At Protiviti, we have a strong belief that collaborating and learning from one another will add tremendous value and help each one of us to develop a unique perspective towards a subject. Varied point of views on a particular topic of discussion can help challenge our thinking, provide confidence in our own plans and increase resilience. The unique set of challenges brought by the current and future effects of CoVID 19 requires a complete refresh on how we manage and optimize costs.
Leaders, from varied industry segments, joined us for a virtual session on Managing Costs in times of CoVID-19. The aim of the session was to facilitate a discussion for professionals from across industries to share thoughts and experiences on operating in ‘the new normal’ and optimizing costs. Held under Chatham House rules, the session facilitated participants to ask questions during the panel discussion.
- • It is imperative to identify, focus and ensure sustainability on key cost levers in the current scenario
- • Being agile, flexible, adaptable and getting into a thinking routine is the new normal
- • Degree of trust and reputation of the organization plays critical role in optimizing costs during contract negotiation
- • Undertaking technology initiatives through transformation projects is the need of the hour to minimize costs and ensure business continuity despite lack of manpower
- • Organizations need to reinvent business models in order to ascertain holistic way for attaining sustainable growth
- • Organizations need to invest significant time & resources in up-skilling people for more diversified jobs and redesign their working models
- • The key business operations across various industry sectors, especially in Real Estate, Hospitality and Aviation, is expected to resurge by the end of Q4 FY2020 or by beginning of Q1 FY2021
Setting the Context
Managing Director from Protiviti, set the context by summarizing the impact of current crisis on organization’s business with Cost Optimization being one of critical aspects requiring attention by the senior management. In these unprecedented times, it is critical for organizations to optimize costs and ensure sustainability in cost reduction. Organizations need to work towards developing agility in future business and prepare for the new normal.
Defining the “New Normal”
Panelists, from diverse backgrounds, presented their thoughts and perspectives on the varying definition of the new normal. Leaders believed that the current situation is similar to a transformative journey that we are still in the process of understanding. However, the same is being characterized by being more agile, flexible and adaptable. This requires developing a mindset that would enable us to step into a thinking routine and evaluating our approach towards redefining and reinventing sustainable business models. It also entails realignment of demands after accounting the changes in customer behavior.
Supply Chain Disruptions and the Right Way to Deal with them
The Executive Director of one of the largest capital advisory firms emphasized on how inventory financing without capital infusion and creation of new revenue streams by considering changes in customer behavior are the need of the hour.
The challenges of obtaining working capital from the banks have become increasingly difficult since pre-COVID debt covenants on the organization’s balance sheets pose as a huge risk for the availability of fluid credit lines. Hence, the priority for organizations is to conserve cash and one of the key levers to achieve this is to manage existing working capital effectively by focusing on selling available inventory and releasing that cash into the business and to maximize the collection of receivables as much as possible.
Partnerships with Suppliers to Solve Supply Chain Disruptions and Renegotiating Contracts for Optimizing Costs
On the question, whether there were any decisions being taken on the supplier front, wherein the supplier network needed to be reworked, taking into consideration supplier constraints.
The panelist stated that it was important to have different approaches for tier I, II and III supplier categories. Tier II and tier III suppliers are smaller suppliers and there is a limited cash requirement to pay them, so there are fewer reconsiderations on their front, however for tier I suppliers, there have to be detailed discussions wherein the suppliers have to agree to meet the organizations half-way and renegotiate the terms of payments and advances.
The Vice President of a large hotel group touched upon the fact that the organization’s reputation as a payer and its credibility of having a stable business environment increases the likelihood of a successful re-negotiation with the supplier significantly. A win-win situation for suppliers as well as organizations is difficult to achieve since the extension of credit is bound to hit someone’s P&L. However, in these times, the organizations and the suppliers need to work together to share the burden in order to generate revenue.
The panel then went on to discuss about the invocation of force majeure clauses in the rental contracts by the tenants and the landlords and how it has now become imperative for businesses to re-evaluate the need of each store/ outlet and to come to a decision regarding the closure of vulnerable stores, where the demand will not pick up post lockdown.
Technology Initiatives and Digital Transformations for Cost Reduction – Emerging Leaner & Meaner
The Chief Operating Officer of a large health organization iterated on how investments in technology have to be evaluated basis the capital expenditure that goes into implementing them and whether they cater to short term or long term gains. He also emphasized on the fact that technological investments such as ERP have become necessities in today’s world and the level of differentiation has only been limited to whether organizations opt for a basic system or a high-end system. In industries such as manufacturing, higher levels of automation has to be considered, since in situations like COVID, where factories are allowed to operate with minimum labor, there has been a shortage of manpower for operating the plants. The emerging perspective from the situation has been that investments in technology and automation have to be considered seriously going forward to ensure business continuity despite lack of manpower.
Cost Optimization Plan Vs. On Ground Implementation
Organizations in the current scenario are planning to cut costs across marketing spends, logistics costs, rental payments etc. The challenges that they face are during implementation of the plan due to lack of support from the partners and overall governance.
Finance Controller of one of leading the alco-Beverage Company, suggested that, in order to scale the increasing complexity of cost optimization, organizations should emphasize on the articulation of clear, effective policies and strong governance mechanisms around cost responsibility, milestones and timelines. The organizations should further:
- Define and monitor quick wins
- Conduct BU wise weekly/ fortnightly business reviews against the designed plan
- Organize monthly & quarterly meetings with all the stakeholders to measure the success of the cost optimization program
Managing Cost Reduction around Human Resources
It is important to note, that for each sector, human capital forms a major part of the expense in their balance sheet. Some organizations that are struggling, have even resorted to laying off their employees apart from pay-cuts & bonus withdrawals.
The panelists suggested that organizations need to invest significant time and resources in up-scaling people for more diversified jobs and redesign the working models as the situation evolves over the period of time. They highlighted, how CEOs and business leadership of many organizations have come forward to take voluntary pay-cuts and led programs to prevent job losses, and retain their talent pool. This demonstrates management’s intent and empathy towards their employees in difficult times.
Also, it is the seamless communication between the top management and their employees via e-town halls that is keeping the morale high. It gives employees sense of reassurance that they are not on the verge of losing their jobs or receiving pay cuts.
Resurgence of the Market from COVID
The deliberations also highlighted that review of historical data suggest that most sectors tend to perform at their 100% efficiency within a span of 12 months from a pandemic. However, the resurgence stint is expected to be longer during this COVID situation since this is a global issue. The world is awaiting a vaccine to be discovered and released, so that people can come out of the present confinement. Governments should intervene and take some measures for aviation, hospitality & tourism sectors, as these are CAPEX intensive sectors.
Some marginal resumption might been seen by Q3 FY 20 this year & normalcy will start coming back by Q4 FY 20. This can also be envisaged by taking China as an example, where the pandemic started in Dec’19 and hospitality, which was one of the worst hit sectors, went to less than 5% occupancy in Jan’20, and now is back to approx. 30% - 40% occupancy.
In the current COVID situation, organizations are looking forward for cost optimization opportunities either by leveraging technology or by negotiating their rates & credit lines with suppliers. People make an organization and this can be very well demonstrated by the fact that almost all the organizations have refuted laying off employees as an option to save cost. Governance mechanism is of utmost importance while conducting the cost optimization exercise.