As inflation and recession fears run high, many companies are embarking on cost-cutting initiatives. Additionally, the upheavals of the pandemic have altered many customer shopping needs and habits. Such a flow can be confusing, but actually creates the opportunity for companies to change their business models in ways that reduce expenses and satisfy customers. Now is the time to look beyond the typical trading reaction and use uncertainty as an advantage.
Cost reduction and innovation are not diametrically opposed forces
For most companies, the first and most obvious conservation initiative is to go through cost-cutting cycles. While reasonable, such cuts risk depleting core capabilities. Additionally, innovation is often put on the back burner as companies focus on preservation. But it doesn’t have to be that way. New approaches are needed.
Such an approach is Costovation. Costovation, as detailed in the award-winning book of the same 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 on the cost side of a business. It mobilizes design thinking, radical reconfigurations of approaches, and rapid prototyping to find incremental cost change opportunities that continue to excel on customer needs.
A great example of costovation is how Capitec disrupted assumptions about retail banking. The company withdrew all the money from the branches and was therefore able to remove the security. He set up branches so cashiers could sit alongside customers and watch screens together, in a collaborative way that enabled cross-selling. It removed the promotion of separate accounts and instead offered a single account for savings, checking and credit. By doing so, Capitec could charge fees around half those of its rivals, while earning an astonishing return on equity of over 20%. By focusing on what its customers really value, Capitec was able to change traditional banking while eliminating costly overhead. Costovation’s principles have created an opportunity to transform an ordinary retail bank, offer low fees, delight customers and simultaneously increase profits.
When is a business ripe for Costovation?
To determine if using the Costovation Methods is right for your business, assess your current state and look for some of these seven signals:
1. Expensive features: If a significant amount of cost is generated by a handful of features, isolate the features that increase the cost. Reduce or find ways to improve their return on investment.
2. Dear Customers: If a significant amount of spend is generated by a handful of customers, adjust your approach to serve “expensive” customers more effectively or make the strategic decision to focus on other populations.
3. Expensive sales: If a significant portion of spend is related to sales, not the product itself, find bold new ways to bypass traditional sales channels and personalize how the offer is sold.
4. Overly standardized products: If the output is standardized despite very specific customer needs, zoom in on the dissatisfied or under-satisfied customer subsets of the current solutions. They are your fulcrum towards disruptive innovation.
5. Too standardized sales: If the offer is sold in the same way to all customers, identify the customer segments whose needs are under-served or over-met by the traditional sales mechanism. Design a new approach that meets their basic needs (and does not exceed them).
6. Cost imbalance: If revenues from certain activities are not commensurate with their costs, stand out in the industry by adjusting prices to accurately reflect the value provided.
seven. emergency creep: If the system is designed to cover every use case imaginable, even the rare ones, choose your fights and focus on what has the most impact.
A Costovation initiative often runs in parallel with other more typical ways of reducing costs. They are not inconsistent. In fact, in tandem, they can create greater savings than cost reduction alone. The process does not require the creation of a group or an entire Costovation team. Often the sponsor is a managing director who can examine the various functions of a business and find ways to blur traditional boundaries with significant effect, as Capitec has done with branch operations, marketing and business development. products.
If you’ve found that your business exhibits some of the seven signs above, it’s time to start implementing. Consider, for example, undertaking a quick six-week effort to determine what opportunities exist. It would have four parts:
1. Understand apparent and hidden cost drivers: If great cost reduction opportunities are evident on the income statement, they are often targeted in other ways. While these line elements are important, it is worth looking past some of the potential hidden cost drivers, such as serving various customer segments in an overly standardized way, downtime in using the personnel or assets and the distributors’ margins levied for the activities that could be contributed. -accommodate.
2. Gain internal insights: Costovation’s best opportunity experts are within your own company. Targeted questions based on Costovation models elsewhere can yield important insights, as well as key assumptions, uncertainties, and discrepancies to be resolved. Critically, this questioning builds on cross-functional thinking by drilling down into function-specific activities, examining 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 line of business, can cause people to look at old problems in radically new ways. Case studies get people thinking about parallels, what is and isn’t unique to their situation, and a handbook of opportunities that can be applied to their situation.
4. Convene a cross-functional workshop to align with opportunities: The six-week effort would conclude with a cross-functional workshop to discuss cost drivers, lessons learned from external examples, and playbook opportunities. It also leverages innovation and design thinking techniques to generate new ideas, and it narrows the set of opportunities down to the most promising for construction.
Cost reduction is on many strategic agendas for 2023. As you move down this path, set aside some energy to find the big changes. Costovation can unlock transformational potential allowing a business to operate with significantly lower expenses while still focusing on the customer in the bullseye.
This piece was written with the help of Angela Perozzi.