Dive Brief:

• Organizations who achieved unexpected cost efficiency gains during the pandemic risk losing the gains needlessly once normalcy resumes, recent Gartner research found. 

• Increased use of technology, evolving customer preferences and moves towards permanent remote work have created numerous efficiencies. But reintroducing costs based on recovered revenue fails to account for permanent business environment shifts, Gartner said.

• "Organizations are discovering a beneficial side to the extreme budgetary constraints they have been operating under for the past 12 months," Dennis Gannon, Gartner Finance Practice VP of advisory said.

Dive Insight:

Cheaper and more efficient operating practices have emerged across several industries during the pandemic, Gannon said. "For CFOs, this means costs need to be examined differently before being reintroduced, to ensure they are still relevant in this environment."

Typically, to preserve profit margins, companies match new costs to recovered revenue after a downturn. Companies then ensure the reintroduced costs align with previously established profit margin structures.

Gartner polled nearly 100 finance leaders in summer 2020 to identify a more effective "constraint-informed approach" to reintroducing costs. The approach they've developed focuses on identifying and leveraging the cost gains made during the past year as organizations reimagine operations. 

The first step for CFOs seeking to maintain cost efficiency gains is to determine which cuts made during the pandemic are truly sustainable, Gartner said. 

While severe cuts, like facility closures, layoffs or hiring freezes, could permanently hurt the bottom line if extended indefinitely, executives often overstate many risks in an attempt to redirect costs to their function.

"CFOs are worried about a return to business as usual," Gannon told CFO Dive. "They don't want to just default running all their costs back."

Gannon pointed out that in the absence of in-person events, travel and entertainment costs and expansion plans, most companies have greatly ramped up spending on digital infrastructure. 

"When travel costs return, companies won't stop funding that digital transformation, so they have to create efficiency through a smart reintroduction of costs," Gannon said. 

That requires the CFO to deeply understand which costs support their organization's differentiating activities. 

"It's critical not to under-invest in those, so efficiency will have to come from commoditizing costs: the costs that give you no competitive advantage, and that any competitor in your industry could derive value from, too," he said. 

Clarifying the sustainability of cost reductions will allow CFOs to better align functional spend to strategic differentiation, Gannon said. He recommends separating costs into one of three buckets.

Differentiating (e.g. proprietary technology): These are unique costs that create a point of strategic advantage and cannot be easily replicated by competitors.

Enabling (e.g. data science talent): These costs, while not always differentiating or unique, help achieve mission-critical operational outcomes.

Commoditizing: These are the costs unrelated to the organization's unique value proposition, and organizations often incur them inadvertently when responding to a competitor's actions.