Effective margin management during inflation

Choose the right levers

Once business leaders decide to hedge against margin erosion, the next steps are to quantify, prioritize, and plan to seize potential opportunities. Determining the right mix of levers requires clear goals (timing and quantities) and solid analytics to analyze revenue, expenses, and organizational trends. Analyzes should focus on people, financial and operational data to develop opportunity hypotheses and preliminary objectives. For example, benchmarking between business units might reveal a critical divestment opportunity that could allow the company to improve its margins despite inflation.

Next, the company must quickly quantify opportunities and develop business cases to help compile a list of potential margin improvement initiatives. In doing so, it is important to consider possible implications for the company’s future operating model, such as how automation may affect business processes and employee capabilities.

Finally, the company must prioritize and plan its list of opportunities based on a cost/benefit analysis, as well as other factors such as dependence on other initiatives or the time required to benefit from them. At this stage, key stakeholders, including senior management, should be aligned on priority initiatives and the implementation roadmap.

This foundational work positions a business to move quickly and confidently into the value capture phase, where it can execute quick wins and develop detailed work and change management plans for more complex, longer-term initiatives.

Example: Prioritizing margin levers for a consumer business
A current client using this framework identified six short-term and two long-term opportunities to improve margins. Short-term levers included reducing back-office spending on professional services and installation services and driving the adoption of intelligent automation. Long-term levers will focus on redesigning the service delivery model by moving enabling functions to a centralized operating model. In total, these opportunities are expected to improve margins by approximately $60 million and free up cash to reinvest in growth initiatives.