June 27, 2017,   9:05 AM

A Better Way To Cut Costs For GCC Companies

Karl Nader


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[caption id="attachment_25259" align="alignright" width="242"]Karl Nader Karl Nader[/caption]

Companies in the GCC are facing mounting pressures. Operating expenses are rising, driven by the requirement to hire local staff instead of expats, and increasing regulatory changes.

Margins are shrinking as multinationals take over more activities from their local partners. Moreover, revenues are declining due to an overall increase in competition and the slowdown in economic growth.

In this new business climate, which seems likely to persist, companies need to rethink their business models.

Companies that fail to act in the face of these trends may struggle. Many others are making the wrong moves: they are cutting costs across the board, drastically and reflexively, looking for short-term reductions without fully considering the impact on their long-term competitive strength.

Too often, they are eliminating the productive “muscle” of their company along with the unwanted “fat,” and dooming themselves to a never-ending cycle of further cuts that will lead to their future irrelevance.

For cost transformation to lead to success it needs to be strategic—to make clear choices about what to keep and what to cut depending on how important it is for the company’s strategy.

The Fit for Growth approach shows how cutting costs can be a catalyst for precisely the change that GCC companies need—to survive in a difficult business environment and to position themselves for growth in a more competitive future.

The approach has three fundamental elements:

Focus on a few differentiating capabilities

Build a clear identity for your company based on the handful of things it does better than any other business. Examples of differentiating capabilities include IKEA’s elegant and low-cost design, Starbucks’ ability to create a unique customer experience, Danaher’s continuous improvement approach, or Apple’s profound understanding of how people live and work.

When you know what your company does well and base your strategy on it, this provides your staff with a “lighthouse”: a clearly defined, focused goal that everyone can identify.

That in turn directs them all to fulfill the same objectives. In such companies, employees know what drives the company’s strategy and outsiders do too.

Align your cost structure to these capabilities

Developing a lean and deliberate cost structure naturally follows from identifying your company’s key capabilities. You need to manage your company’s costs not only tightly but also thoughtfully. Not all costs are bad. Expenses that strengthen your company’s differentiating capabilities are good costs, and they should be adequately resourced.

This process will enable you to determine what capabilities and business segments can be eliminated or scaled back—take out as much of the costs associated with them as possible.

You can review where your operations and people are located, and explore opportunities to achieve efficiency of scale or economies of scope. You can also review and re-engineer business processes to eliminate waste.

Organize for growth

In most large organizations, longstanding relationships have developed in an ad-hoc fashion between the center, local business units and shared pools of resources that provide group services such as human resources and IT.

Redesigning your organizational model—so that your operations, business locations and business processes are aligned with your strategy and support your key capabilities—enables fitness and growth in two ways: by enabling and sustaining cost reductions which can be redeployed as investments in differentiating capabilities; and by creating the right conditions for managers to drive growth.

GCC companies need to reconsider their costs, but they should take a scalpel—not an axe—to their expenses.

A cost-cutting strategy geared toward growth may require much deeper cuts in some areas than traditional cost-cutting approaches, but will also reinvest in the areas that drive the company’s differentiation in the market.

This thoughtful and deliberate approach will position GCC companies to succeed in the future.

Karl Nader, Partner with Strategy (formerly Booz & Company), part of the PWC network.

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