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Insight

Cost optimisation: understanding the drivers of cost pressure

Jonathan Kennedy

Businesses are facing increasingly turbulent conditions, with geo-political, economic and supply chain issues leading to operational and financial challenges. 

Consequently, business leaders are under increasing pressure to deliver near-term cost reductions and attempt to respond without the full picture.

Effective cost optimisation starts with understanding the external and internal drivers that are specific to your circumstances. This will determine the nature of the problem you are trying to solve, whether near-term and one-off, or ongoing and enduring, and help you decide which cost reduction strategy to pursue.

External cost drivers

An infographic showing the various external cost drivers you might encounter.

Learn more about these common external cost drivers, along with typical trends in each area.

Internal cost drivers

An infographic showing the various internal cost drivers you might encounter.

Learn more about these common internal cost drivers, along with typical trends in each area.

How to respond to cost pressure

Many businesses are under pressure to act quickly to deliver short-term savings, but they need to assess the relevant cost drivers to determine how to react appropriately. 

The post-pandemic slowdown coupled with a high inflationary environment is putting significant stress on businesses. Within many organisations, rising operating and borrowing costs, together with new technologies and intense competition, will require a disciplined cost mindset.

Understanding these drivers and how they impact your organisation specifically can help you gain clarity over the problem you are trying to solve, and potentially identify the level of savings you need to achieve and the timeframe required. This will help you to make informed decisions on your course of action. 

There is no one-size-fits-all ‘right’ answer and choosing a path forward depends on the outcomes you need to achieve and the trade-offs you’re willing to accept. 

How can you respond to cost pressure?

Your response will typically include a combination of cost avoidance, cost reduction and cost base optimisation. 

An infographic showing the various cost programme options.

Cost avoidance involves deferring or cancelling controllable spend in the near term. It would typically be appropriate when undertaken in reaction to an unexpected event or materially adverse underperformance.

Cost reduction efforts typically focus on identifying and eliminating activities that generate limited or no value to enhance budgets. They are usually undertaken to address medium-term cost pressure.

Cost base optimisation involves evaluating which activities to undertake and how they are performed across the entire organisation. Such programmes require long-term, structural change and so typically form part of strategic transformation.

In Part 2, we’ll explore these different responses in more detail so we can understand the different options available, their potential and their limitations.