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