With both inflation and recession fears high, many companies are embarking on cost-reduction initiatives. Moreover, the dislocations of the pandemic have changed many customer needs and buying patterns. So much flux may be unnerving but actually creates opportunity for firms to alter business models in ways that both reduce expenses and keep customers delighted. This is a time to look beyond the typical business reaction and use the uncertainty as an advantage.
Cost-cutting and innovation are not diametrically opposing forces
For most companies, the first, and most obvious, initiative in conservation is to go through rounds of cost-cutting. While reasonable, making such cuts risks hollowing out core capabilities. In addition, innovation often gets put on hold as companies focus on preservation. But it doesn’t have to be that way. New approaches are needed.
One such approach is Costovation. Costovation, as detailed in the award-winning book by that name, is a customer-centric way to spend less and innovate more. It is a proven approach that deploys the tools and methods of innovation to the cost side of a business. It mobilizes design thinking, radical reconfigurations of approaches, and rapid prototyping to find step-change opportunities in costs that continue to excel on customer needs.
A prime example of Costovation is how Capitec upended assumptions about retail banking. The company removed all cash from branches, and so could do away with security. It configured branches so that tellers could sit alongside customers and look at screens together, in a collaborative manner that enabled cross-sell. It did away with promoting separate accounts, and instead offered a single account for savings, checking, and credit. In doing so, Capitec could charge fees roughly half that of its rivals, and still earn an astonishing 20%+ Return on Equity. By focusing on what their customers really valued, Capitec was able to change traditional banking while stripping away costly overhead. The principles of Costovation created an opportunity to transform an ordinary retail bank, offer low fees, delight customers and increase profits simultaneously.
When is a company ripe for Costovation?
To determine if utilizing Costovation methods is right for your business, evaluate your current state and look for some of these seven signals:
1. Expensive features: If a significant amount of cost is driven by a handful of features, isolate the features that drive up costs. Cut back or find ways to improve their return on investment.
2. Expensive customers: If a significant amount of expense is driven by a handful of customers, adjust your approach to serve the “expensive” customers more efficiently, or make the strategic decision to focus on other populations.
3. Expensive sales: If a significant amount of expense is in sales, not in the product itself, find daring new ways to circumvent traditional sales channels and costovate the way the offering is sold.
4. Over-standardized products: If output is standardized despite very specialized customer needs, zoom in on the customer subsets that are dissatisfied or under-satisfied with current solutions. They are your foothold to disruptive innovation.
5. Over-standardized sales: If the offering is sold the same way to all customers, identify customer segments whose needs are being underserved or overserved by the traditional sales mechanism. Design a new approach that is tailored to meet their core needs (and does not overshoot them).
6. Cost imbalance: If the revenue for certain activities is not proportional to their costs, stand out in the industry by adjusting pricing to accurately reflect the value being delivered.
7. Contingency creep: If the system is built to cover all conceivable use cases, even those that are rare, pick your battles and focus on what is the most impactful.
A Costovation initiative often runs in parallel with other, more typical ways of cost-cutting. They are not inconsistent. In fact, in tandem, they can create greater savings than cost-cutting alone. The process does not require the creation of an entire Costovation group or team. Oftentimes, the sponsor is a general manager who can look across the various functions of a business and find ways to blur traditional boundaries to significant effect, as Capitec did with branch operations, marketing, and product development.
If you have found that your company is showing some of the seven signs above, it is time to begin implementation. Consider, for instance, undertaking a rapid, six-week effort to determine what opportunities exist. It would have four parts:
1. Understand both apparent and hidden cost drivers: If big cost-reduction opportunities are obvious on the income statement, they are often being targeted in other ways. While these line items matter, it pays to look beyond at some of the potential hidden cost drivers such as serving diverse customer segments in overly standardized ways, downtime in the usage of personnel or assets, and distributor margins taken for activities that could be brought in-house.
2. Gain internal perspectives: The best experts on Costovation opportunities lie inside your own business. Targeted questioning based on patterns of Costovation elsewhere can elicit significant insights, as well as key hypotheses, uncertainties, and divergences to resolve. Critically, this questioning leverages cross-functional thinking in delving into function-specific activities, looking at the overall business system and the underlying cost drivers within it.
3. Leverage relevant external case studies: Appropriate examples from outside the company, and often even outside the company’s industry, can get people to look at old issues in radically new ways. The case studies get people to think about parallels, what is and isn’t unique to their situation, and a playbook of opportunities that can be applied to their situation.
4. Convene a cross-functional workshop to align on opportunities: The six-week effort would conclude with a cross-functional workshop to talk through cost drivers, take-aways from external examples, and playbook opportunities. It also leverages innovation and design thinking techniques to generate new ideas, and it narrows down the set of opportunities to the most promising ones for building out.
Cost-cutting is on many strategic agendas for 2023. As you proceed down that road, reserve a bit of energy to find the big moves. Costovation can unlock transformative potential for a business to operate with significantly lower expenses while continuing to keep customer-focus right in the bullseye.
This piece was written with the assistance of Angela Perozzi.