The broken link:
Why cost reduction efforts
fail to fuel growth in Australia
Luca Martini and Olaf Schatteman
The rules of competitiveness are changing—
and businesses must fire on all cylinders to
keep pace with the unprecedented demands
for speed, scale and flexibility in today’s
marketplace. Since 2000, 60 percent of
Australia’s top ASX 200 companies have
ceased to exist due to liquidations, mergers,
acquisition or other factors. And 73 percent of
the ASX 200 companies are no longer in the
top 200 companies today.
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In such a disrupted market, organizations
need to identify future growth sources and
create cost reduction programs to free up
cash, assets and capital for reinvesting. This
volatile environment demands business
leaders rethink their cost structure.
improvements. With the ongoing slowdown
in Australia’s economic growth forecasts,
Australian organizations need to continue
with such cost redesign programs. The key
will be for organizations to take a different
approach. To be sustainable, this will require
rebuilding costs from the bottom up annually.²
Australian businesses have enjoyed a solid
trajectory of earnings growth over the last
decade, so there wasn’t acute pressure to
optimize the cost structure. However, given
the change in our economic climate, the
managerial agenda has now pivoted to focus
on cost reduction and productivity to be able
to fuel growth.
Accenture Strategy research³ across 700
executives found that most businesses have
made both cost reduction and growth a
priority, but the critical link between cost
reduction and growth strategy is broken.
Why? Because executives are unclear on
where to best invest, are juggling too many
cost reduction initiatives and execution is
lagging. Leaders are misaligned on where
to invest for growth, and in some cases,
operating models are too inflexible to fuel
growth initiatives.
Accenture Strategy research found that
Australia’s top 20 companies from the
ASX 200 have referenced cost reduction
initiatives as an area of focus over the last
two years. Programs have largely been driven
by a desire to achieve operational and
productivity
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Connecting the dots to increase competitiveness
(57 percent), improving competitive
advantage (54 percent), improving financial
performance (53 percent) and reinvesting cost
savings into growth initiatives (49 percent).
What are the weaknesses that businesses
face on the journey to growth? There are
several, but most important is the fact
that businesses aren’t grasping the critical
interdependencies between cost reduction
efforts and growth strategy.
And while the intentions for cost reduction
programs are good, executing them well is
very difficult. The reality is that most programs
are not aligned closely enough to the business
strategy or are often the “Plan B” reaction
to failed growth initiatives. Only 23 percent
say they have optimized their process for
identifying and removing business activities
and investments that do not add value.
Accenture research shows the importance of
sustainable cost savings to fuel growth. In
the coming year, Australia’s top 50 ASX 200
companies would need to increase their
earnings by approximately AUS$12 billion—
AUS$15 billion to sustain past earnings
performance in the predicted economic
environment. Interestingly, 27 of the
ASX 50 companies have a reduction in
forecast earnings per share (EPS)
performance.⁴
Leadership is missing the mark on
sources of growth and misaligned
on where to invest
To capitalize on new opportunities and
position for long-term growth, focused cost
reduction strategies will need to be put in
place to fuel the necessary earnings growth.
Businesses fail to execute growth strategies
and they are not optimized for value
creation because executives across titles
and levels have competing priorities.
Weak execution dilutes fuel for growth
Specifically, CEOs, CFOs and vice presidents
(VPs) are not united on where to invest and
how to align cost savings initiatives with
business strategy. Only 36 percent of the
C-suite believes their reinvestment priorities
are aligned to the business strategy—and
only 25 percent of VPs do.
On a positive note, executives have big plans
for cost reduction programs, aiming to fuel
growth and competitiveness for the long term.
The top outcomes driving cost management
activities are simplifying and increasing the
flexibility to respond to market changes
82%
Accenture Strategy research found
that 82 percent of companies are
focused on cost reduction to free up
funds to invest in growth initiatives,
yet only 36 percent strongly agree
they are able to sustain benefits of
cost reduction programs.
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36%
Many businesses also have too many growth
initiatives and they can’t decide where to
invest. Only 30 percent of executives say they
prioritize the reinvestment of cost savings
in alignment with business strategy. Instead,
they are taking a diversified—or shotgun—
approach. Budget holders are reinvesting
savings across their own initiatives, yielding
smaller growth, versus funding two or three
winning initiatives that will lead to gamechanging paybacks. Inconsistency at the top
puts businesses at risk for cutting the wrong
costs and reinvesting in the wrong areas, or
worse, achieving poor valuations.
flexible operating model that can adapt to
consistently deliver on strategy and execute
activities that drive value for the organization.
Businesses are gaining agility through new
operating models. One food company designed
and built a new operating model to increase
the company’s efficiency and agility. This
global business services platform is delivering
key functions including supply chain, finance,
human resources and IT. The value generated
through the program—an expected $100 million
in recurring savings—will enable the company to
fuel its growth strategies.
To identify the right operating model that will
fuel growth, companies must decide on which
axis they are going to manage their business.
For example, one axis is national or global/
Rigid operating models and a lack of visibility/
regional or local. Does the business want to
insight into what creates value for the
balance national or global with local to take
organization is exacerbating the problem.
advantage of scale while reducing local service
What’s even worse: Executives are aware of
and effectiveness? Or should the business pass
the problem but unable to solve it.
on some benefits of scale in order to enable
better local support and performance?
Operating models don‘t flex for cost
reduction—or for growth
Consider the fact that only 22 percent
of executives say their company’s
operating model is aligned to fuel
strategic growth initiatives.
Digital is the direction
One thing executives agree on is the
importance of investing in digital to increase
competitiveness. In 2015, Accenture Strategy
estimated that 29 percent of Australia’s GDP
can be attributed to some form of digital
skills, capital and intermediate goods and
services used in production. That equates to
AUS$462 billion.
Executives would not argue that operating
models should align with how a business
wants to profitably grow. Yet, only onefourth of companies surveyed have a
Automating for savings
In Australia, more than half (54 percent) of executives can already report
cost savings of 15 percent or more from automation over the past two
years. This is driving greater investment, with 44 percent reporting a
mandate to use automation to cut overall costs.⁵
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If the Australian economy were to improve
its digital density through an optimal
combination of improvements in digital skills,
capital and other enabling accelerators, it
could enjoy a higher boost to GDP, adding an
additional AUS$44 million to the 2020 GDP.
This equates to a 2.4 percent uplift to GDP
beyond current forecasts.6
Forty-two percent strongly agree that digital
business is an enabler of strategic growth.
Using digital, companies get ahead of industry
disruption, accelerate innovation, fuel more
efficient operations and deliver personalized
experiences. With the right digital strategy,
many operating model choices move from
“and” to “or.”
Accenture found that 54 percent of executives
cite digital technologies as the most common
direction for reinvesting cost savings. Digital
investments boost competitiveness because
they enable new business models that allow
unprecedented speed, agility and scale.
Businesses are digitizing the front office—
using analytics, the cloud and other Internet
of Things-enabled innovations—to get closer
to the customer, among other benefits.
Companies are also taking non-traditional
functions and digitizing them to reduce costs
and improve efficiency and scale.
Fixing what’s broken
Businesses must better connect cost reduction and not just use a blunt instrument to cut
efforts with growth strategy and business
costs. They need to focus on identifying and
strategy to increase competitiveness and fuel eliminating “non-working money.”
profitable growth. Here’s how:
Rethinking the cost structure from zero each
year helps remove unnecessary costs and
1. Organize for growth
create a detailed forecast. This process allows
spend visibility at a forensic level. Savings can
First, identify sources of growth. In a disrupted be earmarked and assigned to activities that
market place, where will your future growth
ultimately boost growth.
come from, and what does your growth
Many Australian organizations have already
strategy look like? Create a sustainable,
ongoing cost redesign reduction program that reduced costs from business operations that
have been traditionally characterized as “lowwill free up large amounts of non-working
cash, assets and capital that can be reinvested hanging fruit.” To remain competitive, it is time
in line with your growth strategy. Connecting for a new approach to rethinking cost structures
for identifying non-working investments. In a
cost reduction and growth strategies—in
slow growth environment, identifying growth
line with the business strategy—will deliver
areas of the business to redirect these nonlong-term growth and competitiveness. But
working investments, will be key.
companies need to do this in a smart way
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2. Manage the journey
Rather than scattering reinvestment dollars
across multiple initiatives, place big bets.
Map out the journey to growth, prioritize
the scope of the effort and split it into
manageable phases.
Align leadership and people on the
“big ideas” and create a culture that is
centered on continuous cost management.
Communicate to all stakeholders the
strategy, the value drivers of change, the
phases of the journey and the expected
outcomes. Demonstrate success through
validation points along the journey. To
sustain growth and guide all future cost
takeout initiatives, institute a governance
program that helps identify what initiatives
will (or will not) contribute to growth. That
way you can quickly abandon the moves that
do not add value.
54%
54 percent of executives cite digital
technologies as the most common
direction for reinvesting cost savings
3. Digitize to fuel
sustainable growth
New digital technologies allow organizations to
rethink operating models in a very different and
“fresh” fashion. Digital business models and
strategies help increase organizational agility,
flexibility and sustainable growth. Businesses
that commit to building digital capabilities and
digitizing traditional processes are most likely
to manage disruption and grow.
For example, use digital to interpret signals of
disruption and determine which disruptions
will impact the business, and when. Strongly
consider digitizing traditional functions and
capabilities to increase speed and agility,
and work across your partner ecosystem and
invest to acquire “missing” digital capabilities
or digitize your company’s non-core activities.
Take advantage of digital to cost-effectively
experiment at speed and scale to solve
customers’ problems and bring new products
to market faster.
Design and embed the right digital capabilities
across robotics process automation, cognitive
computing, cloud and next-generation
outsourcing. Be a leader that can withstand
change. Build CEO-level support and drive new
growth through a team of leaders who are
laser-focused on digital—and digital “fixers”
who can draw on the right skills at the right
time. By adopting new digital technologies,
Australian business leaders are better placed to
execute with pace and certainty, and achieve
sustainability in an era of digital disruption.
Cost reduction unlocks funds that can be reinvested in growth.
But without a cohesive, strategic plan—and people to support the
plan—those efforts will fail. In today’s climate of unprecedented
competiveness, failure is not an option.
Join the conversation
About Accenture
@AccentureStrat
Accenture is a leading global professional
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works at the intersection of business and
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Contact the authors
Luca Martini
[email protected]
Olaf Schatteman
[email protected]
Notes
¹ Accenture Strategy analysis
² Accenture Strategy analysis
³ Increasing Agility to Fuel Growth
and Competitiveness, Accenture, January
2016
About Accenture Strategy
⁴ Accenture Strategy analysis
Accenture Strategy operates at the
intersection of business and technology.
We bring together our capabilities in
business, technology, operations and
function strategy to help our clients
envision and execute industry-specific
strategies that support enterprise wide
transformation. Our focus on issues related
to digital disruption, competitiveness,
global operating models, talent and
leadership help drive both efficiencies
and growth. For more information,
follow @AccentureStrat or visit
www.accenture.com/strategy.
⁵ Accenture Technology Vision 2016: Is
Australia at a technology tipping point?
⁶ Accenture; “Digital disruption:
The growth multiplier,” page 2
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