Cost Optimization – The Margin of Resilience

Nitika: COVID has brought many buoyant industries down to their knees from a social, economic, and even an operational angle. The hospitality industry, travel, gaming, casinos, energy & utilities have all been severely impacted. Many companies not just in these industries, but across the board are in a position where they have to take the ordinary decision of having to put their employees on furlough and in many cases having to let them go. Right now. It’s a fight for survival. Right now, cost takeout is not an option. It’s non-negotiable. However, cost management for what we have seen often falls short of what is possible and what might be necessary for the near future. Today I have with me Nilesh Thakker, Managing Partner and Global Head of our Engineering Excellence practice. Nilesh has extensive experience in helping companies deal with this particular situation and especially how to ensure that they are poised to take on the current corporate crisis. Thank you, Nilesh for joining us today.

Nilesh: Thanks, Nitika.

Nitika: So Nilesh, current data shows that if companies leverage the right levers, they can drive a rapid cost takeout of close to 20%. What are those levers and why is it critical at this juncture for companies to provide their organization with the requisite scaffolding if you may, to fortify themselves during this crisis?

Nilesh: So Nitika, every company needs to continue to innovate and for innovation they need talent. And now because of COVID they have other factors such as digital transformation, employees are working from home so there’s more employee transition transformation that needs to take place in addition to your product innovation. You need to now put in customer digital transformation and digital transformation initiatives, which require more global and technology talent. So, there are three main ways in which companies can optimize their costs. One is looking at your entire product portfolio and figuring out in which products they should continue to invest, where should they optimize the cost or investments, and where they should re-invest. This is a good time to look at your product portfolio and make the right choices. The second – do you have talent at the right locations. Most companies, even if they’re using global talent, they are using it sub-optimally or using them in staff augmentation more, rather than using them from a disruptive, innovative, leadership point of view. The cost benefits considerably increase if the global talent is leveraged more effectively. So if you’re not using at least 50% of your talent in low-cost locations, that’s one way to look at it. But if you already are looking at global talent, make sure that you’re leveraging the talent effectively. And the third area where cost takeout can be done is by making outsourcing effective. We find that companies have multiple vendors and that they don’t use the right business models with these vendors. They don’t have defined strategies on what they should outsource and what they should insource. So looking at those areas, there’s another 15 to 20% of cost savings you can take out. So if you effectively use these three methods, we believe that the minimum you can get is 20% savings and there are companies that we have worked where they achieved 30 to 35% savings with these initiatives.

Nitika: Great, thank you so much for that perspective, Nilesh. So a quick question and you talked about these three levers, which of these levers can be exercised quickly to take out the cost in the near term, and which one of these are long term plays?

Nilesh: So, as I mentioned, outsourcing effectiveness is something that you can do very quickly. For example, if you’re using time and material, changing those contracts into most managed services could be something you could do very quickly. It reduces the amount of overhead that you need to deploy to make those contracts work. In addition to that, you’re able to offload some of the risks which you may have now that outsourcing partner may be able to take greater risks. Plus, you will be able to get better talent because they are more motivated to deliver those projects as per quality and schedule. So that’s one way of doing it. Also consolidating your vendor. So if you have eight vendors, you get on an average of about 30 to 40 people per vendor. You’re not getting the attention which you should be getting from these companies. So cutting it down to maybe two or three niche key vendors which are effective for you could be another way of doing it. That’s one way. But also product portfolio optimization. That’s not something which can take a lot of time we can work with companies where they’ve been able to make these investment decisions in less than 60 to 90 days where they’ve been able to focus on products which are in the growth curve in a product lifecycle, as compared to where products are either declining in revenue or mature which is not going to give you the boost in revenue, which they should be getting from the investment. So those both are easily done. And now because it is so easy to set up operations globally, we can set up operations for companies in 60 days to 90 days where you can have people working for you in a global location in about a 90-day timeframe. So you can have a team of about 10-30 people in about 90 to 120 days from today. So, I would say if all three done with the right experts, you can get to those cost savings pretty quickly.

Nitika: Got it. So that’s a great point Nilesh. So the good thing that you’re saying is in the short term, or the long term, it really depends on what kind of machinery you put around it to be able to drive the outcomes. So another thing that we’re looking at is that everybody talks about cost takeouts, but we don’t really talk about what could potentially go wrong with such costs. takeouts, what are some of the common mistakes that businesses make while going through this process?

Nilesh: Yeah. So you know it’s ironic that we talk about cost takeout, but we want to make sure that you’re not just solving for cost, you’re solving for quality and output. So don’t try to hire the cheapest talent or the low-cost talent make sure that you are hiring the top talent. Don’t try to set up staff augmentation because that’s going to be the easiest thing for you to do. Hey, I need three people so let me just hire three people. Figure out what full team you want to send to the global location and hire for that team. Don’t try to rush into building a three-member team here and four-member team there. You may be able to grow quickly but you’re not going to get the productivity as you should be getting out of that. Secondly, make sure that the vendors or the partners you select help you for the long term and are strategic. Don’t go for the lowest cost partner because they may not be able to put in the investments that will help you in the long term. So make sure you are choosing the right partners who are going to get you the kind of skills that you need, which you don’t have internally, which will help you build those capabilities. So, make sure that you don’t rush into a decision, spend a couple of weeks to think about what the right way is of doing it, and then kind of plunge into it.

Nitika: That’s a very interesting point. So taking that conversation thread ahead, right, you said you need to spend a little time doing the groundwork so that the decisions that you make are impactful both in the near and the long term. So one of the things that we’re seeing is when you’re looking through these priorities, the question arises is whether you should look at all three together or whether you should look at one. So how do you prioritize one over the other? Or how do you ensure that you take all the adequate measures in a scenario planning so that you don’t lose sight of the long-term game while you’re straddling survival?

Nilesh: So if I were doing all three, I would start with the product portfolio optimization and make sure that I am investing in the right products. You will need to decide as to which products will be developed in each location. So we make that decision first, which will help you figure out what kind of talent you need, what kind of partners you need. If you already have that clear and if you know in which products should the investments be made, then you can start with both globalization and outsourcing initiatives right away. Outsourcing is probably going to go quicker because you already have partners who know how to hire where to hire, they have the infrastructure to get going. So an outsourcing relationship you can get started in as quickly as 30 to 45 days. As I said earlier, even the global locations we have set up companies in about 90 days, so it still takes you a little bit longer than outsourcing but it’s still pretty quick. When I used to set up teams about 10-12 years ago, it used to take six to eight months before you get started. So things have gotten relatively simpler and easier and speedier these days. So I would say start with your product portfolio, make sure that you know which products are built where and in which products you invest, then figure out which products you want to outsource, and which products you want to build with your own teams, and then go forward.

Nitika: Got it. Thank you for those inputs. So how rapid is rapid in today’s scenario?

Nilesh: Yeah, as I said earlier, we can analyze what are the potential savings in about a couple of weeks, where we can look at your current global talent distribution, your current products, current outsourcing relationships. A week later, we can do a workshop with customers and give them a pretty good overview and estimate as to where their biggest opportunities lie. So in about a two-week timeframe, you have a pretty good roadmap as to how you can go about doing it.

Nitika: Great. If companies have to think of just one thing, right as to why they need to ruthlessly prioritize cost at this point? What would that one thing be?

Nilesh: I think this is the right time to figure out what is your post-COVID strategy, right? What are the products people are going to need? How are your employees going to be most effective? How are your customers going to be interacting with you? You want to make sure that you have those things in place right now for that you’re going to need talent. Right now you’re not going to get any additional budgets from your CFO so you need to figure out how I’m going to leverage my current budget to spend on all these initiatives for future growth.

Nitika: Great. Thank you for your time Nilesh. I think this will help businesses as they try to build an inherent resilience into their operations, into their cost, and also in turn to their global teams. Thank you, it was a pleasure talking to you.