Developing a growth catalyst that funds itself
To drive growth, one has to first find the fuel—and for many companies, that’s not so straightforward.
Internal and external obstacles, including onerous approval processes, and short-term stock-market impact, can make it hard to fund promising ventures. But that doesn’t have to be the case.
Research shows that many companies that consistently post top-line growth operate with what we call an investor mindset. They continually squeeze funds from underperforming areas and allocate the savings to new ventures or existing programs that have the potential to scale. In other words, they fund their own growth.
As simple as that might sound, this investor approach is a significant departure for many executives, who tend to be consumed with cutting costs and playing it safe by banking marginal gains. They fall victim to a common behaviour that drives only short-term profit: taking the savings from often highly disciplined cost-cutting programs and dropping the cash to the bottom line.
Growth leaders are different. They constantly scour for savings across the business. They know exactly where each incremental dollar of savings should be reinvested to drive new growth, and they know the ROI of every dollar invested. In our experience, it often takes a significant event, such as a new CEO or business-unit leader, an acquisition, or a transformation to turn around a declining business, to jolt the business into action. While these catalysts are effective motivators, business leaders intent on driving growth (and in some industries or sectors facing stiff headwinds, investing only in growth might not be the best option) don’t have to wait for them to occur to build the Investor DNA into their organization.
This Investor approach is most effective as part of a purposeful and diversified approach to driving growth (Exhibit 1).
The Performer approach, where businesses continually optimize commercial functions (marketing, sales, and pricing) can yield a massive source of investment funding. The Creator approach pours those investments into new products, services, or business models to drive future growth.
Thinking and Acting Like an Investor
For companies looking to jump-start their growth ambitions, the Investor approach can be a fast way to achieve results. Investing in proven winners—initiatives that are already driving growth but maybe underfunded—can put points on the board quickly. Sustaining that, however, requires leaders to be intentional in making the necessary commitments to change the business’s growth trajectory. That includes making a number of “big moves to improve productivity and dynamically reallocate funds. It also requires putting in place new processes and using data to make better decisions. In fact, data and analytics are the top differentiating capabilities between high-growth Investor companies and their peers, according to research (Exhibit 2).
FIND THE MONEY AND SQUEEZE
Investor companies can uncover hundreds of millions of dollars in savings. This isn’t some theoretical pot of money that will materialize in the distant future; often, companies can begin banking the new funds in a matter of weeks or months. Here are three steps high-performing companies take to find the biggest savings opportunities:
Get real about transparency
For growth leaders, there’s no such thing as black-box spending, in which you invest money in a service or program and wait to see how it works out. Instead, these companies insist on radical transparency, demanding to know the exact purpose of each dollar spent as well as the anticipated return. They put in place processes, metrics, and simple dashboards that allow them to get a clearer view of how their ‘spend’ is performing.
Drive maximum productivity
Just as underperforming programs sometimes continue to receive funding out of inertia, some processes may continue to churn along even though there are faster, cheaper alternatives. High-performing Investor companies continually scour their organization for outdated, inefficient ways of operating. To get the full benefits of productivity, each process should be in the top 30 percent for the industry.
A few of the most promising areas of focus are:
- Efficiency. Leading companies engage in detailed process mapping, looking for opportunities to streamline operations, eliminate redundant processes, and hunt down opportunities to rationalize partnerships. Advanced analytics has emerged as a powerful capability in driving new levels of efficiency. Simplification can also be useful in improving efficiency.
- Procurement. Adding rigor to the procurement of products and services by benchmarking prices, soliciting bids, moving some services in house, and driving for transparency can unlock significant savings. When it comes to marketing, it’s been found that by analysing ongoing costs such as agency and overhead, companies can uncover savings of 10 to 20 percent on marketing spend. Digital has the potential to radically increase savings as well.
- Automation. Advances in analytics have allowed companies to unlock significant efficiencies, resulting in enormous savings through reduced time, errors, and personnel costs (often while also improving the customer experience and overall performance). Robotic process automation, for example, is able to cut policy conversion time by 50 percent for insurance companies.
Trim the excess
In most organizations, general and administration expenses (G&A) and personnel are likely to yield the biggest cost-saving opportunities. The most effective personnel savings are based on rethinking processes and ways you work as well as revisiting strategic priorities, rather than simply letting go of people. When done correctly, best-in-class businesses reduce overlaps in activities, eliminate inefficiencies, and focus personnel on growth activities. Cuts must be approached with care. G&A includes some critical activities, such as enabling innovation and developing talent. When done correctly, however, the impact can be profound.
FIND AND FUND THE OPPORTUNITIES
The most successful companies prioritize the opportunities they uncover so that they can quickly allocate funds and people to them as they become available. Those opportunities generally come in two flavors: first, are proven winners—existing programs that could outperform with greater investment. The second is promising new areas that require funding to acquire or launch. Every company’s growth drivers are different; the important thing is to find what drives growth for your company—and fund it.
To be ready to allocate funds quickly to the most promising opportunities, successful companies take the following steps:
Identify and fund the high-potential opportunities
Most companies have plenty of data on hand to pinpoint the areas of greatest potential. This should yield insights both on where to invest for immediate growth and where investments are most likely to pay off over the long term. As companies search for opportunities, they should also mine their frontline workers, who can be an important source of intelligence on trends and opportunities. Many businesses find it helpful to create an “opportunity map” of potentially lucrative hot spots. The best companies, however, run advanced analytics against internal and external data sets from a variety of sources to build a picture of the future opportunity, not the historical reality.
Reallocate funds and people dynamically
High-performing Investor companies have mastered the art of dynamic allocation. Research shows that dynamic reallocators, those that reallocate at least 49 percent of the previous year’s budget, achieve a compound annual growth rate in total return to shareholders of 10 percent, compared with just 6.1 percent for static allocators. It’s not just about putting funds to use; it’s about focusing your best talent on where the growth is. Effective allocation, however, requires discipline to follow through and a clear set of metrics that decision-makers are aligned around. Leadership alignment on priority markets, in fact, is the top Investor activity for top-quartile growth companies.
Fund a continuous, systematic stream of acquisitions.
Programmatic M&A can be a powerful lever for growth. Companies that use it well invest up to 30 percent of their market cap each year in acquisitions that mesh with their strengths. To do that, however, requires constant work to maintain a healthy pipeline of target companies.
Be disciplined in prioritizing opportunities
To keep the process untainted by bias or territorial thinking, it must be rigorous and transparent, taking into account both the opportunities and the needs of the organization as a whole.
EMBED THE CAPABILITIES
To fund your own growth, disciplined decision making must become the new normal rather than a one-off exercise. Here are some critical steps to take:
Build a rigorous budgeting process
Rigor in budgeting requires clarity about current budget performance and a commitment to allocating spend to drive growth. Zero-based budgeting (ZBB), for example, requires teams to rebuild their annual budgets from zero, with no carryover from the previous year. This process helps to identify small and not-so-small pockets of waste that can add up to big savings. While it is common for budget owners to use bottom-up budgeting, for truly breakthrough results, they need systematic visibility into budgets, clarity about what to measure, accountability for ambitious targets, and governance mechanisms to challenge budgets and reallocate resources.
Build mechanisms to surface investment opportunities
Finding opportunities to save and reinvest requires engagement from across the enterprise, from finance experts to product owners to business-unit leaders. But while the spirit of cooperation may be strong, without dedicated mechanisms to surface opportunities, those good intentions often amount to little.
Support data-driven decision-making
Investors of any sort are only as effective as the data they rely on. Many bring in data scientists to set up a robust analytics capability. Once they identify the highest-potential areas for investment, they use analytics to develop a more granular view of where—and how—to double down, investigating by city, segment, region, product, or even demographics, using a mix of methods. In developing effective analytics, it’s important to focus on rationalizing data and creating common standards (for KPIs, metrics) so that investment performance across activities is comparable.