Companies challenged to achieve higher savings this year, after rapid cost takeout in 2022
Decentralized decision-making and inconsistent measurement contribute to missed targets
Enterprises worldwide are aiming to cut costs an average of 7 percent in 2023, after realizing similar cost savings last year from rapid cost takeout measures, according to a new survey by Information Services Group (ISG) (Nasdaq: III), a leading global technology research and advisory firm.
The latest global ISG Buyer Behavior Study, conducted in February 2023, asked more than 250 executives about their cost optimization plans and cost-savings targets, among other impacts.
“Companies are raising the bar on cost savings this year, but they will be challenged to do better than last year, when they were able to pick much of the low-hanging fruit,” said Alex Bakker, director of primary research for ISG and co-author of the cost optimization study. “Generating consistent, year-on-year savings requires a much more detailed and thorough evaluation of costs.”
According to the ISG survey, 69 percent of enterprises met or exceeded their 2022 cost-savings targets. Of the 31 percent that missed their 2022 targets, the vast majority (20 percent) narrowly missed them.
“Managing costs at the speed of digital requires a shift in enterprise thinking and sustained, high-level focus,” said David Lewis, partner and leader of the ISG Cost Optimization advisory practice. “Our survey results revealed a strategic gap between 2022 cost targets and actual results, which may stem from inadequate prioritization, a lack of senior-level focus and inconsistent measurement on the part of enterprises.”
Lewis noted the magnitude of targeted savings was less a factor in whether or not a company achieved its objectives in 2022 than the approach it took to achieving those targets. The ISG survey found the majority of reported cost metrics are not actively or formally managed, and enterprises are challenged by manual cost reporting or consolidating results from a range of tools and sources, and by the delegation of cost leadership around the business.
Nearly all enterprises surveyed had a dedicated cost optimization program, yet around a third said their program did not have a dedicated lead, but instead had distributed responsibility across roles and lines of business for measuring progress against targets, often resulting in a siloed approach to achieving results.
“For cost optimization to succeed, organizations need to understand their business requirements, establish cost allocations and chargeback-enabling tagging strategies, develop KPIs and benchmark internal teams and external industry peers,” Lewis said. “Further, they need to combine strategy, governance and best practices to drive the financial accountability required to achieve their targets this year, because all the easy wins have already been taken.”
Both customer experience and information security were cited by respondents as extremely important to their organization’s strategic direction, with more than half saying initiatives in those areas would be completely protected from cost optimization.
The primary motivations for cutting costs, the survey found, were long-term efficiency and business transformation and growth, cited by 70 percent of respondents. Less than a quarter of respondents cited economic conditions as the motivating factor, even for programs launched in the past year.
“Cost optimization in this environment is about transitioning from long-term fixed commitments to long-term strategic relationships,” Lewis said. “Enterprises should look to achieve cost savings not only for bottom-line impacts, but to free up resources to fund continuous digital transformation programs that improve customer and employee experience, meet increasing ESG requirements and fuel sustainable growth.”
The ISG Cost Optimization advisory practice helps clients identify, achieve and sustain cost savings; improve productivity; re-invest savings in new digitally enabled business models and digital transformation initiatives; enable competitive resilience and reduce technical debt. Click here for more information and the full results of the 2023 ISG Cost Optimization Survey.
ISG (Information Services Group) (Nasdaq: III) is a leading global technology research and advisory firm. A trusted business partner to more than 900 clients, including more than 75 of the world’s top 100 enterprises, ISG is committed to helping corporations, public sector organizations, and service and technology providers achieve operational excellence and faster growth. The firm specializes in digital transformation services, including automation, cloud and data analytics; sourcing advisory; managed governance and risk services; network carrier services; strategy and operations design; change management; market intelligence and technology research and analysis. Founded in 2006, and based in Stamford, Conn., ISG employs more than 1,600 digital-ready professionals operating in more than 20 countries—a global team known for its innovative thinking, market influence, deep industry and technology expertise, and world-class research and analytical capabilities based on the industry’s most comprehensive marketplace data. For more information, visit www.isg-one.com.