How CFOs Should Run a Cost Optimization

Program
30 September 2024 - ID G00818133 - 17 min read
By: Dennis Gannon
Initiatives:Enterprise Growth and Cost

Companies rarely realize the full potential of cost optimization

initiatives and struggle to drive accountability for cost outcomes in
dynamic businesses. This research teaches CFOs how to run a
cost optimization program that engages the business to
sustainably reduce cost without harming growth.

Overview
Key Findings
■ CFOs too often position themselves and their broader finance teams as
“scorekeepers” in cost optimization efforts, resulting in limited influence on business
leaders and suboptimal strategies such as cutting growth investment to meet a cost
target.

■ Business leaders who want to protect their resources naturally see cost optimization
initiatives as a point-in-time undertaking to be survived and managed through. But
this perception limits the ability of a CFO to drive sustained culture change, even
with a focused and successful cost optimization initiative.

■ Cost optimization is usually driven by a portfolio of quick-hit initiatives, which can

lead to organizational regret and unwinding of changes when those initiatives
impose unacceptable business friction or undermine enterprise growth ambitions.

■ Cost-cutting programs are prone to underdelivering relative to promised benefits,

especially in the absence of dedicated enterprise governance of the cost
optimization portfolio.

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Recommendations
■ Architect a roadmap for your cost optimization journey that provides clarity on
targets and KPIs and steers leaders toward the kinds of cost-savings behaviors that
you want to amplify.

■ Nurture the creation of a cost-conscious organizational culture by adapting finance’s

approach to performance management, ways of working and decision-maker
education.

■ Create a balanced portfolio of cost optimization initiatives by evaluating

opportunities on a comprehensive set of dimensions beyond narrow financial
indicators.

■ Drive execution of the cost roadmap and accountability for cost outcomes by
installing governance and oversight structures that provide regular review of cost
optimization progress and lessons learned.

Introduction
Business volatility and profitability pressures of the last decade have led the average
organization to undergo multiple rounds of cost reductions in that time. Typically, though,
the initiatives that organizations undertake to achieve profitability goals underperform
relative to their promised benefits by 25% or more. 1 As a result, these efforts have failed
to create lasting cost structure discipline, with as few as 11% of organizations sustaining
their cost reductions past year three. 2

New cost pressures from wage increases, technology price inflation and other
environmental factors continue to mount. This history of recurring cost pressures
combined with underperforming and/or unsustained initiatives makes it challenging for
CFOs to summon organizational attention to cost optimization. It is easy for this situation
to devolve into the vicious cycle shown in Figure 1, wherein unsuccessful cost
optimization efforts lead to short-term reactions that drive longer-term disengagement.

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Figure 1: Vicious Cycle of Unsuccessful Cost Optimization

By following the principles set out in this document, CFOs can avoid trapping their
organizations in that vicious cycle of diminishing returns. Instead, they can kick off a
virtuous cycle of compounding cost optimization gains illustrated in Figure 2, where
successful efforts build trust and drive further success.

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Figure 2: Virtuous Cycle of Successful Cost Optimization

Analysis
Architect a Roadmap for the Cost Optimization Journey
CFOs too often approach cost optimization as an incremental, year-over-year undertaking,
driven by targets set in the annual budgeting process. However, organizations often see
burnout and cost fatigue from the uncertainty of this open-ended approach. CFOs should
instead craft a roadmap and accompanying communications that clearly articulate the
multiyear journey ahead.

Initial CFO communications should focus on defining a journey for the organization that
helps managers move past short-term, reactive cost cuts and into more significant and
sustainable approaches to value optimization. Figure 3 provides a framework that CFOs
can use to anchor these communications, illustrating a progression from cost cuts to
value optimization and the associated organizational behaviors.

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Figure 3: Strategic Cost Optimization

By communicating the progression from spend reduction to value creation, CFOs can
illustrate for the organization that “cost optimization” is not just a palatable euphemism
for “cost cutting,” and get buy-in to the creation of a cost optimization roadmap. Cost
optimization is often thought of as a continuous improvement exercise. But CFOs
experiencing acute cost pressure will typically find more success by starting with a
defined horizon and target, and only then transitioning to a continuous improvement
mindset in the following years.

CFOs should develop a roadmap similar to the one shown in Figure 4 to provide the
necessary level of organizational clarity and rigor around the path ahead. This roadmap
should articulate initial targets and initiatives by functional and business area, the
milestones the organization is hoping to achieve in later periods, and the KPIs that will
measure success of the program.

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Figure 4: Three-Year Cost Optimization Roadmap

This roadmap forces CFOs to answer (at least) two critical questions in the early stages of
defining a cost optimization initiative:

1. What is our target as an organization?

2. What behaviors do we want to encourage to hit that target?

Defining Your Target

Cost optimization targets are often informed by a peer benchmarking exercise that can
provide useful directional guidance on functional costs relative to peers. However,
management questions about the applicability of peer data to their own organizational
situation and the lack of granularity in this data mean that benchmarks are usually
insufficient for defining a cost optimization target. CFOs will thus need to run a target-
setting process that ensures a credible and appropriately ambitious cost optimization
target.

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CFOs should balance top-down and bottom-up methodologies to come to an appropriate
cost optimization target. A target set with a pure top-down focus risks misalignment to the
actual opportunities in the business. For example, a top-down, across-the-board 10% cost
reduction imposed by corporate finance will hurt those businesses that have already
trimmed their costs in advance, while it will undertarget businesses that have multiple
layers of redundant or unnecessary costs. By contrast, an excessive bottom-up focus will
be prone to sandbagging, creating incentives to “hold back” on what is possible to make
sure the resultant target is achievable.

A good approach to balancing top-down and bottom-up approaches is illustrated in Figure

5. In this model, the CFO sets a top-down cost optimization goal for the business, but the
business is also responsible for producing its own bottom-up submission for the cost
optimization goal. The CFO then compares the two targets:

■ If the top-down target from corporate is more aggressive than the bottom-up target,
then the top-down target simply becomes the target.

■ If the bottom-up target is more aggressive than the top-down target, then the top-
down number becomes a baseline target, with the bottom-up number serving as a
stretch target.

If the business achieves the stretch target, it is rewarded disproportionately relative to a

business that did not submit an aggressive enough target to yield a stretch goal.

Figure 5: Illustrative Mix of Top-Down and Bottom-Up Target Setting

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This mix of bottom-up and top-down ensures that business leaders have a reason to
aggressively look for cost-savings opportunities, even when they are not stretched by the
corporate target.

Encouraging Acceptable Behaviors

CFOs must move beyond the traditional finance “scorekeeper” mentality and supplement
their guidance to the enterprise to include not just a number that needs to be hit, but also
the acceptable and unacceptable behaviors on the path to that number. All things equal, a
CFO would rather see a business hit its target by reducing its run-rate operating expense
through the elimination of low-value work than by delaying critical maintenance spending
or by forestalling strategic investments.

CFOs need to lead a dialogue with their business and functional leaders about what is,
broadly speaking, in scope and out of scope when it comes to cost optimization behaviors
in order to avoid damaging long-term growth prospects. Figure 6 illustrates a spectrum of
cost optimization pathways, ranging from more to less acceptable, that CFOs can use to
level-set with their business on what “counts” as cost savings.

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Figure 6: Hierarchy of Business Pathways to Cost Savings

As CFOs build out and socialize this roadmap with the organization, they should also pull
the right levers to support the creation of a cost-conscious organizational culture.

Build a Cost-Conscious Culture

Organizations have a limited number of enterprisewide initiatives upon which they can
sustain focus. Cost optimization will underperform if business leaders do not internalize
and take ownership of cost outcomes in a sustainable way. How CFOs can build a cost-
conscious culture is worthy of full exploration in a separate analysis. But focusing on
three primary categories of culture creation can provide a solid start (see Table 1).

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Table 1: Strategies for Building a Cost-Conscious Culture
(Enlarged table in Appendix)

Performance Management, Incentives and Rewards

How business leaders are evaluated and compensated is obviously an important factor in
what they prioritize. Heavily weighting incentives that drive a cost focus (e.g., earnings
before interest, taxes, depreciation and amortization [EBITDA] growth, margin) will result
in more management attention to cost optimization than will incentives that are more
about top-line growth and nonfinancial measures like customer satisfaction. Balancing
these can prove challenging, as some CFOs will not want to dilute the organization’s top-
line growth orientation or may not have standing to change general manager (GM)
compensation. As a workaround, CFOs can consider relating the size of a bonus pool to a
set of cost optimization goals, and then deploy that bonus pool for growth-related target
achievement.

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Incentives and rewards go beyond performance compensation, however, and smart CFOs
take advantage of a wide range of informal incentives. For instance, some CFOs have
found great success simply by carving out significant space in public forums and
communications to celebrate cost optimization work done well across the business. CFOs
can also create winback funds that aggregate cost savings into funding pools that can
then be turned around to fund innovation and new business activity. CFOs can identify
incentive misalignment across the enterprise by cognitively adopting the posture of a
business leader asked to deliver cost savings and asking the question, “What’s in it for
me?”

Processes, Systems and Ways of Working

The day-to-day decisions and activities of a business are driven by the enterprise’s ways
of working: the sum total of processes, systems and organizational structure that
determines how work actually gets done. CFOs can exert substantial leverage on the
prominence of a cost focus in the enterprise’s culture by making strategic adjustments in
these areas. For instance, CFOs can:

■ Change business behavior by smartly deploying alternative budget process

techniques like ZBB or rolling methodologies to provide a refreshed perspective on
costs.

■ Enlist tools that provide richer workforce data and productivity tracking capabilities
to maintain an ongoing focus on personnel cost optimization — for instance,
through strategic workforce planning and robust cross-functional initiative
management.

■ Create decision support teams with specialized, focused mandates around identified
cost categories that can collaborate with business stakeholders to create an always-
on focus on these critical organizational costs.

Education, Training and Skills

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Most decisions that impact costs are not made with a CFO or other finance leader present
to offer guidance and perspective to the decision maker, which is why education is a key
component of any CFO strategy to enable a cost culture. Education of nonfinance staff
can be an especially impactful driver of a cost culture when an organization is maturing,
and the top-line growth that would otherwise mask bad cost behavior begins to slow. For
maximum impact on cost culture, CFOs should deploy finance-driven training and
outreach (e.g., a finance roadshow or finance brown-bag lunches) to improve the financial
literacy of not just top management and business leaders, but of the entire organization,
including junior and frontline staff.

Create a Balanced Portfolio of Cost Optimization Initiatives

As they progress through their cost optimization roadmap, CFOs must build the right
portfolio of cost optimization initiatives by balancing quick wins and “low-hanging fruit”
with more aggressive and transformational plays. This means that CFOs and their teams
need to have a consistent and structured way of surfacing, evaluating and organizing cost
optimization opportunities. The template shown in Figure 7 is a good model for what
CFOs can have their business and functional leaders populate to provide detail on how
they will meet their cost optimization targets.

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Figure 7: Sample Cost Opportunity Assessment Template

However, it is usually not enough for CFOs to simply provide this sort of templating, as the
executives and managers populating them may not naturally identify the highest-value
potential opportunities. It is common for leaders to remain anchored to existing budgets,
processes and ways of working in a cost optimization conversation. This anchoring
makes it far more likely that they will gravitate to marginal savings opportunities rather
than truly transformative undertakings. CFOs must therefore ensure that they and their
teams are able to take a “challenger” posture in their business interactions. In other words,
they need to push budget owners to think beyond obvious short-term cuts and revisit their
assumptions about how work needs to be done.

The risk, timeline and benefit information provided in this process helps CFOs build a
portfolio that minimizes business disruption and delivers sustained benefits across
multiple time horizons. CFOs can use the heat map shown in Figure 8 to organize and
manage the initiative portfolio along these dimensions.

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Figure 8: Sample Cost Optimization Initiative Heat Map

This type of heat map visualization serves a variety of purposes in organizing the cost
optimization initiative, including:

■ Balancing quick wins with transformative undertakings to ensure early momentum

and sustained progress

■ Identifying and deprioritizing lower ROI efforts

■ Highlighting potential fatigue and overloaded functional areas

■ Spotting and managing interdependencies across initiatives

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Execute on Your Cost Optimization Roadmap
Successful execution of a cost optimization roadmap requires governance and portfolio
oversight that balances flexibility with accountability for delivering promised outcomes. In
particular, CFOs should adopt three strategies to ensure successful execution of their cost
optimization roadmap:

1. Establish the appropriate level of governance to ensure the progress of cost

optimization initiatives, and intervene where necessary.

2. Oversee initiative performance using a project charter format that enforces project
sponsor accountability.

3. Identify and disseminate lessons learned about cost reduction strategies that can be
applied in different business and functional areas.

Install Cost Optimization Governance

There is no single governance and oversight structure that makes sense in every cost
optimization context. CFOs must be mindful of their organization’s corporate culture and
the driving forces behind their cost optimization initiative when installing cost
optimization oversight. A governing body could serve a variety of purposes for an
organization, including:

■ Enforce accountability for cost optimization outcomes.

■ Provide resource mobility across initiatives as risks and opportunities emerge.

■ Provide the board of directors (BoD) and executive team with assurance about
progress toward cost goals.

■ Generate and sustain organizational momentum for the cost optimization effort.

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CFOs should clarify the purpose of cost optimization governance in their own
organization. Governance bodies with deeper and broader representation across
operations and functions are more suited to sharing best practices and sustaining
momentum. These could include federated governance structures at large and
multinational organizations, where corporate teams cascade accountability to businesses
and regions. In contrast, a smaller governing body of executive leaders is better suited for
organizational priorities related to driving accountability and making resource trade-offs
across initiatives. In organizations with a more decentralized, business-driven decision-
making culture, CFOs may wish to only leverage existing financial processes (e.g.,
budgeting and forecasting review sessions) to drive cost optimization outcomes.

Based on the mix of these factors at play, CFOs might deploy any of the governance
options shown along the spectrum in Figure 9.

Figure 9: Spectrum of Cost Optimization Governance Options

Oversee Initiative Performance

CFOs must ensure that the regular review of cost optimization initiatives reinforces
accountability for operating and financial outcomes while also allowing for productive
interventions when initiatives are off track. CFOs usually use business cases as the
primary vehicle for enforcing accountability for initiative performance. But business cases
themselves are approval-focused mechanisms that operate at too granular a level of
detail to support an ongoing, multiperiod conversation about ongoing performance
relative to expectations. CFOs should thus create a project charter to drive accountability
for initiative performance, as shown in the following case study.

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 Case in Point: Living Project Charters (PrimeLion*)

The CFO and senior finance leadership at PrimeLion* worked

with the organization’s project governance committee (PGC)
to develop “living” project charters. Project charters are high-
level, often single-page agreements designed to instill a
greater sense of accountability for project outcomes. Like business cases, each charter
sets out a cost-benefit analysis, KPIs and current assumptions. However, unlike a
traditional business case, finance and the PGC emphasize that the KPIs and
assumptions in a charter may change as the company learns more about projects’
performance, interdependencies requirements and operating environments.

The cost savings promised in the business case are hardwired into the project charter
and automatically reflected in future years’ budgets. However, the charter is built to
recognize that new lessons may inform how that target is achieved and what the full
benefit picture actually looks like. The charter also names individual business unit
leaders and overseeing executives as joint stakeholders and sets out the budgets,
timelines and outcomes that business unit leaders have committed to. This maintains
consistency for projects that often see new personnel roll on and off over time.

Ultimately, the project charter serves to reinforce accountability for outcomes in a way
that traditional business cases are unsuited for. Figure 10 provides an overview of
PrimeLion*’s project charter.

* Pseudonym

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Figure 10: Illustrative Project Charter

Disseminate Lessons Learned

CFOs should leverage their unique vantage point to support a sharing of cost optimization
lessons learned and best practices across the entire portfolio. At a minimum, CFOs should
use their business operating reviews as an opportunity to not just enforce discipline on
target achievement, but to share strategies that other parts of the organization have used
to achieve their targets. Beyond that, progressive CFOs create recurring occasions in
which experts with similar responsibilities in different areas of operations (e.g., regional
inventory managers) can share their strategies and experiences directly with each other.
These can take the form of monthly or quarterly meetings facilitated by finance, with key
parties from the business and operations owning the bulk of the conversation.

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CFOs who excel at cost optimization go even further than progressive CFOs, recognizing
how work that appears different on the surface may have important and valuable
structural similarities that allow for a transfer of lessons learned and cost-management
strategies. Figure 11 shows an example of marketing and procurement workflows that,
while superficially different, prove to have underlying commonalities and costs driven by
similar factors.

Figure 11: Finding Analogous Workflow Characteristics to Drive Cost Optimization

This perspective allows a CFO to apply cost optimization practices across business
groups and drive structural cost savings that would otherwise go uncaptured. For
instance, workflows across IT, legal, HR and finance might each involve, at various points,
having a representative answering calls at a help desk, presenting an opportunity to
deploy a standardized and scalable solution across those functional silos.

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Next Steps
To get started on their cost optimization journey, CFOs should:

■ Craft a communications strategy to enlist the support of the business leaders who
will be tasked with finding and driving savings, emphasizing the journey from cost
cutting to value optimization.

■ Start building a cost optimization roadmap using the model provided and identify
key information needed to complete its first iteration (e.g., KPI availability,
benchmark data).

Evidence
This research is based on over 300 conversations with CFOs and other finance leaders
over the last three years, along with existing Gartner research on cost optimization.

1
2017 Gartner Growth Investment Survey

2
Polling data from this webinar: CFOs’ 2022 Playbook for Enhancing Profitability &
Driving Digital Acceleration

Disclaimer: The organization (or organizations) profiled in this research is (or are)
provided for illustrative purposes only, and does (or do) not constitute an exhaustive list of
examples in this field nor an endorsement by Gartner of the organization or its offerings.

Recommended by the Author

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Table 1: Strategies for Building a Cost-Conscious Culture

Category of Cost Culture Strategies Illustrative Strategies

Performance Management, Incentives and Rewards ■ Individual bonus tied to cost target achievement
■ Group bonus pool determined by cost savings delivered
■ Promised savings from new initiatives “hardwired” into future budgets

■ Individual contributions to cost savings celebrated and informally

rewarded

■ Winback mechanism to reinvest portions of cost savings delivered

■ Dashboarding and reporting on cost categories and cost drivers

Processes, Systems and Ways of Working ■ More diverse budget tools (drivers, zero-based budgeting [ZBB]) beyond
standard historical approaches

■ Executive ownership of cost categories “horizontally” across budget silos

■ Aggressive scaling of a centralized global business services model

■ Cross-functional teams for complex enterprisewide costs

■ Specialized finance decision support teams focused on major cost

categories

Education, Training and Skills ■ Sharing lessons learned on cost savings across businesses in operating

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 reviews

■ Teaching nonfinance employees about total economic cost and

shareholder value drivers

■ Using a “cost differentiation” framework to talk about budgets and

investments with the business

Source: Gartner (September 2024)

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