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A Zero-Based Mindset: Cost Transformation for Traditional Media & Entertainment Businesses

Over the last few months, the Media and Entertainment (M&E) industry has been a vital resource, with people around the world relying on it. As a result, select segments of the industry are experiencing greater demand for their content and services than ever before. With people staying at home more, consumption of films, TV shows, video games, music and other forms of entertainment is on the rise.

Mike Chapman, Media and Entertainment Lead for North America, Accenture

Mike Chapman, Media and Entertainment Lead for North America, Accenture (Image credit: Accenture)

Higher demand, lower margins

You’d think this situation would be an automatic win for content creators and providers. But in fact, many of them are struggling to generate profits and sustainable growth. Indeed, while audiences are engaging with content more, it’s the changing nature of their engagement - and underlying economics - that present a challenge to media organizations.

Audiences have been moving away from M&E companies’ traditional offerings for some time. The shift from broadcast TV and live linear bundled video– toward on-demand video offerings has been consistent over time – with sports as a notable exception. We all saw a similar move some years ago in the music industry, away from physical recorded media and toward digital streams and downloads. 

Add this to shifting advertising spend from live linear to digital, the disruptive effect of agile, digital-native competitors, and the higher operating costs that often burden legacy M&E companies, and it’s easy to see why profit margins are so tight for many traditional M&E companies

The cost cuts don’t work

To relieve this pressure, many of these organizations have looked to targeted cost-cutting initiatives using typical approaches. Though well-intentioned, the reality is that these cost initiatives rarely work in the long-term. Accenture analysed the financial performance of 33 major publicly-traded M&E companies who have announced cost reduction initiatives between 2014 and 2019; when assessing the outcomes over a period of two years, a pattern emerges. Profit margin rises and peaks within roughly three quarters after a cost reduction initiative is launched, then reverts to below prior profit levels inside of two years. Perhaps more striking is that by the fourth quarter after an initial announcement of a cost reduction program, M&E companies often give up almost all the profit gains.

At best, standard cost-cutting measures offer some immediate cost relief. But they are not delivering long-term cost reduction and profit growth. This raises two questions that all traditional M&E organizations need to ask themselves. What’s preventing us from achieving sustainable cost savings? And what strategy might we adopt to remedy this?

Defend and attack

Regarding the first question, there are a number of cultural and institutional factors preventing the traditional media businesses from successfully realizing cost savings. To name a few: their organizational complexity; their reliance on outdated planning methodologies; a habit of introducing incremental cost savings without a corresponding vision for wider cultural change; minimal reliance on outsourcing and the shielding of certain ‘sacred’ areas of the business from restructuring or cost analysis. 

What can be done then? According to a study published in the Harvard Business Review, which surveyed over 4,700 companies across over three global recessions (1980, 1990, 2000), companies that mastered the delicate balance between cutting costs and investing for future growth were best equipped for survival. In fact, they found that those that deployed a specific combination of offensive and defensive moves had the highest probability – 37 percent – of breaking away from the pack.  Said differently, companies that are optimization-oriented and balance cost reduction with continued investment are twice as likely to come out of a downturn successfully than purely prevention-oriented companies that comprehensively reduce cost and investment.

A zero-based mindset

A zero-based mindset is what allows a business to achieve this balance. By adopting a zero-based mindset, a company essentially forgets about the past and reimagines its cost base not from what it is today, but what it would be if the company were to start from scratch. In essence it’s about re-allocating non-productive resources (from a zero-base) in a way that boosts profitability and future growth.

The principal advantage of a zero-based mindset is that it encourages competitive agility, meaning an organization can execute with equal strength across the pillars of growth, profitability, sustainability and trust.

Overcoming resistance

So, what does implementing a zero-based mindset look like? And what are some of the obstacles to successful adoption among M&E organizations? 

To execute, businesses need to clearly define the scope of the spend the company wants to address. Do they want to target a specific area such as labor, technology, indirect material supply, contractor spend, raw material supply or real estate? Or do they want to address all areas of the business? In the case of M&E organizations, it might well be the case that major opportunities for zero-based cost transformation exist in core functions such as content production. 

Regardless, the goal is to gain insight into all purchases and spending through forensic analysis and triangulation of spend data. Once a company knows this, it can target the future spend required and determine the “should-be” cost.

Companies that have embraced a zero-based mindset report that cultural buy-in (67 percent) and change management (41 percent) are the hardest obstacles to overcome. These issues are especially entrenched in traditional M&E organizations, which have been slow to adopt zero-based cost transformation.

Nothing to lose, everything to gain

But for those that act now, the rewards could be huge. According to Accenture research, companies that implement zero-basing are seeing average cost reductions of 15 percent and average bottom-line savings of more than US $260 million annually. Cost savings ranging from 20 – 40 percent are achievable using zero-based cost transformation. 

But zero-basing isn’t just about savings. M&E companies that embrace a zero-based mindset will discover a range of benefits depending on their focus. These range from being better able to respond to changing market shifts and customer demands, to being able to produce and distribute content at costs comparable to those of their leading digital competitors. 

Cost transformation doesn’t need to be traumatic to be effective. Zero-based cost transformation is a lifestyle change rather than a crash diet. Now is the time for traditional M&E companies to embrace a zero-based mindset and set themselves up for future success. 

Accenture is a leading global professional services company, providing a broad range of services in strategy and consulting, interactive, technology and operations, with digital capabilities across all of these services. We help media and entertainment businesses outmaneuver uncertainty. With end-to-end transformation expertise, our clients emerge stronger and grow.