ROI optimization at client and product levels requires granular cost modeling that can be difficult to implement and hard to sustain.

Businesses are in constant evolution and all organizations have created their own ways to monitor costs and profitability. Over time however, organizations have become increasingly complex; operating with wider portfolios, larger client bases, more service channels, and different Business Units, further complicating the competitive landscape. Often organizations turn to their GTM Strategy, Product Mix and Pricing Strategies to seek efficiency and ROI optimization but lack the means to trace the impact of the changes implemented.

From our experience, organizations face the same challenges across industries and geographies to trace costs and improve results. These may include:

• • Not operating at the necessary level of granularity: Setting the right allocation criteria to understand what drives bottom line profitability at a client and SKU level
  • Failure to truly reflect the Cost-to-Serve a client: Analyzing profitability within the current GTM model to identify distortions from discounts, product mix and execution times
  • Not evaluating the impact of production volume oscillation in product costs
  • Lack of systems or governance to guarantee a strong foundation of capabilities and tools: Ensuring that the allocation criteria, validation governance, and systems are in place to enable core financial processes such as Revenue Management, Portfolio Optimization and ROI

Without a sophisticated cost modeling process, organizations may struggle to map out and capture opportunities at product and client level, limiting the ability to improve the efficiency of commercial strategies and profitability.

We help organizations to deepen their understanding of the costs at a client and product level and have a more informed discussion on how to improve profitability

We use the principles of Activity Based Costing (ABC) to deliver our cost modeling projects to meet the specific needs of each of our clients. Most commonly, we support our clients in two areas:

• Cost-to-Serve: Assessing profitability at the client level, to support Go-to-Market and Commercial Policy decisions.
• ABC Modeling: Used to negotiate contract fees, assess performance at product level, and identify possible mix optimizations.

In both cases, we work with you to deliver:

1. Financial simulator generating detailed P&Ls through a cube of channel, client, region, category and product angles or with specific views reflecting your needs
2. Profitability analysis providing you with important insights from a granular view of performance and identifying opportunities to support decision-making
3. Assumption book detailing how the simulator was built, with the main assumptions (allocation criteria) to keep the process alive internally after our project is finished, and support future waves.
4. Optional ‘What-if scenario’ simulation built into the tools so the company can analyze the impact of the proposed solutions

In clients across all industries we have seen tangible benefits resulting from Cost Modeling improvements:

Cost to Serve:

• Empower decision makers, increase client contribution margin: Providing a clear understanding of costs and performance at client level, enabling decision makers to adjust service models effectively
• Decrease costs: Identifying negative margin clients and main “offender” cost lines, implementing targeted actions
• Refine product mix strategy: Using granular cost information to optimize product mix and drive efficiency

ABC Modeling:

• Improve decision-making: Deeper understanding of value-adding activities, improving efficiency and quality of decisions
• Minimize distortions in product costing: Removal of arbitrary allocations of indirect costs
• Increase efficiency in business processes: Knowledge of the true cost of a product or service, and visibility of specific drivers

We apply a proven methodology and our pragmatic learnings to your reality

We are convinced that our clients know their business better than anyone else. At the same time, we provide outside experience, proven methodologies and cross-industry benchmarks that can support our clients in developing these Cost Modeling assessment with speed and accuracy.

To build up a cost modeling tool, we take a step by step approach that ensures we (i) understand you and your business, and (ii) develop a tailored solution grounded in reality – applying a pragmatic wisdom to discuss cost allocation, splits and trade-offs and (iii) ensure a detailed hand over for the company to keep the model alive and support future cost modeling improvements. This typically translates into 6 project phases:

1. Baseline: to set up a more granular view of cost modeling, we work alongside the different departments to define the adequate cost breakdown in a ‘bottom-up’ approach, considering the unique client model and challenges to be addressed.
2. Design of the model: we define with our client’s team the allocation criteria of each cost pool per product or client, ensuring to reflect business reality while reconciling management and accounting information.
3. Allocation of costs: we build the tool according to the model designed (for Cost-to-Serve a new P&L format is built to isolate the most relevant costs).

4. Data analysis: we carry out profitability analysis comparing the results to internal benchmarks (different clients, different products etc.) to identify opportunities and draw more informed conclusions. In this project the objective is give a tool for the company to pinpoint the problem, not to concretely propose a redesign / solution.
5. Validation of results: after constructing the cost models we conduct a series of analyses and sit with managers to ensure their understanding of results and possible clues and root causes. We evaluate with different professionals the results of the calculations and correct if necessary (it can be common to find non-recurring costs that have to be segregated and are not documented accordingly)
6. Documentation and hand over: ensuring that all the data used and process to update the tools are documented and well explained to company professionals.

The company can use our design to implement automatic systems in the future, but in our projects we construct the tools (using Excel or Alteryx / Python and other programing languages) to speed the process and also reduce investments for this first concrete final product. We can also make a formal hand over to a System developer to assure the same criteria used in our models are implemented in a new system.