Save-to-transform as a catalyst for embracing digital disruption Deloittes second biennial global cost survey April 2019Contents Executive summary 4 About the study 8 Key global insights 12 Other catalysts of cost reduction 26 Digital and technology solutions applied to cost management 30 Save-to-transform as a catalyst for embracing digital disruption 38 Looking ahead 50 Appendix A: Global insights from key industries 54 Appendix B: Zero-based budgeting 68 2 Save-to-transform as a catalyst for embracing digital disruption | Deloittes second biennial global cost surveyDigital technology and digital disruption have burst onto the global scene as key levers for cost management and business transformation. In Deloittes 2017 Biennial Global Cost Survey, 1digital disruption was identified as an emerging risk by respondents in the United States but was barely visible elsewhere. Now, however, digital riskincluding digital disruption and cybersecurityrank among the top external risks globally. While cost management remains a strong imperative around the world, the prevailing mindset seems to be expanding from save-to-grow to save-to-transform. Companies in all regions continue to have very positive expectations for revenue growth, and many are using cost reduction as a tool to help fund their required growth investments. However, in todays increasingly digital world, more and more businesses also recognize the need to transform their operations and capabilities with infrastructure investments in key digital innovations such as robotic process automation, cognitive technologies, business intelligence, and cloud- based ERP systems. These digital technologies and innovations can deliver dramatic improvements in competitiveness, performance, operating efficiency and, increasingly, cost savings. Equally important, they can also strengthen a companys positioning for adverse future events, including economic downturns and digital disruption. In this highly dynamic environment where digital innovation is a critical enabler for both cost reduction and business transformation, we are delighted to share the findings from our second biennial global cost survey. The study includes responses from more than 1,200 executives and senior business leaders across all major global regions, with strong representation from every major industry. This report provides an up-to-date view of the cost management practices and trends shaping the future of business globally. It also takes a detailed look at how the latest digital technologies and cost management strategies are acting as a catalyst for transformation in a world being actively redefined by digital disruption. We hope you find these insights useful and look forward to hearing your thoughts and feedback. Foreword Omar Aguilar Strategic Cost Transformation Global Market Offering Leader Jason Girzadas Managing Principal, Consulting Deloitte Global 1Thriving in uncertainty in the age of digital disruption: Deloittes first biennial global cost survey report, December 2017 3 Save-to-transform as a catalyst for embracing digital disruption | Deloittes second biennial global cost surveyExecutive summary Key global insights Cost management remains a global imperative. Cost reduction continues to be a standard business practice in all regions: 71% are planning to undertake cost reduction initiatives over the next 24 months Failure rates are also up. Globally, 81% of respondents were unable to fully meet their cost reduction targets (18 percentage points worse than in 2017) Nearly 2/3 of the companies that failed to meet their cost targets fell short by 25 percent or more, achieving less than 75 percent of their targeted cost savings 4% of global respondents exceeded their cost targets Cost targets are up. Globally, more than 2/3 of respondents are targeting total cost reductions of 10% or higher (up from 55 percent of respondents in 2017) Nearly 1/3 of this years global respondents have cost targets above 20% Growth expectations remain very positive. Globally, 86% of respondents saw their revenues increase over the past 24 months, and the same number expect their revenues to increase over the next 24 months Digital risks top the list of external risks. In 2017, macroeconomic concerns were the No. 1 external risk. However, that risk has now been surpassed by two digital-related risks: Digital disruption was barely on the radar in 2017, except in the United States; however, it is now recognized as a top external risk in all regions except LATAM. Information systems are the top internal risk. Reliability and functionality of information systems is the top internal risk globally, particularly in the United States and Europe. That risk is followed closely by recruitment, development, and retention of talent; and by lack of controls, processes, and systems to ensure business continuity. Save-to-grow is evolving into save-to-transform. Sales growth, product profitability, and technology implementation remain in a virtual three-way tie as the top strategic priorities globally over the next 24 months. The increasing emphasis on technology implementationalong with digital enablementreflects a new transformation mindset for cost management. Growth and competition remain the primary drivers. Over the next 24 months, the top three drivers for cost management globally are expected to be: 1. Required investment in growth areas 2. Intensified competition among peer group 3. Increased international growth opportunities cybersecurity digital disruption 4 Save-to-transform as a catalyst for embracing digital disruption | Deloittes second biennial global cost surveyKey global insights Technology capabilities are the primary development focus. In developing their capabilities, surveyed companies have primarily been focusing on cognitive and artificial intelligence (AI), ERP infrastructure, and especially automation. This focus on technology is consistent with a save- to-transform mindset, with companies investing more time, money, and effort in capabilities that contribute to digital enablement and digital transformation. Barriers and lessons learned. Implementation challenges remain the top barrier to successful cost reduction initiatives, followed by lack of effective ERP systems and infeasible targets. The top lessons learned are: invest in technology improvements to enable data availability, reliability, and decision making; design a solid tracking and reporting process; and assess, validate, and adjust targets to fit the realities of implementation. Top cost reduction actions have been mostly tactical, but strategic actions are expected to gain ground. The most common cost reduction action over the past 24 months was streamlined business processes, followed by streamlined organization structure and improved policy compliance. However, strategic cost actions are expected to gain ground over the next 24 months, to a point that the mix of tactical and strategic actions will be more closely balanced. Other catalysts of cost reduction Cost management maturity levels have room to grow. Roughly 2/3 of companies globally do not have highly mature cost management practices. The United States leads the way with: 50% of US respondents reporting a high level of maturity where cost policies and procedures are continually reviewed and examined to ensure best practices around efficiency and cost management. Impact of M however, they also invest in IT and innovation that can transform the business and help it survive and thrive in a world of digital disruption. Automation and other digital technologies take a lead role in capabilities developed. RPA and cognitive technologies such as AI and machine learning (ML) have emerged over the past 24 months as the most common digital capabilities developed to reduce costs. ERP infrastructure is also receiving significant effort and attention, with many companies making the transition to cloud-based ERP. Save-to-transform provides both growth and defense. This years survey respondents continue to have a very positive business outlook, bolstered by one of the longest periods of economic expansion in history. However, economies are cyclical, and even the strongest expansion can defy gravity for only so long. Potential warning signs are starting to emerge in the survey data, including: 97% increase in global respondents concerned about macroeconomic risk over the next 24 months 20% increase in US respondents who expect a significant reduction in consumer demand over the same period Digital disruption and innovation are reshaping the business landscape globallyand their impact is only increasing. Companies today need to harness the transformational power of digital technologies to streamline their cost structures and generate strategic cost savings that are both significant and sustainable. These improvements can help a company achieve its immediate growth objectives while preparing for the inevitable ups and downs of the economic cycle. They can also position the company to capitalize on digital disruptionbecoming the disrupter, rather than the disrupted. Digital risks zoom to the top. Digital disruption is now widely recognized as a top external risk cited by: 61% (of this years global respondents) up from just 6% (in 2017) Cybersecurity received similar recognition with: 62% ranking it at or near the top of the external risks list both globally and in all regions except LATAM. Save-to-transform as a catalyst for embracing digital disruption All technologies reviewed are expected to be implemented at a level of 47% or higher over the next 24 months 63% Cognitive/AI 62% Automation The technology expected to be the most actively implemented is cognitive (planned or in-process), followed closely by automation. 7 Save-to-transform as a catalyst for embracing digital disruption | Deloittes second biennial global cost surveyDeloitte Consulting LLP (Deloitte or Deloitte Consulting) engaged Research Now to conduct a global cost management survey in order to better understand business leaders perspectives on current and future cost reduction initiatives within large companies and multinationals. Study objectives Understand factors, approaches, actions, and targets related to cost initiatives Assess the effectiveness of the cost actions, including lessons learned from previous efforts Understand the drivers and scope of past and future cost initiatives Provide context on how digital disruption and advanced digital technologies are affecting cost management Assess industry results, and provide insights on different behaviors related to cost reduction Methodology Data was collected through detailed online surveys conducted between November and December 2018. January February March April May June July August September October November December United States (226 responses) Europe (414 responses) Asia Pacic (APAC) (332 responses) Canada (50 responses) Latin America (LATAM) (167 responses) South Africa (30 responses) Firmographics The survey included responses from 1,219 executives directly involved in cost management in their organizations. Respondents were from 24 countries representing all major regions, including: About the survey LATAM representation: Mexico; Brazil; Chile APAC representation: India; China (incl. Hong Kong); Australia; Japan; New Zealand; Singapore Europe representation: UK; Germany; France; Spain; Netherlands; Italy; Belgium; Finland; Norway; Denmark; Sweden 8 Save-to-transform as a catalyst for embracing digital disruption | Deloittes second biennial global cost survey