Now Is The Time to Deliberately Reset Your Margin Structure

Executives managed through the early COVID pandemic with ingenuity and perseverance. Just as we are readjusting to a new reality, the next frontier of uncertainty is here.

The macroeconomic situation is defying the rules and economists are surprised all can be true at once: unprecedented inflation, GDP growth in the Q3 after two quarters of contraction, dramatic rate increases and a tight labor market. Geopolitics continue to be unpredictable. Some executives are wrestling with the concern that they may have ‘pulled forward’ growth during COVID while others are only now seeing new growth momentum as countries are returning to pre-pandemic behaviors. It’s a unique environment for executives to navigate.

So, what are leaders to do in the face of this uncertain environment? Often executives hear from their teams that they need to choose between focus on cost or growth. We believe that’s a false premise. Companies must achieve both - an opportunity we call “Margin Reset.” 

Margin Reset Breaks the Cost/Growth Compromise

Growth-minded executives know that they can’t cut their way to a winning business model. The last 25 years provide a compelling playbook that cost-out alone only provides short-term gains, but quickly falls short. Driving growth improves performance during future crises relative to industry by +6pp (impact on average on industry-adjusted total shareholder return). Rewards of this approach are material for both near-term resiliency and long-term advantage.

So, what is Margin Reset? Margin Reset is a process to examine and reset the fundamentals of how your business is structured to grow, looking across the whole enterprise. It stretches the thinking on what your cost structure should be based on your growth and profit goals and where unproductive costs or assets could be redeployed against your growth and profitability agenda. Often a series of incremental, organic decisions leads to a structure that ties up massive resources (capital, operational, organizational, mindshare) that could be freed up or redeployed.

Our Margin Reset typically includes looking holistically at five areas. Some companies choose to deploy all five at once, while many focus in on one or two areas:

1. Expand revenue management excellence to support gross margins
2.  Optimize commercial & innovation investment for growth and ROI
3.  Reinvent your organization post-pandemic
4. Accelerate supply chain and operations excellence
5.  Reset your indirect cost base

When executed well, Margin Reset creates a virtuous cycle that improves both bottom-line and top-line performance by shifting spending from where it is wasteful or has low impact to where it generates top-line growth and strategic value. We have seen significant revenue uplift of 200-500bps of margin in addition to savings of 10-30% of spend, with 50-100% delivered in the first 12 months. A winning approach has four success factors:

• Ensures the full enterprise is in scope
• Takes a lens of re-directing resources to support customer growth and profitability
• Leverages the full power of digital innovation to create transparency into spend, capital, and ROIC
• Empowers leaders to chart their own destiny with fresh eyes, by enabling them to come up with choices and make decisions on how to spend their money to create win-win outcomes 

Now Is The Right Time For a Margin Reset

• The importance of re-examining your company’s fundamentals is even more critical now than in in previous years, because of how the business context has changed:
• COVID growth tailwinds in some industries can be leveraged to provide cushion for spend reduction
• Customers and consumers have changed their habits, making business model innovation easier. For example, a recent BCG survey found that 70% of buyers younger than 45 said they try to use bots and self-service tools rather than dealing with a sales agent.
• Costs have fundamentally changed from cost of labor, executive talent, indirect/direct goods, etc., reshaping trade-offs and returns
• Digital acceleration has continued, with a new arsenal of digital solutions allowing companies to be fundamentally stronger and more agile without spending on a multi-year, multi-million IT implementation. For instance, sophisticated inventory deployment dashboards, which save planning teams 20% of time and can be stood up in 8-10 weeks)
• The nature of work has changed, talent can be sourced from different places, and real estate is less important

Additionally, in today's environment there are four things that are fundamentally more important than before:

• Building resiliency / flexibility into your business in a more volatile environment
• Embracing business model and product innovation to increase ROI on resourcing
• Bringing about change in a way reflects evolving employee motivations, including enhanced need for purpose, personal growth, and flexibility
• Developing an integrated view of people, process, and technology

The implication for executives is that whether you anticipate a recession, lasting inflation, or geopolitical issues in your country and whether you think it will have an impact on the business, it is critical to avoid the temptation of just looking at optimizing your cost and organization. Focusing on cost and growth are not trade-offs, but to emerge stronger from this unprecedented moment of uncertainty, both must be achieved. For these reasons, now is the time to put a Margin Reset on the leadership agenda.

This article was written in collaboration with my colleagues Geraldine Prasuhn Rhodes and Alicia Pittman .