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uh Our Guest today is Chris etner uh who
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chairs the accounting department at
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Wharton uh we are speaking with him
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about a paper titled cost Management in
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the digital era which he co-authored
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with Omar agiler of deloit Consulting uh
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Chris welcome to knowledge at Wharton
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it's great to have you here with us
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today thank you for having
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me uh this a very interesting paper and
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and and you write in the paper that cost
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management has become a competitive
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necessity
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uh but why have companies changed their
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approach to cost management from being a
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defensive measure to something that's
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much more proactive well traditionally
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and again if you read the newspaper the
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only time we ever hear about cost
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management is when a company is in
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trouble we're going to lay off workers
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we're going to close manufacturing
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plants in truth what we find and I've
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done this work with with Omar from deoe
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um most companies now the primary reason
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why they're doing cost management has
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nothing to do with we have a cost
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problem that we need to deal with what
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they're trying to do is free a
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resources and take that money and
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reinvest it in the firm and in finance
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Theory it's actually cheaper to generate
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your own cash and go out and borrow it
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so what lots of them are doing is using
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cost management right let's get rid of
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inefficiencies in our process let's take
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all the extra money we have there and
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let's use it for growth so it's a very
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different way of even thinking about
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cost management than we've ever done
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before on that given now that we're
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using it as as a strategic lever as
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opposed to just a defensive response to
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I'm in trouble that opens up all new
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strategic spaces for using cost
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management it's no longer just a
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reactive tool it really is a proactive
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way of making yourself more competitive
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in the global environment so I think Deo
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did a cons uh did a did a global study
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on this and what were some of the key
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findings of the of the study deoy has
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has done their they have a bial Global
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cost management study and we analyze the
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date on that um we find things like if
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you're really going to make cost
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management effective make sure you've
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got a good Strate iic reason for doing
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this I mean it could be the case that
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yes I I have a a problem I have to solve
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and I have to cut cost if that's really
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imperative yeah you are going to cut
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costs right on the other hand I've got a
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strong strategic imperative that I need
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to cut cost and then reinvest it that
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also appears that those are the two two
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groups that actually hit their toost
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targets most companies that actually do
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cost management according to Lloyd
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survey don't hit their cost targets they
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don't even get close to it but if I got
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a strong strategic imperative obviously
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if I need to cut costs to stay in
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business I'm going to do that if I'm
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using this and I have a strong
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imperative to grow those companies also
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tend to hit their cost targets but
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they're also the only ones that also at
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the same time grow their revenues on it
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the people that do not do well at all
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it's kind of I'm going to do cost
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management but I really don't have a
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real strong strategic imperative to do
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it that's one thing we find other things
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it makes a real big difference who's in
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charge of this the higher in the
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organization you make in charge of the
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cost management effort the more likely
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it's going to be strategic and
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sustainable so it's going to be much
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High better if you've got a CEO's
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responsible for this or a major division
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head as opposed to pushing this down and
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it looks like just an operational
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Improvement you're trying to do finally
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a real big thing is what information
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systems are we putting in place to
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support this which brings up the whole
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notion of this digital that what we find
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with the survey the people that have
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actually hit their cost targets and
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actually saved more money are the ones
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that have put in new digital
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Technologies they're putting better
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forecasting systems in place better
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budgeting systems and the big things
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we're seeing is putting using things
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like artificial intelligence and machine
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learning to try to understand our cost
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structures better to try to optimize
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what we're doing but even more than that
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with a lot of the digital that we have
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now you can completely transform the way
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you do business so so here's here's a
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simple example would be software is
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service traditionally we've always had a
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big it Department well there's a huge
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fixed cost we have but now what I can do
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I can go on cloud computing I could use
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software as service I'm only paying for
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what I use so by using digital I can
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completely change the cost structure of
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my organization so it's not just a way
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of optimizing your current operations
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which a lot of these Tech digital
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Technologies can do how can I just kind
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of completely think outside the box in
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terms of how I deliver products and
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services to my customers and what does
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my cost function look like right now all
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these are really interesting findings
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I'd like to sort of tackle them uh one
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by one sure well some of the data that I
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found really interesting especially in
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terms of the responses of some of the
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Chinese companies that took part was
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just 35% of the Chinese companies were
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able to hit their cost reduction targets
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and if you look at the companies that
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both were able to cut costs but also
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increased their revenues by at least 10%
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that number was even lower with just
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about 12% what are some of the reasons
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for that well I mean this is true
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worldwide it's not just Chinese
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companies and the reason we're talking
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about Chinese because this was written
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for a Chinese Journal right but across
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the board what you see is the percentage
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of companies that actually hit their
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cost management targets is far below 50%
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that's across the board right and since
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a lot of them are actually using it to
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cut cost and not to grow their firm they
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have not even put into place I'm going
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to try to figure out which cost
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management efforts could I use that now
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I can redeploy those assets into some
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growth opportunity so since very few of
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those have actually done that right we
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see many of them who have been able to
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both cut their cost and grow their
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revenues but the ones that have done
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that have done cost management very
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differently so what's the main
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difference what what sets apart those
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who are able to both cut cost
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successfully and increase revenues from
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those companies that aren't able to
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again the biggest one they're using new
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technologies to do this right they're
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not just trying to take let me take the
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existing Technologies let me take the
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existing processes and let's just try to
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do them better let's try to do them
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cheaper right what they're doing is
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thinking outside the box here's what I
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have to deliver to my customer to grow
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how can we do that how can we use new
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tools new techniques new completely new
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cost structures that not only reduce our
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costs and free up money to for growth
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but in fact I can use those capabilities
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to grow things so it could be the here's
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an example let's take Amazon right okay
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you got digital storage well that's part
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of their cost structure is we have all
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this it infrastructure because you need
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that for Amazon
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but now that I have that capability
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guess what I can do there's a whole new
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Revenue stream where now I start selling
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cloud services so if you're a company
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that starts thinking outside the box the
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ones that have been able to both cut
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their cost and part of the reason Amazon
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did this I need the capability but it's
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going to be cheaper for me to do it than
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to go out and Outsource this so you
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build that capability that makes your
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cost lower but now I have also a
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capability that I could take advantage
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of to grow a whole new business I never
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thought about so it's a m different way
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of thinking about what am I trying to do
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here in truth I'm not trying to do cost
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management I'm trying to do profit
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optimization right so if you
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simultaneously are thinking about when
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I'm doing this cost management effort
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and notice it's not called cost
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reduction it's called cost management
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right how can I do things that will
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simultaneously do both of these and what
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you see is those people are taking a
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whole new path in terms of how can we
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change our cost structure in such a way
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both it makes us more efficient but
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allows us to deliver things we could
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never deliver before so are there any
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other examples apart from Amazon say in
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a different industry like Finance where
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you see the same thing going on in the
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creative use of uh digital technology to
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both manage cost as well as increase
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revenues well I mean part of this is if
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you think about where where a lot of the
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cost management happening is things you
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never traditionally thought about which
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is overhead and indirect costs right
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where we can start adding robotic
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process automation we can start doing
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things where we never ever thought that
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we didn't need a person for right I mean
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they new technology you can do facial
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recognition take an insurance company
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one of the big things insurance
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companies now is basically you can put
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in technology they're going to take all
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those forms I get the police report I
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get the insurance form they're all in
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different formats there's handwriting
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that so you can train a system to
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actually do this well then they can
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process your insurance claim faster
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guess what happens as a customer I'm
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much happier if you can process my
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insurance claim faster so what happens
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is you not only cut down in your cost
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because I can allow technology to do a
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lot of things we had humans to do but I
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could use that for a strategic Advantage
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Now by saying okay not only do we cut
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our costs you as a customer guess what
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when you make a claim and file it with
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us we're going to be be able to respond
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a lot faster so there's lots of examples
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there on the kind of things you wouldn't
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think about kind of the human factor
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that not only can we we automate some of
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this and do things we don't necessarily
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need a person but then strategically we
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could use that for some other advantage
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no that that sounds really fascinating
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now the other result of using more and
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more digital technology is that you get
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a lot more data than you than you did
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before and I wonder you know what kind
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of insights into managing costs and you
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get just through big data and analytics
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that was not possible in in in uh
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previous ways of doing things any
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examples of that well it's the
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combination of big data and when we talk
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big data it's not just a lot of things I
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can throw into an Excel spreadsheet
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it turns out these days data could be
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anything it could be what's called Soft
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Data again people have done facial
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recognition that's data I can see how
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the person looks I can see what kind of
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words you use so with the technology one
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we can translate a lot of unstructured
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data into structure data we can do the
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analysis then we also have the
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algorithms and the Predictive Analytics
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and cognitive technology and machine
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learning and artificial intelligence to
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actually let the computer Identify some
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underlying relationships we never really
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thought about right it may be a whole
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complex things I have to do ab C and D
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for anything to happen I never would
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have thought about that until the
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underlying algorithms using all kinds of
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data we have were able to find these
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relationships and once I find those I
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could see if okay in my business if I
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Implement all of these together that's
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where you get The Big Payback but what
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it does allow you to do is identify a
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lot of underlying relationships that you
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never would have been able to identify
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yourself on this right so one of the
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things you're right in the paper is that
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in the past cost management was even
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often thought of as something that was
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very tactical but as a result of some of
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these changes it's becoming a lot more
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strategic and and uh allows companies to
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transform their operating models is is
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that is is that a fair summary of what
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well that's completely true right I mean
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simple little things like are you going
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to use cloud computing versus am I going
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to have an IT center right that it
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completely transforms my business but it
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also changes how am I with Strat ially
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what I might do because now I'm not
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stuck with a bunch of fixed cost I can
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decide to adjust how much Services it
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also allows you to add and subtract
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things faster part of the whole thing
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with digital is the world is changing a
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lot faster so I have to have a company
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that's responsive to that well if I've
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implemented digital in my firm I'm going
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to be able to adjust things a lot faster
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than I would if I kind of went with the
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old tactical i' I've come up with this
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solution we're going to stick with it
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for a long time so it's the whole notion
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of of dig permeating your organization
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and allowing you to do things either
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from understanding cost or managing
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costs that you never would have been
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able to do and that's how you can
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actually move forward and kind of into
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the digital age you really have to start
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thinking digital right now what are some
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of the most important digital cost
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Management Solutions uh involving
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analytics and cognitive Technologies uh
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that companies are deploying to do more
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effective cost management well again
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with the second round of the deloid
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banial cost survey which we we just have
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coming back and then they will have a
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white paper coming out fairly soon maybe
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we will do a link to that right but part
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of this is saying okay what kind of
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digital technologies have you put into
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manage costs and which ones have and
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have they they met your expectations
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exceeded them or Fallen below and it
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turns out that the things that have
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actually exceeded their expectations is
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artificial intelligence and machine
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learning interesting right where again I
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can take all the big data I can use
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these algorithms I can get insights I
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never would have had behind before the
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thing that appears to be falling behind
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blockchain right people are trying
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blockchain partially because you may
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think of blockchain only as I'm going to
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go buy Bitcoins but a lot of it is how
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do I get secure algorithms that allow me
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to have ledgers right I mean that's part
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of what we're trying to do with
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blockchain the people that have put that
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in as part of cost management the
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probability that they thought this thing
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met their expectations was Far lower
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other things why why is that well I
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think a lot of people don't actually
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know what to with it it sounds like a
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great idea but it's such an emerging
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field that I don't think unless you kind
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of really know why I'm putting this
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technology in there and to be perfectly
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hon it it's not like blockchain provides
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insights like cognitive and artificial
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intelligence does right that then I
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could take advantage of no it's doing a
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better way of doing what I did before
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which is maintaining ledgers and things
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like that so in that respect it's more
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like somewhat more like the old
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technology I'm finding a better way of
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doing the old stuff I did it's more
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secure which is a big thing we care
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about now because of cyber security
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right I can do things more efficiently
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but effectively it is a ledger which
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we've always had where the difference
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with kind of cognitive machine learning
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and AI it's providing brand new insights
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that we never had before that we can
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really take advantage and I didn't even
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know I was going to have that that's why
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we can exceed expectations it's
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delivering a lot more than we ever
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thought about in terms of information
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that I could use to transform my
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business uh what about what impact has
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robotic process automation had on cost
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management has that metant expectations
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or not really generally most of these
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have met their expectations when you
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look at these right whether you exceed
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it or not we find those generally they
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met their expectations they did not
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exceed it whereas again the AI and the
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Machine learning they they've got a lot
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more out of it than they thought so it
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is paying off in terms of yes we put it
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in there for a reason right it is kind
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of meeting our targets for this stuff
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but a lot of that again in in in the at
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least currently
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a lot of the robotic process automation
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stuff like that has really hasn't taken
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the step forward of completely
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transforming our business we're doing
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what we're currently doing better maybe
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with less people and we're automating
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things rather than thinking how can I
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fundamentally use this now now that I
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freed up these resources to apply those
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people to more value added things and I
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think when we take that next step RPA is
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paying off in terms of kind of the
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Tactical view but I think as we take the
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next step and people realize okay now
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that I I can systematize this again how
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could I use that for strategic advantage
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and I don't think that's quite there yet
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how companies using Predictive Analytics
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to optimize costs and improve
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productivity oh this is Hu I don't care
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which industry you're talking about
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people using Predictive Analytics right
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I mean part of it is if I can understand
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you know if I make these actions what's
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going to happen in the future well
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there's really two things that come out
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of this right one is what what are the
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things that drive my costs I want to if
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I do more or less of this thing what's
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going to drive the cost then kind of
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what's the cost of every time I do it
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and once you start getting that the big
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advantages are okay if I understand what
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my drivers are and a lot of times
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Predictive Analytics comes out of
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artificial intelligence I Now understand
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drivers that I didn't understand once I
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understand the drivers that's what you
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can manage the drivers of my cost the
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other thing is you could use Predictive
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Analytics to say okay I can forecast
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better right and if I could forecast
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better
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right we have to acquire resources in
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advance right I've got to figure out I
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forecast here's what my demands are on
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the cost side here's what my Revenue
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demands are right I go I go borrow money
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I place resources and obviously if I
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can't forecast very well right I'm going
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to be spending either too much or not
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have enough expenditure on resources
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available so the better you can forecast
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right the better off and we've done some
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work on this where people are doing like
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stochastic modeling and artificial
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intelligence
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are able to come up with much better
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management earnings forecast both in
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terms of what our earnings are when
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they're going to show up what our costs
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are going to be and how much Capital we
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actually have required so now I could
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better match my resource demands and my
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expenditures because I can forecast a
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lot better so these models are really
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helping us out a lot in terms of
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understanding the dials we have to play
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with allowing us to forecast better
00:16:51
that's that's amazing what surprised you
00:16:54
most in this research any any any
00:16:57
surprises I think it really was kind of
00:17:00
surprising how many people are now doing
00:17:02
this as a growth strategy it is a
00:17:04
completely fundamentally different way
00:17:06
of thinking about this right and how
00:17:09
people with this new digital technology
00:17:11
the ones that are really embracing this
00:17:13
is I'm not just using to improve current
00:17:15
productivity right have been able to
00:17:17
completely start transforming their
00:17:19
business now this is still in its
00:17:20
infancy it is still moving forward it's
00:17:22
a moving
00:17:23
Target but I I I strongly believe that
00:17:26
going forward this is what people going
00:17:28
to have to do we moving into a digital
00:17:29
world it's a world that's changing a lot
00:17:31
faster we have to incorpor that into our
00:17:35
organization knowledge is expanding a
00:17:37
lot faster so being able to process more
00:17:39
information but not just processing I
00:17:41
need to translate that into something
00:17:44
that's going to allow me to make Better
00:17:45
Business decisions and and one of the
00:17:47
big things with the big push we have at
00:17:48
Wharton is in a in business analytics
00:17:51
the thing that's missing in companies
00:17:52
what you don't need is a bunch of data
00:17:54
scientists that are running kind of a
00:17:56
whole bunch of algorithms and something
00:17:59
comes out that nobody knows what to do
00:18:00
with I think what the companies I work
00:18:02
with a lot of what they're missing is is
00:18:04
that business person who knows enough
00:18:06
about analytics works right to say
00:18:08
here's the business problem I would like
00:18:10
you to help me with right and then when
00:18:11
the data scientists do the what the data
00:18:13
scientists do and they're very good at
00:18:15
it something comes out that's actually
00:18:17
actionable and the space I I we find
00:18:20
missing in companies right now you got
00:18:22
great data scientists right they do what
00:18:25
they do you get the business people here
00:18:27
but right now I think the Missing Link
00:18:29
in a lot of companies is the people who
00:18:31
know enough data analytics I'm not
00:18:32
making you a data scientist but enough
00:18:35
data analytics say here's the problem
00:18:36
I'd like you to help me with and then
00:18:38
they can take the outcome from the data
00:18:40
sign to says how can I use this to make
00:18:42
myself better off and I think that's
00:18:45
really what where we have to get in the
00:18:47
next coming couple years I don't think
00:18:48
it's that far out if we really want to
00:18:51
take advantage of a lot of these digital
00:18:53
Technologies that's you referred to the
00:18:56
next iteration of the deoe study
00:18:59
survey is also going to happen what does
00:19:01
the future look like to you I mean what
00:19:03
what what will the next generation of
00:19:04
digital Innovation look like uh for
00:19:07
companies that want to think
00:19:08
strategically about cost management I
00:19:10
think one issue we're going to have to
00:19:11
deal with what's the role of
00:19:14
people okay because with with robotic
00:19:17
process automation a lot of what we're
00:19:18
doing is taking things we always thought
00:19:20
we needed people to do and we can
00:19:22
automate a lot of this so how is it we
00:19:24
can Elevate people to their highest
00:19:27
valued use well to be perfectly hon
00:19:29
honest right it's thinking outside the
00:19:31
box I mean a lot of this the the
00:19:33
automation yes there is machine learning
00:19:35
it's learning how to do things but in
00:19:37
truth people are the ones that are going
00:19:38
to be doing things out of the box so
00:19:40
we're going to have to figure out how do
00:19:41
we transform our
00:19:43
workplace I was actually reading an
00:19:44
article about Stanford University right
00:19:46
they're big on artificial intelligence
00:19:48
and machine learning all of a sudden in
00:19:50
their classes and this stuff they're
00:19:51
trying to bring the people element back
00:19:53
because it's gone to a black box right
00:19:55
right so I think that to make digital
00:19:57
move forward with the next is we have to
00:20:00
figure out what is the role of people
00:20:02
here so we we can take advantage of the
00:20:04
digital Technologies right but I don't
00:20:07
want to completely give up to that
00:20:08
because you you're not
00:20:10
competitively right the machine's not
00:20:12
going to be able to make your company
00:20:13
move forward you want to take advantage
00:20:14
of the digital Technologies and that's
00:20:16
what we're going to have to Grapple with
00:20:18
moving forward when we start doing this
00:20:20
great uh that sort of covers the
00:20:22
questions I had are there any other
00:20:24
issues that you'd like to emphasize that
00:20:26
we haven't talked about yet well again I
00:20:28
I would really push this notion that in
00:20:31
our companies we need people who can can
00:20:34
understand digital but can map this into
00:20:37
the business questions we have right
00:20:39
right that's really if we want to take
00:20:40
advantage of digital either on the
00:20:42
revenue or on the cost side right that's
00:20:45
the people we need we can't assume that
00:20:47
the data scientists are going to be able
00:20:48
to do this off on their own right we
00:20:50
can't assume that the business people
00:20:52
who are currently trained without kind
00:20:54
of understanding at least what of the
00:20:56
tools that are available will be able to
00:20:58
C capitalize this and I I would kind of
00:21:00
stress that I think this is a capability
00:21:02
that companies really are going to have
00:21:03
to do if they want to take advantage of
00:21:06
the whole digital capabilities and use
00:21:07
that for cost management or Revenue
00:21:09
enhancement great Chris thank you so
00:21:11
much for speaking with knowledge at
00:21:12
Wharton thank you
00:21:14
mol for more insight from knowledge at
00:21:17
Wharton please visit knowledge. won.
00:21:20
up.edu
00:21:24
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