Getting Smarter About Cost Savings Initiatives

How customer value should influence the “what and how” of cost reduction – evidence from 27 years of primary data

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Short-term cost savings are often at the expense of long-term growth

The annual inflation rate in the United States rose to 3.5% in March, global energy indices rose more than 1%, and purchasing power variability is making it more challenging for businesses to predict cost. ¹ ²

In one industry example, technology executives indicated an overwhelming need to identify labor cost improvement, as well as broader operational changes to address increasing margin compression. ³

As sponsors and operators scramble to identify a path forward, efforts are often targeted at where the greatest synergy savings exist not taking into consideration how customers will respond or the impact on revenue stability.

And there may be no place in a business that feels this stronger than Customer Service (sometimes called Customer Success): AI companies touting reduction opportunities of up to 2/3rds of their workflow, or a continued shift to global Shared Service Center (SSC) for wage arbitrage. ⁴

However, we have seen Customer Service as a Strong driver of B2B Loyalty more than 22% of the time and the relative importance of which activities are most impactful differs substantially by industry. 5 Not taking a preliminary step to understand revenue impact and what aspects of the experience are most critical can be detrimental.

Service is just one example of where synergy savings are often targeted. Organizations pour millions into initiatives to improve customer relationships from the back to front office, but over 50% still fail. ⁵

This underscores the need to first capture customer feedback, pinpoint areas for synergy by modeling across the entire base and track ongoing variation/impact periodically. Those extra 2-3 weeks to get smarter about where to focus can yield 10X greater returns. ⁵

Figure B:

Not all customer experiences have the same impact on Loyalty. When this is ignored, organizations can pour investment into areas where customers think performance is great. This leads to no impact on financial value (i.e., Share of Wallet, Churn, CLTV) because customers did not change their behavior.

“Our operational diligence helps identify which areas to target cost and efficiency based on P&L and industry benchmarks. These numbers don’t tell the full story.” - Middle-Market Private Equity Firm.

Identifying and targeting “Black Holes” to drive cost savings without impacting customer value

There were four common areas observed across industries. Black Holes can drain resources without adding value but require a vigilant “outside-in” approach to identify.

Product Variants:

• Industrial Services: Significant investment in product packaging as part of delivery process in high transaction volume industries

• Electronics: Offering numerous variations with different features or slight changes that do not impact Customer Loyalty

Extensive Product Lines:

• Manufacturing: Product SKU list with uncommon specs, one-off orders, and no formalized sunset process for low order SKUs

• Software: Tiered packages where differences are marginal or irrelevant to users
  

Over-Elaborate Service Materials:

• Telecommunications: Detailed service manuals and user guides for basic services, which must customers do not refer to or prefer an alternative such as online video

• Business Services: Complex brochures or offering overviews
  

Documentation Accuracy:

• Business Services: Overly detailed monthly statements or customer reviews that are too complex to understand

Industrial Services (Add-On) Case: Changing the production process to provide bulk instead of individual products for non-customer facing applications led to ~6% EBITDA savings

A leading approach: Getting more specific about where to target cost and productivity improvement by adding a lens for customer value

Insight to Action: A practical example of prioritizing

Seeing it in Action

In addition to the approach, the GrowthOptics (“GO”) platform helps prioritize value drivers that differentiate you, including identifying areas that are not important to your customers yet drive complexity and cost.

In this example, specific aspects of account management were identified as critical while certain billing and invoice processes were driving overhead costs without any impact on Customer Loyalty.

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Sources

1. US Bureau of Labor Statistics (CPI), 2024.

2. US Bureau of Labor Statistics (Energy), 2024.

3. AlixPartners, 2023.

4. Klarna, 2024

5. Metanalysis of Loyalty Research Center Data, Conservative Estimates