Accenture Strategy: Cost reduction should be a deep building block of planning

It is becoming increasingly difficult for U.S. hotels to achieve both revenue and profit gains, and last year's profit growth once again relied heavily on hotels' ability to control costs.
Cost savings remain key for operators. (Getty Images/z_wei)

A report from Accenture Strategy counsels communications service providers to drastically adjust and deepen their cost-reduction strategies. Doing so will free up money for new services that are keys to survival in a competitive and rapidly transforming landscape.

It's a bit of a vicious cycle: CSPs are facing players without legacy networks to protect. Those firms can invest more in new initiatives. Meanwhile, CSPs don't have as much freedom to innovate because their valuations are dependent on current cash flows. In short, they must be more interested in optimizing current business than what may be profitable in the future.

CSPs therefore are faced with investing to keep current cash flowing and, when they can, planning for the future. A main source of funding for these dual priorities is cost reduction. It is falling short, however. The report says that legacy cost-reduction strategies top out at about 10% savings and that strategies by the top 50 CSPs generate only 35% of the funding necessary to support growth and infrastructure.

This all plays out in a tough environment for established CSPs. In May, Jefferies said that Amazon will spend $28 billion on capex and $26 billion on research and development. Alphabet/Google is second on the list, with $23 billion on capex and $21 billion on R&D.

The answer, according to "Time to Zero Base Your Telecom Business," is a deeper and more comprehensive budgeting philosophy across the organization. "ZBx" is a granular rethinking and expansion of cost-cutting strategies. The approach aims to reduce network and IT costs, streamline the organization and manage external spending. It is divided into four elements: Zero-based spend, zero-based organization, zero-based front office, and zero-based supply chain.

The approach is holistic and built into the organization's fabric. Instead of picking a savings target, the organization starts from zero and builds the budget upward. "Rather than choosing an arbitrary percentage of costs to reduce, CSPs need to start with a blank slate, calculating costs from a zero base," the report reads. "And if they take zero-based budgeting (ZBB) a step further to a zero-based mindset (ZBx), this can help fuel the growth necessary to compete with nimble digital challengers." The report was written by managing directors Terry Steger, Chloe Barzey and Vikrant Viniak.

The monies saved can be dedicated to developing new revenue streams such as IoT, 5G services, mobile commerce, data optimization, digitization and customized business-to-business services. "ZBx, a zero-based mindset, combines a new level of cost optimization with emerging technology to free funds to reinvest in growth," the report says.

The approach is not a one-off. It is baked deeply into the CSP's operations and will lead to continual savings and reinvestment. "ZBx results in change that is sustainable because it is underpinned by a forensic level of accountability," the report says. "Companies can continuously optimize their spend without costs 'growing back.' Savings can then be divided between the bottom line and investing in growth. ZBx is the antithesis of seeing cost elements and projects in silos."

The report suggests that this approach is the wisest way forward in the fractious current environment: "Diversified growth funded by aggressive re-baselining of costs is the only way for established players to maintain and expand total shareholder returns."