Expert Insights

Cost and value

transformation
in the era of
COVID-19
Experts on this topic
Edward Giesen As a leader in the IBM Global Digital Strategy
CoC, Edward focuses on Digital Strategy and
Global GBS Partner, Reinvention, business modeling, innovation,
European Growth Leader Digital customer strategy and management governance.
Strategy, Digital Strategy Center He has over 20 years’ experience helping
of Competence companies across sectors and governments shape
linkedin.com/in/edward-giesen/ innovative business and digital strategies to deliver
edward.giesen@nl.ibm.com breakthrough performance. He leads the European
Growth Platform on Digital Strategy.

Jean-Michel Fally Jean-Michel has spent most of his 20-year

consulting career serving clients across all retail
Digital Strategy Partner, and consumer products industry sectors, with a
Global Business Services primary focus on food, drug and mass formats.
IBM Global Business Services His engagement experience covers merchandising
linkedin.com/in/jean-michel- (including category management, pricing,
fally-b233385/ assortment management, promotions management,
jean-michel.fally@ibm.com Private label), digital transformation, merchandise
procurement, marketing, supply chain, vendor
collaboration and store operations. He has worked
with companies such as Aldi, Apple, BJs, Cost Plus
World Market, HEB, HP, Kellogg, Kroger, Meijer,
Sam’s Club, Southeastern Grocers, Walmart, and
7-Eleven.
Key takeaways As organizations around the world continue to navigate
COVID-19, uncertainty remains about how businesses will
finally reemerge, and what markets will look like. One thing
Remember the big picture
is clear. In the different normal that ensues, resiliency,
Cutting cost in a crisis is crucial—but so, agility, and speed will separate those organizations that
too, are strategic investments that harden succeed from those that don’t.
an organization’s resilience and increase In a disruption-ready reality, organizations need to
growth potential once the crisis abates. anticipate and respond more frequently to sudden and
significant change. They will not know in advance when
The exponential solution or how often shocks will take place, or their precise
nature and how they will affect individuals, regions,
To optimize value, organizations should
industries, or businesses. With COVID-19, for example,
systematically embed AI and other some industries are experiencing radical swings in areas
exponential technologies in processes, of demand (see Figure 1). To better prepare for a more
volatile future, organizations should be taking steps now to
workflows, and operating models.
develop the core business capability of responding quickly
to challenges.
Foundations for resilience
Organizations should also make costs
more variable, expand the potential of
cloud, and move non-core functions to
shared services models.

Figure 1
COVID-19 impact varies across retail (month-to-month sales change)

Apr May June

80

Furniture and home

60
furnishings
Sporting goods, hobby,
40 and musical
Restaurants
20
Gasoline stations

0 Retail and food services

-20

-40

-60
February March

Source: U.S. Census Bureau, Advance Monthly Retail Trade Survey, July 16, 2020

1
-89 -63
Companies that cut
the deepest do not usually
rebound well from recessions.

Beyond immediate health and safety concerns, cost control

ranks high in business executives’ minds (see Figure 2).
Value transformation versus
Sudden revenue decline, supply chain disruption, and cost cutting
rapid workforce adjustment—regarding how and from
where employees work—all create substantial liquidity Cash preservation is critical. Without a strategy that
challenges. As Jerome Powell, Chairman of the US Federal balances value transformation with cash preservation,
Reserve, noted, “the passage of time can turn liquidity organizations face the temptation to cut costs in blunt,
problems into solvency problems.”1 linear, traditional ways that preserve cash but rob them of
the capacity to flourish in the future. Among these cuts, the
Just weeks into the COVID-19 crisis, reports emerged impulse is often to lay off people and ask the organization
that nearly a quarter of global public companies would to do more with less.
run out of cash within six months without some form of
intervention.2 Several high-profile bankruptcy filings have But companies that cut the deepest do not usually rebound
been reported.3 Uncertainty remains about the timing of well from recessions. One study found, for instance, that
eventual recovery. An extended period of stagnant among organizations that faced past crises, 37 percent of
innovation, productivity, and growth seems inevitable. those who deployed a balanced, “reduction plus offensive
investment” approach went on to outperform their rivals in
subsequent years, in contrast with those that focused on
defensive, reduction-focused approaches.4
Figure 2
Cost control is still a top priority The answer, then, isn’t merely cost cutting—it’s a focus on
cost and value transformation: Finding better ways to
Cost management organize and run a business that lower cost and make it more
variable, while enabling investments so the company is
38% 87%
positioned for growth.
Cash flow/liquidity management
Unavailable just a few years ago, exponential technologies—
38% 86% including artificial intelligence (AI) with natural language
processing, robotics and automation, IoT, and a variety of
Enterprise efficiency hybrid cloud-based analytical tools—give organizations
powerful new ways to pinpoint cost and value drivers,
36% 86%
diagnose and prioritize business areas, and create new
Business continuity approaches to value transformation. Furthermore,
“as a service” business models enable more flexible
36% 84% cost structures.

Two years ago In two years

Source: IBM Executive pulse survey Q1C; n=3450, fielded April

27 – June 9, 2020. Question: To what extent is your organization
prioritizing the following business competencies?

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 Value analysis Based on our work with clients through many challenging
times, including the ongoing COVID-19 crisis, we see value
Highly strategic organizations use the opportunity of transformation comprising three major phases:
challenging times to reposition themselves for an unknown
– Survive
future. Value analysis will address near- and longer-term
opportunities through coordinated activities across three – Transition
broad categories: capability and process cost optimization; – Thrive
operating model transformation; and digital and cognitive
reinvention (see Figure 3). The fundamental purpose of value transformation, though,
is to lessen as much as possible the impact of the first two.
During crises, an organization must recognize what can By taking the right steps now, a company confronted
and should be done immediately, and where to target its with an unexpected disruption will be better equipped to
efforts as it emerges into a different normal. An emphasis shorten its survive phase and transition quickly to growth.
on stabilization and rapid cost transformation opportunities
will give way over time to adaptation and value transfor-
mation. As such, for each of these categories, we have
identified areas of focus for both the near-term and the
longer-term.

Figure 3
Scope of Digital Reinvention impact

Process optimization and benchmarking 0 to 6 months

SG&A Direct and Headcound Vendor

reduction indrect spend reduction rationalization
optimization

Operating model transformation 6 to 12 months

Maturity and value

Core vs. Shared Centers of Outsourcing Globally

non-core services excellence integrated
functions enterprise

Digital and cognitive reinvention 12+ months

Tech lead Digital Digital apps AI, NLP, Digital Platforms led
process innovation and services AR/VR ecosystems organizational
innovation factories reinventions

Near-term focus area Long-term focus area

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Survive: Process optimization Insight: Component business
and benchmarking modeling (CBM)
Short-term CBM is an approach to modeling and analyzing an
enterprise that seeks to define an organization’s
The foundation of cost and value transformation is gaining
“business components”—entities within the
an accurate picture of an organization’s costs and value
organization that comprise activities, resources,
drivers, including the relative cost of various capabilities
applications and infrastructure, and a governance
and processes, the balance of which may have shifted
model, as well as provide value in goods or services.
during the crisis. Job one, therefore, is finding the right cost
CBM can operate at several levels, taking higher
and value levers to adjust, keeping in mind what portion of
level entities that qualify as “businesses” and then
the total cost base they will influence. Cutting a cost,
breaking them down further into finer-grained
even substantially, that makes up a miniscule part of the
components. A sophisticated pre-built model may
company’s overall cost base will have little long-term effect.
have more than 400 components that can be used as
To help them identify high value transformation functions a starting point for any CBM project.
or processes, organizations can employ a methodology The CBM approach helps a company evaluate the
like component business modeling (CBM) to identify criticality, business readiness, and value of various
3-5 priority areas for cost transformation (see “Insight: processes and functions, and helps it balance its
Component business modeling”). Functions, processes cash flow and operational expenses.
and tools that enable business continuity and improve work
flexibility should jump to the top of the list. So should
customer-facing experiences that are the lifeblood of a
company’s business. Technology, work policies and culture
that support remote work also tend to increase resiliency
and may reduce cost.

Benchmarking against peer organizations, industry leaders,

and even the “art of the possible” can help identify and map
the biggest pockets of spending for cost optimization to
stabilize cashflow and reduce risk. As an example, many
organizations have been forced to evaluate their supply
chains and reexamine risks on transportation, logistics and
other factors that affect the flow of critical materials.

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Free up workers for more complex,
variable tasks—the kind of work
humans excel at and find far
more rewarding.

An IBV study conducted in May 2020 suggests that

executives at organizations producing physical products
Transition: Operating model
were planning for a different future even before COVID, transformation
with the percentage favoring a just-in-time supply chain
strategy dropping from 39 percent two years ago to just Short-term
15 percent. Taking a more balanced approach will enable
The immediacy and seriousness of the COVID-19 crisis
them to procure assets or raw materials at a reasonable
provided an undeniable impetus for change. Companies
price, while building greater capacity to weather future
may find it easier now to break up calcified operating
uncertainties.
models, re-examine supply chains, and reconfigure their
workforce’s capabilities using modern technologies.
Longer-term
Once the organization has identified areas for immediate
As they optimize processes and look at benchmarks for cost reduction and taken initial steps to stabilize cash flow,
guidance, organizations should not forget to fully support it can shift its attention toward defining a digital operating
their existing employee base. While at times benchmarking model for the future.
may point to headcount reduction as a viable area for cost
reduction, it’s important to weigh the impact of headcount The journey to revamp a company’s operating model
reduction against organizational capacity and employee begins by identifying core versus non-core functions
morale. based on the company’s strategy and recognized core
competencies. In the near term, organizations should
To build a resilient workforce, companies need to examine prioritize business continuity and leverage virtual ways of
how they communicate transparently with employees and working for both core and non-core functions. Evaluate
how they enable them to work productively. They must functions identified as non-core—possibly personnel
assess if their current policies, data security and privacy administration, payment processing, and accounts
protocols are aligned with new work realities, including payable and receivable—for centralization, automation,
the capacity to shift quickly to remote work. (See also or a move to a shared services model.
“The CHRO’s guide to workforce re-entry—Rethinking
the workplace,” IBM Institute for Business Value, Organizations should consider three areas for investment.
June 2020.)5 First, identify opportunities to accelerate the migration of
applications and workload—especially legacy mainframe
In determining the right level of organizational capacity for work—to the cloud. Second, consider transitioning
the long term, organizations should recognize that vendor applications, where possible, to open source software.
negotiations, direct and indirect spend reduction, and IT Third, invest in the advanced automation of repetitive
spend optimization can often create more desirable tasks, using approaches like robotic process automation
long-term impact. (RPA), to increase cost efficiency and free up workers for
more complex, variable tasks—the kind of work humans
excel at and find far more rewarding.

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Intelligent workflows use exponential
technologies to get work done more
efficiently and with greater responsiveness.

Longer-term Thrive: Digital and cognitive

As an organization considers longer-term actions and looks
to transform operations across the enterprise, it should reinvention
consider establishing Centers of Excellence (CoEs) around
core technologies, critical processes, or applications. CoEs
Short-term
bring together cross-disciplinary teams that sit outside of As an immediate, short term step toward digital and
established governance silos, promote consistency and cognitive reinvention, organizations should look to
governance, and help to define scalable and repeatable leverage ready-made platforms and established
solutions. This cross-disciplinary collaboration not only capabilities that support stabilization and value
contributes to operational efficiency, but can improve transformation opportunities.
customer experience.
A simple but powerful application is seen in cognitive
As a resilient organization evolves its operating model, call centers. When companies were faced with having to
it will match staffing with areas ripe for rapid growth and adapt quickly to a COVID-19 environment, cognitive call
embed agile principles in the way its employees work. centers helped compensate for personnel restrictions
Agile principles encourage focusing on more cost-effective and answered customer requests while maintaining a
outcomes aligned with changing market conditions. Applying viable level of service and—crucially—the company’s
agile principles also supports a better employee experience. image. For example, as the pandemic began to spread in
If a company is alert to the possibility, new virtual ways of North America, requests for help or information to the
working may reveal unanticipated opportunities to airline WestJet increased more than 1,600 percent on
decrease cost and improve productivity and morale. Facebook Messenger and WhatsApp. The airline’s virtual
Where appropriate, consider the opportunity to gain agent completely handled 87 percent of the issues,
flexibility and variable cost through business process helping lower response time.6
outsourcing and/or developing a contingent workforce.
Similarly, AI-enabled chatbots for simple requests
related to HR, procurement and employee IT needs can
manage transaction volume and reduce pressure on the
workforce. This flexibility is proving invaluable to many
companies. At IBM, for example, we reported saving
almost USD 1 billion since 2011 by embedding AI
in human resources processes.7

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Longer-term Insight: Control towers help
As the organization shifts focus toward longer-term
adaptation and sustained value transformation, the
manage disruption
integration of cognitive technologies enables an A control tower is a connected, personalized dashboard
organization to build new business platforms on which of data, intelligence and analyses. It enables organizations
it can compete. Control towers can coordinate work, to more fully understand, prioritize and resolve critical
data flows and analysis in real time across the company issues in real time. Control towers are especially useful
(see “Insight: Control towers help manage disruption”). in times of unpredictable, yet inevitable, vulnerabilities
Intelligent workflows supersede outdated, siloed business and disruptions, such as a pandemic.
processes that resist optimization and change.
A control tower provides end-to-end visibility across a
Intelligent workflows use exponential technologies, discreet set of workflows and applies AI to bridge data
such as sensors and IoT devices, to get work done more silos, reduce manual processes, and derive real-time
efficiently and with greater responsiveness. Applying actionable insights from data. It also enables collaboration
intelligent workflows can make possible cost savings in across teams and partners and preserves organizational
the 50-70 percent range, compared to conventional belt knowledge to accelerate better decision-making.
tightening approaches that yield cost savings in the 10-20 Ultimately, it can help an organization better predict
percent range. But more importantly, intelligent workflows disruptions, improve resiliency, manage exceptions and
can at the same time improve quality, effectiveness, and respond to unplanned events.
worker safety. Typically, belt-tightening degrades quality.8

Adding AI with natural language processing also

empowers employees and helps shift their focus to higher
value work. AI-enabled content curation tools, when used
for professional development or training, for example,
enhance employees’ skill sets and their ability to continue
growing professionally. Advanced and customized chatbots
can extend employee capability by capturing the collective
expertise of the entire organization.

Together with ecosystem partners, an organization can

establish digital platforms that use its talent, workflows
and data to compete in new ways, convene coordination
across its value chain, or expand into new markets. New
partnerships can help mitigate gaps, or even lead to new
offerings identified in the midst of a crisis.

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Action guide Build crisis management tools and conduct robust financial
stress testing.
A progressive path to value transformation – Develop a suite of applications for issue routing and
resolution, automated reporting, and predictive
Survive—Focus on liquidity maintenance.

Preserve cash to support ongoing operations and pave the – Build a knowledge and decision platform with AI
way for longer term progress. intelligence for faster decision making.

– Conduct a rapid diagnostic for business continuity and Drive renewed demand and prepare for success by creating
cost reduction opportunities, including benchmarking a ramp-up strategy.
and advanced analytics, to decide on options for expense
– Establish an agile, market-responsive innovation
reduction and temporary shutdown.
program, such as an IBM Garage, to prototype and pilot
– Assess supplier and vendor relationships, as well as a first wave of cost reduction minimum viable products
product assortment and performance, as part of your (MVPs).9
cost reduction analysis.
– Re-design and re-imagine workflow processes with the
– Review your capital project portfolio and use intelligent goal of embedding exponential technologies like AI to
supplier lifecycle management to optimize spending cuts. make them into intelligent workflows.
– Benchmark shared services and back-office expenses to
identify areas for cost optimization.
Thrive—Invest and scale value

– Develop a resiliency strategy and implementation plan. Reduce your effective fixed-cost base—Modernize IT
infrastructure and build new cloud-based microservices
– Establish a roadmap to shift select workloads to the
to increase agility and scalability.
cloud for operational agility and scaling.
Create more quickly scalable solutions that support
Transition—Build flexibility and seek opportunities growth.

Develop scenarios and plan responses for potential – Develop MVP pilots into a first production-ready release.
contraction of the business or sudden increases in demand. – Continuously monitor, test, and improve releases, and
– Use AI and advanced analytics to pinpoint and prioritize scale them rapidly.
production issues, reducing the amount of time needed – Deploy agile innovation projects in growth areas, as well
to resolve issues. as candidate areas for continued cost improvement.
– Scale up your procurement function to renegotiate key – Personalize and contextualize customer outreach based
contracts quickly. on localization and/or time-sensitive triggers.
– Implement robotic process automation (RPA) for
back-office activities to reduce manual work and cycle
time.
– Use AI-driven technologies to optimize logistics and
distribution for sudden decreases or increases in
demand.

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About Expert Insights © Copyright IBM Corporation 2020

IBM Corporation
Expert Insights represent the opinions of thought New Orchard Road
leaders on newsworthy business and related technology Armonk, NY 10504
topics. They are based upon conversations with leading Produced in the United States of America
subject matter experts from around the globe. For more September 2020
information, contact the IBM Institute for Business Value
at iibv@us.ibm.com. IBM, the IBM logo, ibm.com are trademarks of International
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worldwide. Other product and service names might be
Notes and sources trademarks of IBM or other companies. A current list of IBM
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trademark information” at: ibm.com/legal/copytrade.shtml.
1 Powell, Jerome. “Current Economic Issues.” May 2020. Board
of Governors of the Federal Reserve System. https://www. This document is current as of the initial date of publication
federalreserve.gov/newsevents/speech/powell20200513a.
htm and may be changed by IBM at any time. Not all offerings
are available in every country in which IBM operates.
2 Morikuni, Tsukasa, Tokio Murakami and Kenta Shinozaki.
“24% of world’s largest companies risk running out of cash.” THE INFORMATION IN THIS DOCUMENT IS PROVIDED
Kikkei Asian Review. April 14, 2020. https://asia.nikkei.com/
Spotlight/Datawatch/24-of-world-s-large-companies-
“AS IS” WITHOUT ANY WARRANTY, EXPRESS OR IMPLIED,
risk-running-out-of-cash INCLUDING WITHOUT ANY WARRANTIES OF
3 Lin, Connie. “Companies filing for bankruptcy: A new normal in MERCHANTABILITY, FITNESS FOR A PARTICULAR
the age of coronavirus.” Fast Company. May 2020. https:// PURPOSE AND ANY WARRANTY OR CONDITION OF NON-
www.fastcompany.com/90501188/companies-filing-for- INFRINGEMENT. IBM products are warranted according to
bankruptcy-a-new-normal-in-the-age-of-coronavirus. Tucker, the terms and conditions of the agreements under which
Hank. “Coronavirus Bankruptcy Tracker: These Major
Companies Are Failing Amid The Shutdown.” Forbes. May
they are provided.
2020. https://www.forbes.com/sites/
This report is intended for general guidance only. It is not
hanktucker/2020/05/03/coronavirus-bankruptcy-tracker-
these-major-companies-are-failing-amid-the- intended to be a substitute for detailed research or the
shutdown/#326c78113425. Bomey, Nathan. “Can these 13 exercise of professional judgment. IBM shall not be
retailers survive coronavirus? Permanent store closings, responsible for any loss whatsoever sustained by any
bankruptcies coming.” USA Today. May 2020. https://www.
organization or person who relies on this publication.
usatoday.com/story/money/2020/05/08/
store-closings-chapter-11-bankruptcy-coronavirus- The data used in this report may be derived from third-party
covid-19/3090235001/
sources and IBM does not independently verify, validate
4 Gulati, Ranjay, Nitin Nohria and Franz Wohlgezogen. “Roaring or audit such data. The results from the use of such data
Out of Recession.” Harvard Business Review. March 2010.
https://hbr.org/2010/03/roaring-out-of-recession are provided on an “as is” basis and IBM makes no
representations or warranties, express or implied.
5 Goldwasser, Charles and Amy Wright, “The CHRO’s guide to
workforce re-entry—Rethinking the workplace,” IBM Institute
of Business Value. June 2020. https://www.ibm.com/thought-
leadership/institute-business-value/report/return-to-work
6 Mehta, Puneet. “How AI can save airline customer service
teams in times of crisis.” PhocusWire. April 20, 2020. https://
www.phocuswire.com/ai-airline-covid-customer-service
7 Aspan, Maria. “This tech giant says A.I. has already helped it
save $1 billion.” Fortune. January, 2020. https://fortune.
com/2020/01/24/ai-ibm-human-resources
8 IBM experience based on internal and client experience.
9 https://www.ibm.com/garage

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