Experience Spotlight

Dec 1. 2020Author: Carl LoBue

Reducing Costs is So Passé… Or Is It?

Let’s start with a statement that will sound obvious, but which seems to have been forgotten— Profits can come from anywhere. A CEO can increase their profits by selling more products and services, yes, but they can also leverage new automation technologies, or increase their operational efficiency, or take myriad other cost controlling activities.

Every CEO would say they know this. But if you paid attention to the strategies of most modern CEOs, you’d come to think there was only one path to increasing profits— growing the top line.

Now, top-line growth will always be a critical strategic lever. But CEOs can only focus on top-line growth as their sole profit-driving strategy when they operate within a business environment that produces a steady stream of reliable opportunities to capture.

And even though CEOs have enjoyed an opportunity-rich business environment for a long time, that environment is currently changing, and the stream of top-line growth opportunities is beginning to dry up. While this change in the underlying business environment will affect banks most directly, all service industry participants will also suffer if they continue to put all of their profit generating activities in one basket.

Make no mistake. We are in the middle of transitioning to a new business environment where CEOs who maintain a singular strategic focus, and who fail to start praying at the altar of cost containment, will find themselves in trouble, and their companies will be punished by Wall Street.

The Undeniable Laws that are Changing Our Environment

To be clear-we are not warning about an upcoming recession. We aren’t reminding CEOs that they might need to tighten their belt for a few years to squeak through a market downturn until the capital starts flowing again.

We are talking about a deeper change that is already underway, that is unstoppable, and that will likely alter the economic environment for the next few decades.

We are talking about global demographic trends which are fostering flattening yield curves and zero interest rates.  All the Fed. and Eu loosening will not save us.

We are talking about our country’s flattening yield curve. It has been produced, and is being sustained by, long-term demographic trends that are not going away for at least 20 years. And we have a pretty good idea of what this change will bring to our business environment.

After all, we have observed what has happened in Japan, Germany, and many other countries in the EU as they experience population stagnation and decline.  This trend will reduce demand pull and the resultant inflation we have become accustomed to since the Industrial Revolution.  to similar long-term demographic trends. We have seen that any country that experiences a demographic downtrend will see their interest rates go down until they hit zero, or even become negative.

Unfortunately, this is not avoidable. It’s a simple output of the undeniable laws of supply and demand. And we haven’t seen it in this country for a very long time. The next couple of decades will be the first time since the Industrial Revolution where population growth will not here to create demand pull.  This means the pie will not be growing like it has been for two centuries. None of our CEOs have every experienced this, and few CEOs are prepared for what that will bring.

CEOs don’t have the luxury of waiting decades for our government to recognize that inflation is in a long-term funk and to revise their economic models. They will have to rapidly adapt to this new business environment we are all beginning to operate within, and evolve their businesses to capture the altered set of opportunities that it offers.

 

How Top-Line Growth Opportunities Will Transform

We don’t want to sound too doom-and-gloom. Over the coming decades top-line growth will still be a critical strategic factor for every CEO. The market will still provide external profit-driving opportunities to capture. But the nature of those opportunities will change in two ways.

First, top-line growth opportunities are going to become much more limited, uncertain, and challenging to capture.

To effectively compete for these opportunities, CEOs will need to focus obsessively on providing the best customer experience possible. They will need to allocate additional resources to identifying their customer’s pain points, improving their satisfaction levels, and continuously uncovering areas of their customer’s experience that they can further enhance. As customers become scarcer, CEOs cannot afford to take any of them for granted.

Second, the nature of these top-line opportunities is going to change.

Most future growth opportunities are going to come from either consolidation or fee-based services, requiring a substantial change in how CEOs run their businesses. You see, even more than others, these services live and die on their margins. If a CEO doesn’t manage costs tightly, profit leverage will become very challenging in the future.

Like it or not, CEOs will need to return to the fundamentals of cost management if they want to profitably fulfill their top-line growth opportunities over the coming decades, and if they wish to derive additional profits to fill the gap caused by fewer opportunities hitting the market.

 

Returning to the Fundamentals of Cost Management

All of that is the bad news.

The good news is— the fundamentals of cost management are not going to change over the coming decades, and cost reduction opportunities are everywhere.

Because most CEOs have been so focused on solely pursuing top-line growth opportunities, the majority of companies carry multiple inefficiencies that can be rapidly ironed out to produce immediate profit generation.

Managing costs. Reducing direct expenses. Eliminating non-value efforts. Identifying areas of cost leakage. Raising the value of resource performance. Leveraging next-generation infrastructure and automation tools. All of these activities offer viable paths a CEO can follow to improve their bottom line in any business environment. Even though opportunities will soon be in shorter supply, by following the fundamentals of cost management CEOs will find profits in every line.

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Author

Carl LoBue

Over the last four decades Carl has developed one big insight— if you improve your business infrastructure, you will improve your results. For nearly 40 years, Carl has proven this point by re-engineering dozens of global enterprises to measurably increase their efficiency, improve their sales, and multiply their market value.

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