10 December 2020
Topics in this article
  • Cost Optimization
  • Finance & Procurement

As we approach bonus season, companies across the United States are still reeling from the pandemic and entering the end of 2020 in varied financial states. Some companies have re-written their bonus plans entirely to keep executives from experiencing a big pay drop. What could these new goals look like and how can companies continue to best optimize their spend?

In a recent article, The Financial Times identified changes to bonus plans as adding non-financial metrics to bonus qualifications and excluding months of poor profits increased during the worst of the pandemic. This could include rewarding saving cash rather than generating earnings, reducing target incentive levels for 2020 and resetting long-term performance targets for 2021. According to a September report from Semler Brossy Consulting Group, at least 20 US companies altered their annual bonus plan to add new goals beyond profits, such as cash flow or operational metrics.

Even more have published changes this month. At least 10 companies have changed their bonus pay performance period to reward executives and eight added board discretion to determine payouts, the report said.

Over the course of the pandemic, companies across the board were cutting jobs as a cost management strategy. We saw large numbers from industries most effected by pandemic-related difficulties, including oil and gas giant Schlumberger cutting 21,000 jobs – about a fifth of its workforce. While these measures may have helped companies remain afloat, or in some cases push through previously opposed change, there must be different approaches taken for long-term cost optimization. There will be more restructuring, including to executive pay changes, in the months ahead. Let’s take a look at ways businesses can set themselves up for success in the near and long-term future.

As companies adjust bonus plans, cash and an upcoming war for top talent need to be considered.

It made business sense to focus on liquidity of self and supply chain early in the pandemic. A lot of organizations took bonuses off the table for 2020, or deferred until a later date. It wasn’t just bonuses. Discretionary expenditure is the first to be put on pause in a crisis. But it was a timely reminder to many that bonuses are most often discretionary, performance linked, and part of a broader package.  

In the short term, the employment market seems to have swallowed this, the prospect of mass employment working as both carrot and stick. However as we return to growth, the war for top talent will reignite, and it will be hotter than ever. In a virtual world, we are already seeing a lot of effort put into redefining the employee experience and comprehensive benefits packages. It is an area of the market that has not been overly dynamic and is ripe for innovation and disruption.

When it comes to costs, business leaders need to keep alternatives top of mind.

In our 2020 State of Spend report, research suggested that on average, Fortune 500 companies spend 75% of their outgoings on supplier costs, with the remaining 25% on expenses related to employment costs. Internal cuts are most frequently aimed at the 25%, and ultimately linked to reducing headcount. Because external cuts are related to cash spent with suppliers, there are numerous short-term levers that can be pulled here such as reducing consumption, negotiating prices, or changing the level of service. Additionally, there are more strategic approaches, likely to take longer, that deliver much more value. Think about re-engineering products or services, changing suppliers, outsourcing, make vs buy, digitization, automation and more.

It’s important to consider how to get the best form internal and external costs

So, if finance leaders want to make a real impact on growth or costs, the 75% we mentioned earlier is a great place to start. The trouble for finance leaders is that business buy lots of things. The finance leader cannot know where to go, what good looks like, or what to pay when it comes to solutions they can actually implement. With speed paramount, seeking a blend of internal and external advice seems the best choice for both the pragmatist and the innovator because of its ability to rapidly blend market knowledge and company knowledge & culture. That’s where strategic procurement should come in.

Most businesses are not the same as they were nine months ago, something has most likely changed. It is likely that the 70% of cash out, no longer reflects todays’ business model or reshaped organizational objectives. We are advising our clients to take a good look at every $ and optimize external costs; reduce where they can, opt for different approaches where there is volatility, and invest where they depend on a partnership for growth. That’s what strategic procurement delivers.

Experts are exploring how to reduce in areas such as business partnerships, outside sourcing and transactions to prepare for Q4 losses.

Each company is different but, when it comes to quickly controlling non staff costs, usually discretionary expenses are the first thing to be put on hold (like third party contractors, marketing, etc.), along with improving the cash position (working capital). Unfortunately, mid to long term some of the “more discretionary” spend areas are often also some of the key tools to spark growth. And so it makes sense to consider partnerships in the round; what will I need to quickly scale? Will my business partners still be there for me?

This doesn’t mean that you can’t cut discretionary spend, or any other type of spend. Many legacy contracts from the beginning of the year will not be fit for purpose, either in scale or objective. It just means that before jumping into anything, we are advising our clients to understand how that pound or dollar works for them now, and their short term cost cutting objectives and mid-term acceleration into  growth mode. So, it is important to focus on your short-, medium- and long-term objectives, and avoid cutting blind.

As we approach the end of 2020, it is apparent we need to cut (or at least right size) costs, and not people. It is not only the right thing to do, but it is the smart business move, with greater impact, less risk, and faster payback. Reductions in external supplier costs are far less likely to negatively impact firm reputation, growth prospects, and innovation, than headcount reductions. Done well, organization will still have key partners, and internal teams there with them in the tough times, committed to organizational goals.

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