Procurement Transformation Blog

Procurement Transformation Blog

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Alternate title: 

Launching cost reduction plans in good times
How to create the transformation dynamics in the absence of urgency?

Executive Summary

 
It is widely recognized that successfully leading cost reduction programs, like any major transformation initiative, requires a strong sense of urgency, commonly shared across the organization. The urgency can be quite easily established when for example, profitability is plummeting or levels of debt become unsustainable. With such visible threats on the company’s business, the transformation momentum is naturally triggered and the commitment of employees rapidly built up.
Creating a cost reduction program dynamics in the absence of urgency is another story. Why initiate cost reduction plans in good times when there is no real, at least visible, urgent need to do so? How to engage top management in cost-cutting initiatives in periods of strong growth and robust profitability? These projects are without doubt harder to sell to the executive committee and more generally to all employees.
With no compelling reason to change, the ‘burning platform’ must be created and widely communicated across the organization. Whether it’s for maintaining leading market positions or anticipating structural changes in the competitive environment, every transformation needs to find its own relevant purpose that will bring together all energies towards that purpose.
Some companies have successfully launched cost reduction programs proactively, well before it’s needed. With such an ability to anticipate, they have delivered above market returns and consolidated their competitive advantage. Ultimately, leading change in good times helps remove pressure and fear to commit employees to the transformation.
This paper provides some insights on how to handle this challenge and make change happen.Through illustrative cases of companies who have succeeded in such endeavors, we will highlight the reasons for success. We will then determine the best strategy for initiating a sustainable cost reduction plan, when there is actually no imperative to change.

1. Success stories: triggering high impact changes with no compelling reasons


If change is hard to impose when things work well, some companies have decided to take a step forward and stand up for large transformations well before it becomes necessary.
We provide here three examples of companies that have successfully led transformations in good times and highlight the key success factors.

Perpetual transformation to consolidate leadership positions: case of a leader in the oil and gas industry

Our client, a multi-billion dollar sales global player in the oil and gas industry, has achieved spectacular results from company-wide transformation projects launched at times of high growth driven by large acquisitions and above market profitability.
In spite of strong fundamentals and a radical increase in size – revenues quadrupled in 10 years-, the company has spared no effort to lead high-impact transformations and continually improve performance. Indeed, a new organization breaking the silos between the different product lines was set up and implemented; support functions were centralized in shared services across the globe, with a clear objective to leverage size and improve efficiency.
This client case is interesting in the sense that there was actually no compelling reason for such large-scale transformations: growing sales, good profitability versus competitors and positive industry outlooks. What did actually drive the transformation effort and ultimately the success?
There are at least 2 main reasons behind this considerable success:
  • It is in the DNA of the company and its employees to continuously target excellence and leadership positions in every market segment where it operates. More than an ambition or a static objective, it is a core value shared across the organization from top management to the field operations.
  • Close monitoring of progress and results is performed at different levels of the organization, after transformation projects are launched.  Specific KPIs measuring achievement of objectives have been added to the compensation letters of key managers in charge of each transformation initiative. In case of deviations from objectives, the necessary actions are taken and the transformation initiative leader is held accountable for their implementation.
     
« An organic system, which is what a company is, needs to adapt. And we think values –that’s what we call them today at IBM, but you can call them ‘beliefs’ or ‘principles’ or precepts’ or even ‘DNA’- are what enable you to do that.»
Samuel Palmisano – CEO of IBM (2002-2011)
 

Value-based management as a lever of transformation: the IBM case

In article of Harvard Business Review[1], IBM former CEO Samuel Palmisano explains how he was able to transform the company at times when business was good. The IT market was shifting but most employees did not perceive it as a threat pushing for change. Indeed, in the past, IBM had been a provider of computer hardware but the market had been increasingly calling more for integrated services and solutions.
In order to lead this strategic transformation, Samuel Palmisano has introduced a value-based management approach to replace the historical command-and-control approach. Value based management is about defining collectively a set of common values that will shape the behaviors of all employees to serve the strategic challenges of the company. These values were defined and refined through a collaborative approach involving all IBM employees in a 3-day discussion on the company’s intranet. Because they were defined in a bottom up approach, they were more likely to be adopted and applied.
The IBM example illustrates the importance of a bottom-up approach to initiate change in good times. In the absence of a ‘burning platform’, one must be created to give a sense to the transformation. Reinventing the values of the firm through a collaborative approach saved the company from potential strategic failure.  As Samuel Palmisano puts it, “we were so successful for so long that we could never see another point of view. And when the market shifted, we almost went out of business.”

Always one step ahead in the transformation agenda: case of Cisco

The world leader of networking equipments, which has been leading an aggressive external growth strategy (more than $35 billion worth of acquisitions between 2002 and 2013)[2], is permanently earning the results of its strict discipline. In both fair weather and stormy times, the company has been massively reducing its workforce (6500 layoffs in 2011, 1300 in 2012 and 4000 in 2013)[3] to improve its competitiveness.
This frugal diet has more than paid off. From 2002 to 2010, revenues are up 90% while profit margins are up to 20.8% from 16.3%. Between 2012 and 2013, the turnover has grown by 6% and its net operating profit by 24%[4].

EXHIBIT 1 – Cisco: showing strict cost discipline in a high investment cycle
 

Source: Cisco Annual Reports

«The hardest thing you do as a leader is to change something that is working well (…) and so I had to move from a command-and-control leadership to collaborative»
John Chambers,
CEO of Cisco

The first key success factor of the good financial results of the company rests on the CEO‘s ability to question and renew his management approach in a favorable economic environment. As he said himself «The hardest thing you do as a leader is to change something that is working well (…) and so I had to move from a command-and-control leadership to collaborative».

Beyond the new management approach, the success relies on 4 pillars:
  • Collaborative leadership: Involving employees in decision making, listening and reacting to ideas, finding common grounds and striking compromises. A social media was set up to connect all of the 60 000 employees in order to help collaboration and identify new opportunities.
  • Constant optimization of the workforce adapted to the next economical context. In 2006 only 4% of Cisco’s employees were located in Emerging countries[5] and in 2009 this percentage has tripled in order to adjust the global workforce and match the demand.
  • Changed incentive schemes for top management:  To stimulate his senior team Cisco’s CEO set up a measurement system on how well they collaborated. As a result, some 15% of the top management team left — those who did not like the new approach or could not do it.
  • Change in the organizational model: To implement the collaborative leadership and bring agility to the company’s processes, the historical silos were broken into functional organizations, and cross functional groups (10-15 managers) were created to pursue new business opportunities.
     

2. Leading a cost reduction program : key convictions


Launching a cost reduction program with no apparent threat on the horizon is a long journey. It requires defining and aligning all stakeholders on the purpose of the program and eventually initiating a shift in the culture of the company.  Given our track record in designing and leading competitiveness programs, we would like to share our key convictions: 
  • Align Executive Committee around an ambitious shared cost cutting strategy: in order to do so, top executives should be involved in identifying the purpose that must be given to the cost reduction initiative within the company’s strategy. In other words, Executive Committee members need to create the ‘burning platform’ the company is missing to launch and embody the cost cutting process.  
  • Develop a culture of performance at all levels of the organization, starting with the Executive Committee: achieving a program of this scope requires developing a performance driven culture across the organization. Executives should become ‘owners’ of the transformation and act as project managers in charge of a predefined perimeter of actions. They should be accountable for delivering results. Creating a specific cross functional entity led by an Executive Committee member in charge of transformation can be a true enabler for change. Indeed, half of CAC 40 companies have a specific entity dedicated to transformation, half of which report directly to an Executive Committee member[6].
  • Rethink the organizational model to break the silos: Strong foundations for cost reduction activities must be established before introducing game-changing efficiency initiatives. As a prerequisite to any cost reductions programs, the internal structure need to be optimized in order to deliver sustainable efficiency. Cost-reduction measures should cross all SG&A functions, business units and geographies. Because ad hoc or in silos initiatives do not bring any long term value, companies should look beyond organizational silos to manage cost reduction opportunities across the entire enterprise.
  • Articulate cost reduction with the ongoing PMI processes: The cost cutting strategy should be thought and built around the integration of acquired companies in order to deliver the expect cost synergies. Indeed, companies acquire many companies, integration and optimization of acquisitions should always be coordinated with the cost cutting initiative.
  • Set the right pace for the cost reduction program: determining the pace of the cost reduction program is critical to ensuring its long-term success. If the cost cutting initiative is too ambitious, it risks jeopardizing the social and managerial equilibrium of the company. If the pace is too slow, the cost reduction program might not deliver the expected results. Managing the right pace is about finding the equilibrium to motivate employees while minimizing risks of economic fracture. The ability to mobilize and maintain its momentum over time is what distinguishes a sustainable cost reduction program from a run-of-the-mill one.
 

EXHIBIT 2 – Managing the ambition and pace of cost reduction programs
The challenge in cost reduction programs is to find the right pace to  rapidly improve economic performance without putting neither the social equilibrium nor the motivation of managers at risk

 
 
  • Ensure successful execution through tight monitoring: well-defined and monitored KPIs are crucial to monitoring performance of the business. The company now operates two distinct business models – manufacturing and services – that require specific KPIs to gauge performance. Tracking performance in the solutions business with the relevant KPIs may be more challenging for a company traditionally operating a manufacturing model.
 
Leading a cost reduction plan in good times is a long journey: it requires a shift in culture and is a true challenge in large global corporations. It is challenging, but not impossible: some companies have successfully managed transformations without being pushed to change. They shared the belief that change without a ‘burning platform’ won’t happen. When not obvious, the rationale behind the cost-cutting initiative must be identified and clearly stated. That is the first step towards building strong dynamics around the program, ultimately leading to sustainable results. 
 
Authors
Philippe Remy – Senior Vice President – Philippe.remy@capgemini.com
Luc Agopian – Vice President – luc.agopian@capgemini.com
Younes Guessous – Principal – Younes.guessous@capgemini.com


[1] Paul Hemp and Thomas A. Stewart, Leading Change When Business Is Good: An Interview by Samuel J. Palmisano, Harvard Business Review, December 2004
[2]http://www.cisco.com/web/about/doing_business/corporate_development/acquisitions/ac_year/about_cisco_acquisition_years_list.html
[3] http://www.huffingtonpost.com/tag/cisco-layoffs/
[4] Morten T. Hansen, How john Chambers learned to collaborate at Cisco, Harvard Business Review, March 4, 2010
[5] Emerging countries: Central and Eastern Europe, Latin America, Caribbean, Middle East, Africa, Russia.
[6] OBEA, Directions de la transformation: quelles structures, pour quelles finalités? Sept 2013
 

About the author

Luc Agopian
Luc Agopian
Luc is a Vice President at Capgemini Consulting, based in Paris. He leads the team dedicated to purchasing. He is specializing in purchasing performance and working capital. He led several competitiveness projects in the manufacturing industry, the retail sector, luxury and energy. Prior to joining Capgemini Consulting, he was senior director and head of the Purchasing Performance & Working Capital team at Lowendalmasaï, a French consultancy based in Paris.

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