ACCELERATING VALUE CREATION: 4 AREAS FOR COST REDUCTION IN PORTFOLIO COMPANIES

Many business leaders focus solely on controlling costs, missing out on the chance to strengthen the overall cost structures. Management systems and IT are designed for budget control rather than offering insights into process transparency and potential improvements, and top-down cost restructuring could remove key resources vital for future growth.

The right cost optimisation tactic not only increases immediate profits but also supports an organisation in managing issues and sustaining the competitive advantage of companies. After finalising the general strategy and the measure of cost-cutting, the organisation must determine which part of the business it needs to work on.

In this article, we delve into four key areas that companies should explore to restrict costs across the business:

Have a Firm Grip on Spending 

A paradigm shift from long-standing practices to adopting new approaches as per the external disruptive ecosystem can be seen in the major private equity (PE) firms’ approach to spending. Through precise control on spending and embracing flexibility, PE firms can efficiently manage costs and risks in the changing business environment. The goal is to identify opportunities to optimise spending on purchased goods and services, thereby redefining business needs and leveraging scale for improved pricing.

In environments marked by significant inflation, traditional procurement methods like demand consolidation, supplier collaboration enhancement, and reverse auctions may result in cost avoidance rather than optimisation. It is crucial to align these strategies with working capital goals. Organisations should aim to lower internal demand pressures to achieve more cost savings. This entails collaborating across sales, R&D, and operations to streamline product offerings and services, or implementing value engineering to eliminate inefficiencies in materials or processes.

Similarly, a comprehensive analysis of indirect expenditures can yield significant advantages. Stringent controls and policies to lower dependence on internal indirect spending, such as adopting a zero-based approach, can unlock substantial value. This frequently entails challenging traditional norms and embracing innovative changes, especially in environments marked by inflationary pressures.

Simplify the Operating Model

Businesses often become more complex as they evolve and exhibit reduced productivity and increased costs. Simplifying operations is key to achieving sustainable cost optimisation. Complexity often emerges over time due to organic growth, outdated decisions that no longer align with present economic or regulatory landscapes, or poorly integrated acquisitions. This can result in duplicate roles and outdated infrastructure, leading to resource constraints and increased expenses.

Organisations must create a streamlined operating model capable of seamless scalability, leveraging productivity enhancements and automation in back-office functions. Prioritising optimisation of the model enhances agility and directs attention to the fundamental markets of the business, which proves crucial during periods of high inflation.

Re-Evaluate the Supply Chain — Don’t Overlook Tax

Reduce unnecessary expenses: Over the past few years, numerous businesses have resorted to expediting shipments or sending partial loads to compensate for shortages. Even as supply chain pressures alleviate, additional costs often persist. This presents an additional opportunity to incorporate ESG initiatives, further strengthening business resilience in the face of uncertainty.

Pursue efficiency gains: Zero-based efficiency assessments frequently uncover substantial opportunities. During the pandemic, businesses quickly established new infrastructure prioritising delivery assurance over cost-effectiveness. This presents dual opportunities: enhancing the efficiency of temporary solutions and resizing or eliminating fixed costs in declining legacy supply chains.

Secure resilience: Smaller suppliers are grappling with macroeconomic difficulties. Urgently replacing suppliers often results in short-term cost hikes that require optimisation. Enhanced transparency regarding suppliers posing potential risks is crucial for bolstering resilience and averting costs.

Explore key tax considerations: Organisations must recognise the inherent link between cost and tax efficiency, assess supply chain tax efficiency, optimise legal entity structures, and strategically plan tax footprints for minimised tax burdens.

Bring Out the Treasury Team Excellence

The treasury team is an integral driver of cost optimisation within portfolio companies, delivering tangible value through the following strategic initiatives.
•    Cash Management: Ensuring transparent cash visibility and effective liquidity management, the team empowers informed decision-making and resource allocation.
•    Working Capital Optimisation: Through meticulous management of accounts receivable and payable, the team accelerates cash flows, bolsters financial stability, and enhances profitability.
•    Risk Mitigation: Leveraging their expertise in asset-liability management and supply chain funding, the Treasury Team minimises financial risks, fortifies business relationships, and reduces costs.
•    Automation and Efficiency: Implementing streamlined processes and consolidation strategies, the team enhances operational efficiency, mitigates risks, and unlocks resources for strategic growth initiatives.

Conclusion

While conventional methods retain merit, they often yield short-lived benefits, with costs resurfacing within 1 to 1.5 years. Leaders must adopt a comprehensive outlook on business operations, integrating expertise from commercial, finance, operations, and data analytics domains. By prioritising immediate needs that foster enduring value, organisations can navigate challenges effectively and ensure sustained success.