Contingency Planning and Sustainable Cost Reduction

Mastering contingency planning and sustainable cost reduction for strategic corporate initiatives provides a sturdy pair of tools.

Senior management has used contingency planning as a tool for many years.  Some organizations have implemented a more or less formal process.

Others assemble teams to respond to particular challenges and, less often, opportunities.

While there are as many approaches and roles for contingency planning as there are organizations, characterizing most is an initial focus on existing operations.  In many respects, it is easier to start with well-understood cost drivers that can impact expenses.

Typical actions include curtailment of all non-essential business travel, cessation of new hires, and perhaps even a reduction in force.  All of these, coupled with a detailed assessment of initiatives and a company-wide re-prioritization, can significantly impact the viability of the company.

When institutionalized and practiced as a core competency, contingency planning enables sustainable cost reduction and revenue optimization.

Inculcating this discipline at all levels helps organizations achieve best in class financial performance and enhance shareholder value.

By flexing financial planning and analysis (FP&A) tools and processes, organizations can implement the type of changes represented above.

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When organizations face financial and risk management challenges, these actions and others are often required. However, just as often, they are not enough.  Frequently, leaders confront the need to seek deferral or elimination of spending by targeting strategic initiatives.

A typical FP&A focus is on overall budgeting, forecasting and analysis. The tools, systems, and processes deployed almost always lack the depth and context required to assess strategic initiatives across the investment life-cycle rapidly.  Effective decision-making requires an end-to-end perspective to identify low value and non-strategic initiatives targeted for deferral or elimination.

Promptly pulling together appropriate analysis is frequently impossible, resulting in indiscriminate actions to meet a savings target without the context needed to evaluate individual projects, programs or portfolios.

Inpensa developed the first end-to-end investment governance platform designed to help executives make better decisions on the prioritization of strategic initiatives.

This unique perspective shines a light on the best practice approach for contingency planning, sustainable expense management, and impact on strategic initiatives.

Events in early 2020 were as unprecedented as they were unanticipated. Companies are under considerable and increasing pressure to establish a responsive contingency planning framework that rationalizes spend.  Achieving this goal means hitting savings targets while minimizing the impact on go-forward operating results.

Contingency Questions

An organization can answer a few questions that will help architect a strategic initiative contingency planning process appropriate for the enterprise and its goals.

  • To what extent is the focus on cash management?
  • To what extent is the focus balance sheet/P&L?
  • Concerning the above, what is the potential for earnings per share impact through rationalizing strategic initiative spend?
  • Are there drivers such as loan covenants or other reasons why specific financial ratios must be maintained?
  • How do you lower costs without adversely impacting revenues?
  • Based on re-balancing and re-prioritization, are there areas, programs or projects that should be evaluated for ongoing expense reduction or elimination?
Purposeful Decisions

Contingency Planning Steps

Creating a responsive contingency planning framework requires several purposeful decisions to establish the metadata and project data models required.

Analysts classify projects using metadata and use project data to understand individual initiative details, such as:

  • Total project cash outflow over time
  • Balance sheet impact over time from capitalized labor and assets
  • Permanent and contingent labor resource classifications
  • Project dependencies
  • Relationship between costs and financial benefits over time
  • Non-financial measurable business benefits and outcomes

Examples of essential metadata elements include:

  • Flagging initiatives as discretionary or non-discretionary with further categorization, such as:
    • Regulatory compliance
    • Corporate compliance
    • Executive mandate
  • Project priority, for example:
    • Critical/High
    • Medium
    • Low
  • Strategic alignment
  • Strategic value
  • Risk

Contingency Planning Process

Organizations can create a data model focused on capturing details required for each project to be evaluated from a contingency planning perspective.

However, undertaking the task in an off-line manual environment with spreadsheets and manual routing for assembly, review and approval is bound to be error-prone.  Requiring weeks or months to conclude a process in this manner presents a significant problem, as well.

Financial professionals and their business and IT counterparts require an on-line, automated process to deliver high fidelity plans in a timeframe that impacts outcomes.  Implementing contingency planning as a reliable core competency requires an “always-on” responsive network.

“Delivery of such a system can only come through a software platform tightly coupled with that which an organization uses to make and manage funding decisions and measure benefits associated with strategic initiatives.”

Sustainable Cost Reduction Strategy

Developing sustainable cost reduction as a crucial aspect of corporate culture requires a real-time contingency planning capability.

Effective contingency planning optimizes organizational readiness to respond powerfully to any range of challenges, from changes in the business climate to macroeconomic shifts to global dislocations. In contrast, sustainable cost reduction focuses on introspection, continually monitoring the business to identify savings and cost avoidance opportunities.

Identifying expense reduction opportunities requires detailed visibility to corporate initiatives across the full life-cycle.

Scrutinizing specific initiatives identifies savings, mainly focusing on projects that are ranked low in terms of priority, strategic alignment, strategic value, or ability to execute. Run-the-business initiatives offer abundant opportunities for sustainable cost reduction, as well.

At times, a sustainable cost reduction process shines a light on initiatives that maximize savings or cost avoidance. Accelerating system migration or ensuring software agreements are in compliance, avoiding overage charges, are two examples of initiatives aligned with expense reduction strategies.

Executing sustainable cost reduction as a dedicated continuous planning activity provides the focus required to optimize return on capital deployed for strategic initiatives.

Contingency Planning Software

Organizations can implement a programmatic approach to automate contingent spending assessment and optimize expenses and earnings.

Digital investment governance platforms provide the ability to create standard templates that capture and manage all key data elements.  These platforms allow collaborators to interact with data simultaneously and route analysis results for review and approval.

Digital transformation platform software provides a great deal of flexibility and configurability to meet specific needs.

By pairing a robust data model with actionable analytics, contingency planning software can deliver rapid time to impact out-of-the-box.

A pro-active, data-driven, sustainable expense reduction capability turbo-charges digital transformation strategies.

As a scheduled update or on-demand, analysis can distinguish between non-discretionary versus discretionary spend for the target period. After the identification of discretionary spend initiatives, the system determines the extent of committed versus uncommitted funds. With the isolation of non-committed amounts, the system determines the period effects for the targeted time frame.

Analysts can easily visualize the impact on expenses, earnings, and earnings per share across periods by excluding individual projects or those based on low priority alone or in combination with medium priority initiatives.

Understanding the parallel impact on deferral or elimination of benefits is critical, as well.  This perspective makes it possible to assess each scenario from the overall financial benefit perspective and specific benefit types, such as revenue, cost savings, and cost avoidance.  These data provide a counterweight to expense reduction incorporated into the final analysis.

For most companies, benefit periods typically ramp after the project set-up period. Most project expenses occur during the set-up phase.

Because of this tendency, decision-makers may execute cost-saving scenarios to meet immediate and medium-term needs, with time allowed to develop alternative scenarios for re-capturing benefits or making other long-term adjustments.

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