Thursday, January 12, 2012

Will the Return to Good Times Bring an End to Frugalnomics?

With economic uncertainty still in play, it should come as no surprise that Executives’ top priority remains cutting costs / improving business efficiency versus growth.  The research by the Financial Times and Doremus indicates that the focus on cost savings is significant, and even higher for larger organizations, where frugality ranks twice that of any growth priority.

This got me thinking, not about the current pessimistic economic outlook, but about a potential recovery and what it would mean for B2B sales and marketing strategies. After all, as the European debt crisis resolves, and the US election cycle unfolds, a recovery could indeed be in the cards. This would likely swing the priority from cutting costs back to growing revenue, opening new markets and launching new products. Or will it?

Indeed, as the economic recovery takes hold, innovative companies will be in a great position to potentially lead and catch the next wave, while agile companies will jockey for ways to capture early growth opportunities and execute on growth plans. However, as a result of the Great Recession, technology and several other factors, the world has changed. Even though the recovery will place more emphasis on growth initiatives, we predict that Frugalnomics, where businesses maintain a focus on costs and the bottom-line, will remain in effect.

The impact is that not just in the short term, but for a long time to come, buyers will remain more cost conscience, status-quo biased, price-centric and bottom-line focused. While B2B sales and marketing will face continued pressure to prove the cost of doing nothing, justify the superior ROI and quick payback on investments and quantify competitive value.

So why won’t the return to good times bring an end to Frugalnomics? There are a few reasons that we feel Frugalnomics will be a permanent part of B2B purchase decisions, and a continued sales and marketing challenge for years to come:

·         The world is flat according to Thomas Friedman, and as a result, global competition makes it easier than ever to source quality solutions from lower cost / better providers, regardless of where they might be located worldwide. This continues to evolve the competitive cost structure of different businesses, business models and supply chains. As a result, an organization can no longer rest on current efficiency levels in such a competitive world, and must seek year-over-year to drive out costs and inefficiency. Efficiency is not just a near term requirement to achieve bottom-line performance in the face of revenue challenges, but a permanent challenge to be competitive in an ever flattening world.

·         When trying to improve bottom-line performance, an executive can achieve this two ways, by increasing the top-line revenue, or by cutting costs. However, each dollar of incremental revenue earned is not the same as each dollar in cost savings as to how it contributes to the bottom-line. For every dollar of incremental revenue, there is a cost of good / service as well as variable SG&A that comes into play. So if you grow revenue by one dollar, it has a cost associated with it so is not worth that full amount, but instead the costs and margin needs to be factored. Typically this reduces the bottom-line impact to 30% or less of the incremental revenue. Improving the bottom-line with incremental revenue requires 3 to 5 times more revenue when compared to each dollar of savings / efficiency improvements. This fact alone means that cost savings will always be in vogue.

·         When considering a new proposal that has many different types of benefits, such as revenue and cost savings, stakeholders view these benefits differently. In business case after business case, regardless of the macro-economic environment, we see that hard cost savings are viewed as more tangible and reliable in making the case than revenue focused benefits. Stakeholders want benefits they can count on, and history has shown that tracking and realizing revenue driven benefits is often difficult. As a result, even for revenue focused projects, the value of hard cost savings in any justification proposal outweighs the value of revenue improvements in almost all cases.

·         As organizations are more risk adverse from the Great Recession, Finance has become more involved in procurement, both at the strategic and tactical level. In some organizations this has resulted in CFOs taking over formal control of several business groups including IT, HR, operations, marketing and more. Financial involvement has increased the level of economic diligence and justification on every proposed investment. As the recovery takes hold, Finance will likely remit some control, but is expected to remain more involved formally and informally for years to come. With the majority of financial executives focused on cost savings opportunities in good times and in bad, the cost consciousness, status-quo bias, price-centricity and bottom-line focus are here to stay.

Although a recovery may emphasize growth oriented value propositions vs. cost savings, a more cost-competitive world, the superior bottom-line value of cost savings and increased financial control and oversight means that buyers will remain empowered, skeptical and frugal, and Frugalnomics will remain in effect.

Therefore, it is relevant not just in the short term, but for long term success, that B2B sales and marketing teams develop and leverage provocative, value-focused content and tools. Oriented to help facilitate the buyer’s journey, these tools can be used directly by customers, or in sales-led workshops to help successively:

1.       Diagnose opportunities and illuminate priorities
2.       Overcome the status-quo bias, proving there is a cost of doing nothing
3.       Justify change
4.       Prove competitive value

The facilitation is best done via interactive tools, especially: provocative white papers, benefit estimators, diagnostic assessments, ROI justifications, and TCO competitive comparisons.

The Bottom-Line
A measurable and sustained economic recovery will be a welcome relief down the road, but our predictions are that it will not mean an end to Frugalnomics.

Buyers will still be challenged by worldwide competitive pressures to be more efficient, with permanent risk aversion, and more financial accountability. B2B sales and marketing will remain challenged connect, engage and sell to a more empowered, skeptical and frugal buyer. Imperative in such an environment to fight Frugalnomics by proving to the buyer that there is a tangible cost-of-doing-nothing, and justifying the superior ROI, quick payback and competitive value of proposed solutions.

When the economy changes, vendor proposals will need to evolve to help convince buyers that the proposed solution can help address the strategic need to grow revenue, launch new products and open new markets. But there will be a continued and important need to quantify, for permanently frugal buyers, the expected hard cost savings, efficiency improvements and bottom-line impacts for each and every significant proposal.

1 comment:

zMarcel said...

Tom, very, very good read and it confirms what I have seen in the last 4 years. What we unfortunately have not grasped fully (yet) is the real cost of Frugalnomics.

Just when we were about to invest again (spring 2011) the next crisis kicked in. And since cost cutting excercises in IT take a long time to show their effect, we are only starting to see the real damage now. My own anecdotal evidence shows many more system failures than ever before, public websites going down, internet banking applications unavailable etc. The Risk Management component of Frugalnomics is something we are only beginning to understand today....