Today's post is brought to us by Steve Wunker, a member of our talent network and Managing Director of New Markets Advisors, a boutique consulting firm that provides actionable recommendations to help companies drive growth and innovation.

With both inflation and recession fears high, many of our clients are embarking on cost reduction initiatives. We are teaming with them to find those opportunities.

But this is also a time to look further. Many companies have already gone through rounds of cost-cutting, and they risk hollowing out core capabilities. Moreover, the dislocations of the pandemic have changed many customer needs and buying patterns, creating opportunity for firms to alter business models in ways that both reduce expenses and keep customers delighted.

It's clear that new approaches are needed. In fact, we have observed that many executives are now recognizing—in this unique moment in time—that there is a real opportunity to pull up and take a fresh look at what, why, and how they do business. The pressure-cooker of the pandemic era yielding to one of economic turmoil has executives searching for ways to focus how they are spending resources and adjust where they are taking the company.

This is where Costovation comes in. Costovation, as detailed in the award-winning book by that name, is a proven approach that deploys the tools and methods of innovation to the cost side of a business. It deploys design thinking, radical reconfigurations of approaches, and rapid prototyping to find step-change opportunities in costs that continue to excel on customer needs.

Consider how Capitec upended assumptions about retail banking. The company removed all cash from branches, and so could do away with security. It configured branches so that tellers could sit alongside customers and look at screens together, in a collaborative manner that enabled cross-sell. It did away with promoting separate accounts, and instead offered a single account for savings, checking, and credit. In so doing, it could charge fees roughly half that of its rivals, and still earn an astonishing 20%+ Return on Equity. Low fees went hand-in-hand with delighted customers and high profits.

Signs That a Market is Ripe for Costovation

Costovation opportunities abound when companies see some of these seven signals:

• Expensive features: If a significant amount of cost is driven by a handful of features, isolate the features that drive up costs. Cut back or find ways to improve their return on investment.
• Expensive customers: If a significant amount of expense is driven by a handful of customers, adjust your approach to more efficiently serve the "expensive" customers or make the strategic decision to focus on other populations.
• Expensive sales: If a significant amount of expense is in sales, not in the product itself, find daring new ways to circumvent traditional sales channels and costovate the way the offering is sold.
• Over-standardized products: If output is standardized despite very specialized customer needs, zoom in on the customer subsets that are dissatisfied or under-satisfied with current solutions. They are your foothold to disruptive innovation.
• Over-standardized sales: If the offering is sold the same way to all customers, identify customer segments whose needs are being underserved or overserved by the traditional sales mechanism. Design a new approach that is tailored to meet their core needs (and does not overshoot them).
• Cost imbalance: If the revenue for certain activities is not proportional to their costs, stand out in the industry by adjusting pricing to accurately reflect the value being delivered.
• Contingency creep: If the system is built to cover all conceivable use cases, even those that are rare, pick your battles and focus on what is the most impactful.

A Costovation initiative often runs in parallel with other, more typical ways of cost-cutting. They are not inconsistent. Oftentimes, the sponsor is a general manager who can look across the various functions of a business and find ways to blur traditional boundaries to significant effect, as Capitec did with branch operations, marketing, and product development.

Discover Promising Costovation Opportunities in Six Weeks

How do you get started? We've found that a rapid, six-week effort can determine what opportunities exist. This fast-moving program has four parts:

• Understand both apparent and hidden cost drivers: If big cost-reduction opportunities are obvious on the income statement, they are often being targeted in other ways. While these line items matter, it pays to look beyond at some of the potential hidden cost drivers such as serving diverse customer segments in overly-standardized ways, downtime in the usage of personnel or assets, and distributor margins taken for activities that could be brought in-house.
• Gain internal perspectives: The best experts on Costovation opportunities lie inside your own business. Targeted questioning based on patterns of Costovation elsewhere can elicit significant insights, as well as key hypotheses, uncertainties, and divergences to resolve. Critically, this questioning leverages cross-functional thinking in delving into function-specific activities, looking at the overall business system and the underlying cost drivers within it.
• Leverage relevant external case studies: Appropriate examples from outside the company, and often even outside the company's industry, can get people to look at old issues in radically new ways. The case studies get people to think about parallels, what is and isn't unique to their situation, and a playbook of opportunities that can be applied to their situation.
• Convene a cross-functional workshop to align on opportunities: The six-week effort concludes with a cross-functional workshop to talk through cost drivers, take-aways from external examples, and playbook opportunities. It also leverages innovation and design thinking techniques to generate new ideas, and it narrows down the set of opportunities to the most promising ones for building out.

Cost-cutting is on many strategic agendas this year. As you proceed down that road, we advocate reserving a bit of energy to find the big moves. Costovation can unlock transformative potential for a business to operate with significantly lower expenses while continuing to keep customer-focus right in the bullseye.