How to reduce cost while building a leaner, faster, stronger organization

By Kevin Kelley, Sarah Baxter, and Emma Crockett

Managing organization cost remains a critical topic for executives as economic uncertainty continues. Our clients are increasingly struggling with costs that are rising faster than top-line growth; while some drivers are well-known, others present incremental challenges.  

Many clients struggle with a perpetual principal-agent problem: leaders in functions without P&L responsibility are always motivated to increase the number of positions in their organization, leading to constant cost creep. While the impact of one or two new roles here and there may seem trivial, over time costs get out of control and organizations struggle under the inevitable inefficiency and high ‘overhead’ that arises. 

Another source of rising cost is a mismatch between future priorities and legacy structure and spend. As organizations will invest in and drive towards one set of priorities, given a set of industry, regional, geopolitical conditions – but then the external environment changes, and the organization must pivot. Without making the explicit choice to move resources from old priority areas to new, leaders will face increasing overall cost – and a lack of clarity around objectives.  

A more novel phenomenon has arisen from widespread, significant investment in technology and digital in the last few years, as Covid accelerated many companies’ digital agendas.  Capabilities and individual productivity are often enhanced by digital investments; however, claimed productivity improvements frequently do not translate to expected bottom-line cost reduction. In other cases, leaders have had to introduce new activities (and roles) to implement and maintain new tech, without making corresponding specific reductions in legacy activity, which offsets potential savings.

Some leaders may be motivated to set broad budget cuts to get cost out, quickly. However, we believe that these measures are insufficient for achieving sustainable cost reduction. BCG’s approach focuses on detailed solutioning and problem solving at the position level. We work side by side with client designers to ensure that org changes directly address underlying challenges and therefore produce real outcomes.  BCG’s approach delivers sustainable cost savings quickly, but also reduces duplicative work, automates, and digitizes where possible, and refocuses employees and their priorities around the organizational mission. We then work with leaders to rapidly staff their new structures and implement new activities, behaviors, and ways of working to immediately transition to performing and winning in the new model.  

An Organization Reset to Create a Leaner, Faster, Stronger Organization 

As discussed previously, BCG’s Org Reset approach is two-pronged: companies must simultaneously play defense (addressing core challenges and designing for sustained cost competitiveness) and offense (creating organizational capability and talent strategy for tomorrow).  

What does this look like?  

Organization and operating model. Our clients use the opportunity of a cost transformation to address pain points and realign the organization towards its strategic goals. For example, many leaders will utilize this event to consider their strategic areas of investment: which Business Units are performing well, and which are consuming a disproportionate share of resources? What is the ROI on recent investments, and where can we make changes to accelerate productivity gains, or decommission underperforming investments? Not only do these discussions generate real cost savings potential, but they also refocus organizational priorities, resources, and leadership attention on areas of highest importance.  

Leaders must also consider how to design the roles in their organizations to strengthen individual accountability and commitment to cost-conscious decision making. They can do this by designing position incentives that reinforce desired behaviors (e.g., performance bonus tied to P&L performance). Or, they may recognize a need to improve efficiency of shared functions to enable delivery of the equal-or-better output from a smaller cost base.  

From here, it becomes much easier to perform a detailed org design of the structure. Designers now have clear parameters when it comes to reducing work (does a given activity align to newly clarified priorities?). Some positions may be closed, while others are created in growing business areas. And, ideally, leaders also have stronger accountability around where to invest in digitizing or automating work, with a view into enduring ROI/ productivity gains and firm deadlines for savings realization. 

Talent, skills, and capabilities. Leaders who fail to consider the talent implications of an org design program are – to put it simply – putting org and cost objectives, as well as future performance, at significant risk. It is not enough to design the boxes in the future state org chart; companies must also invest the time and effort into making sure that those boxes are filled by the people who are best equipped to lead the organization into the future vision.  

Talent selection and staffing as part of an Org Reset starts with a data-driven understanding of the skills and capabilities required in the new structure. Then, client designers go through a process of staffing employees to positions where there is a match between role requirements and individual capabilities and proficiency. When executed optimally, designers give consideration to: retention and promotion of key talent; placement of high potential talent into new or strategically important positions; visible, successful placement of employees who demonstrate desired behaviors and organizational culture. If headcount needs to be reduced as part of the program, leaders should skew these exits towards those who do not demonstrate desired cultural and behavioral attributes.

Leaders at all organizational levels need to commit to a fair staffing process where choices are made on transparent rationale and everyone is treated with integrity – regardless of individual staffing outcome. Read more about equitable talent selection in this LinkedIn article: Employer Integrity in Turbulent Times: What to do when you must let go and hire in tandem. 

We have shared some thoughts on the “what,” but the “how” is equally important.  

Change Management. We believe it is essential to create a context where individuals are motivated to make decisions aligned to organizational objectives. For an organization to sustain any objective – including those around cost – its employees must understand their role in executing the mission, and then be empowered to act accordingly within the new context.  

The process of creating this new context starts with the org program itself. A cascaded process helps create the right organizational context to drive the desired behaviors. It also demonstrates leadership visibility and ownership as each leader – starting with the CEO – designs, staffs and implements his or her next layer within boundaries and guidelines.

This approach has many benefits, including: priorities and objectives flow from the top, so the mandate of each position is tied into overall objectives for that Business Unit; leaders closest to the work are given the autonomy to design and solution challenges in their next layer, creating a sense of ownership and buy-in. Additionally, due to the participative nature of this process, employees are quickly onboarded to their role in the new structure, then entrusted to design their next layer. This process results in a fully changed organization, with employees working and making decisions in their new roles, quickly. 

How BCG helped one client manage people costs to prepare for the future 

Our approach can deliver a fully implemented, future-state model in 4-6 months, depending on the size of the organization and the magnitude of the required changes. 

We recently worked with a client that was experiencing a steady, significant decline in revenue, and who urgently needed to reduce cost while also investing in business lines with the highest revenue potential. The client had undergone several rounds of layoffs in the recent past but had not previously focused on optimizing talent.  

In collaboration with the company’s leaders, we produced a two-step Org Reset plan. First, we helped design the new operating model and a detailed organization design that directed decision making and resources away from declining legacy businesses and toward new initiatives. The reset plan gave the new business units greater autonomy, while allowing them to take advantage of enterprise scale and shared commercial and core functions.  

We then helped the company implement a talent enhancement program, placing emerging leaders into roles critical to the organization’s mission and strategy. We helped them to move high potential talent from legacy to new business lines, and supported selective hiring to fill roles for which internal talent did not exist in the current organization.  

Over the course of a 6-month, cascaded process, the client was able to reduce structural costs by 20% - but they also enhanced P&L accountability and matched it with resource control, placed the right people in the right roles, and adopted a future-proofed operating model that would enable the organization to flex to changes in the market and regulatory environment. The exercise also helped to generate ownership and commitment among the organization’s senior and middle-management leaders, who led the detailed design, staffing and implementation of the new structure.  

Getting to Leaner, Faster, Stronger 

The prospect of managing org cost can be daunting. While there is no easy fix, BCG’s approach delivers far-reaching, positive impact – fast. Once costs are reduced, it’s critical to create an organizational context where individuals are motivated to manage cost in the long term. This entails aligning accountabilities, decision making, and incentives to overall organization goals, while also enabling teams to work together effectively to handle future challenges and seize opportunities.  

Interested in learning more or connecting with us?  Visit our Cost Management, Organization Design and Talent Management pages to learn more about how we help organizations prepare for the future.