Visualize, Itemize, Prioritize: Growing Through Cost Reduction

FP&A at one company supports self-funded strategic investments by “relocating” expenses to growth projects.

In this challenging economic environment, many companies are cutting costs. However, depending on how they are executed, budget-tightening efforts can backfire by sabotaging top-line growth. At one NeuGroup member company determined to avoid that, leadership adopted a unique mindset. Instead of making arbitrary or across-the-board cost cuts, it is reassigning or “relocating” expenses to free up funds for growth projects.

• In 2021, the corporate set ambitious four-year financial targets for EBITDA, sales and EPS growth. “Our challenge was how to consistently invest in our long-term strategy and transformation agenda, while delivering on our financial commitments,” explained the company’s SVP of FP&A at a recent meeting of NeuGroup for Heads of FP&A.
• Meeting that challenge meant deciding whether current spending items should be kept or cut. “Instead of relying on last year’s budget as the baseline, we started with the assumption that all expenses must be reassessed,” she said.
  • “Our objective was to accelerate our growth by redirecting resources to the most significant long-range plan (LRP) priorities and areas where being best in class is critical to our success.”
• Prior to launching this self-funding growth initiative, new or additional investments had been included in the budget for each area. “That did not provide us with a good way to look across the company to prioritize which investments have had the largest impact.”

Getting the VIP treatment. In collaboration with the senior leadership team (SLT), FP&A constructed a three-pillar process of visualization, itemization and prioritization, or VIP.

• The first pillar involves visualizing investment opportunities that are aligned with the company’s LRP and targeted at boosting economic profit and shareholder value.
• “The goal was to produce an exhaustive list of investment options that can be prioritized once funding capabilities become clearer,” the member said.
• This stage took 10 weeks and included weekly discussions to envision what’s possible for the company, and where it needs to invest to become best in class.
• With the help of an analytics tool, the core team went through each member’s investment proposals and produced an exhaustive list of possible areas for strategic growth.
• This was not an easy task, according to the member. “Every senior leader had his or her investment projects in mind.” However, it was made easier by a clear mandate from the CEO for the SLT to find alignment.

Itemizing expenses. Concurrently, FP&A leaders for each function worked with their business partners to build a list of every P&L spend item over $10,000. While this sounds like a low threshold, “the savings can add up,” the member said. In addition, the increased visibility revealed legacy expenses “that just kept recuring year after year, which managers did not even know about.”

• The eight-week itemization stage involved creating a granular categorization of all expenses for each functional leader. Then, each function delivered a hard copy of every expense line item in its P&L. “We created a 150-page consolidated binder for all of the functional areas.”
• The purpose was to identify expenses that can be relocated to fund growth projects. The core team and SLT went through the compiled data in a three-day meeting and decided which expenses should be kept, cut or reassigned.

Tangible results. The exercise paid off: In both 2021 and 2022, VIP yielded over $100 million in savings. “It was lots of small stuff that added up,” explained the member.

• Examples include not using external recruiters in HR. “We are also closing out facilities and transitioning into small hubs to support a fully virtual workforce.”
• While the annual planning process occurred in parallel with this special project, “we were able to leverage the prioritization in preparing next year’s budget.”
• In 2022, the process went more smoothly. “The first time, we had to deal with a lot of messy data. Much of the cleanup work carried over to support better analysis in 2022,” she said.
• Preparing for a possible third round in the future, she expects data quality to be even higher.

Success factors. Having gone through this process twice, FP&A has learned several important lessons to apply going forward.

1. Start with growth. “We worked back from defining the growth areas’ investment requirements to how to fund those requirements.”
2. Immediately reinvest. VIP incorporates some elements of zero-based budgeting, or ZBB. In particular, the “starting-from-zero” aspect. To avoid the pitfall of generating savings and not reinvesting them in top-line growth, “we relocated the savings right away to growth projects and the functions started to spend them. By putting this discipline around investments, we ensured that the funding would be prioritized even if other budget tightening occurred.”
3. Convene a tight group. The decision-making process was handled by a very small group: the SLT and five FP&A staff. Leaders had to be able to present their own expense items and answer questions. “With a larger group, it would be harder for leaders to keep the enterprise mindset, which was critical to the exercise,” said the member.
4. Be very specific. During round one, leaders were allowed to be a little vague about where they could find savings. “We called those the ‘go-get areas.'” For example, an executive would tell the group that he or she could likely save X% from reducing supplies expense, but they would not materialize. The second time around, “we were much stricter on those. Savings had to be visible.”

Next steps. Whether there’s a third round of VIP or not, “the expectation is that after a couple of rounds, the organization will have stronger policies and procedures to reduce unnecessary expenses before they are spent,” the member said. While progress has been made, there’s more to be done.

• “The goal is for this to be an every-couple-years exercise as there are significant new investment opportunities to fund.”
• While this is an intense and time-consuming project, the member said FP&A staff now ask to be part of the core team because participation provides them with a unique opportunity for visibility with the SLT. “Where else can a manager interact directly with top executives?” the SVP of FP&A said.