Cost of Service: Boosting profitability beyond the Cost of Goods

In both cases, optimizing Service Costs and Operations are the current topics keeping decision makers up at night.

Working with our clients to optimize their bottom line, we come across various visions on what is the Cost of Goods Sold (COGS), Cost of Service or Total Cost of Ownership and what each of these definitions is comprised of.

Some of these differences are obviously explained by the diversity of businesses. After all, a B2B local manufacturing operation features very different metrics than a B2C global SaaS business or a hotel chain group. However, regardless of the nature of the underlying business, across our engagements we often encounter very different ways of accounting for costs or recognizing revenues, thus (mis)leading to ill-informed managerial decisions.

Through interviews with client stakeholders, we’ve discovered that project finance and accounting practices are often defined by personal interpretations to what falls into the different categories of costs rather than the result of a robust process of fixed costs and overhead allocations.

These practices deprive company executives from the appropriate granularity of the profitability picture and can lead to poor strategic decisions rather than enabling optimizations.

In order to adapt to the specificity of our client’s business, each engagement to optimize Cost of Service – and ultimately overall Service Operations – starts with an audit to gain clarity on the variables at play. At this stage, we don’t hold ourselves to a restrictive definition of Service Cost or COGS to avoid any analysis bias.

Due to service being both a cost center and a revenue driver, we look at every business with a holistic approach, carefully monitoring the interaction between the top line and the bottom line in order to boost profits through optimization of Cost to Serve and Service Operations. It’s critical to avoid wrongly incentivized “cost killers” that achieve significant savings at the expense of the revenue pipeline. The best cost possible isn’t good to any business if it sacrifices revenue in the process. At IAC Partners, any recommendation we push is under the angle of profit and Net Present Value for our clients to find the sweet spot where profit is maximized.

Based on the result of our audit we will select a tailored approach, activating the relevant levers for both quick and long-term gains. Our approach will typically revolve around 1 to 3 work streams in sequence or parallel:

We like to see things through. To us, aligning incentives is essential for a fruitful collaboration.

Depending on our clients’ needs and flexibility, we cater our approach to either full implementation or performing the PMO/change management role to ensure that the transformation path laid out is walked seamlessly, ensuring full realization of the identified value for our clients. It’s not about identifying why optimization is necessary and what needs to be transformed with whom, but also about how to do it in an agile environment where strategy adjustments along the way may arise.