofmore than 11,000 consumers worldwidein April 2020found that the appetite for online shopping hadnever been bigger-and wouldcontinue to grow postCOVID-19. Many companies have seized the opportunity to expand the mix of channels through which they engage with their customers and accelerate their digitalization programs. Yet to really turn this into an opportunity and benefit from the cost savings of movingmore businessonline, ways of workingmust also be transformed.

For example, in China, coffee chain Starbucks remodelled its stores as well as its customer engagement during the country's lockdown, enabling people to order via an app and pick up their coffee or food purchase with no physical contact. Switching to more digital channels, however, is not a simple change. It involves a whole host of areas, including your workflows, marketing, operating processes, customer interaction, etc. Get it right and the impact on the bottom line could be huge for a global business running multiple outlets.

New trends emerging

Inthe past few months, some global manufacturing organizations have begun to bringabout a paradigm shift in the offshore/outsourcing model. Many organizations previously resistantto outsourcing are now rethinking their approach, notably in financial services (corporate investment, banking, etc.) and manufacturing. Further, as well as looking at how to rationalize costs in their own internal processes, organizationsare expectingtheir suppliers and subcontractors to get involved inoptimizingend-to-end costs.

There has also been ashift in the scope of outsourcing being taken on by external suppliers. Asorganizations seek to hand off certain areas of cost, theoutsourcing activities traditionally focused on non-core functions,such as finance and IT, are beingexpanded to embrace productivity areastoo. For example, a manufacturer in the aviation industry might now outsource certain activities close toits core production, such as quality, planning and scheduling.

While this evolution might seem daunting for some companies, there are several measures that can help mitigate concerns. Transparency enabled by data will allow you to monitor the end-to-end process of your outsourced activity. Close collaboration with your subcontractor to establish a common vision is essential and your outsourcing partner must show a commitment to skills development, with training and coaching programs to ensure alignment with your business.It may also be necessary to review and change the way in which procurement is managed with subcontractors.

Clearly, certain sectors need minimum staffon the ground to maintain operations, for example in factories,or in physical retail outlets. However, more andmore companies are now looking at remote workingand automationas a means to redesign the employee experience, whilst reducing costs. The cost potential and cost variablization opportunities here are significant, although an initial impact on IT budgets would be required to enable this more flexible (and ultimately more cost efficient) model going forward. We recommend building a strongbusiness case not only around the costs of managing facilities but also on empowering employees with digital collaboration toolsand more autonomy. As both employees and companies have adapted to new ways of working, it presents anwindow of opportunity to seize the initiative.

Maintaining the pace

Thekey to long-term cost resilience is to actnow. However, whether organizations will take the opportunity to maintain the accelerated pace of digitalization after the pandemic remains to be seen.

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