In the current business environment, cost management is a critical priority for companies worldwide. Jacopo Brunelli, a managing director and senior partner in BCG’s Operations practice, says that when it comes to the European market, the real challenge in cost transformation isn’t capturing the initial benefits but making them stick over time.

Jacopo Brunelli

Managing Director & Senior Partner

Milan

BCG: Why is cost top of mind for European business leaders right now?

Jacopo Brunelli: Inflation, interest rates, and geopolitical tensions are all creating a lot of uncertainty, and cost management is the number-one priority in Europe right now. The real goal isn’t cutting costs for the sake of cutting. Instead, companies should look to free up the resources they need to make investments and become more competitive in a tough market.

To compete in this environment, you must reduce costs to protect your margins, but you also need to invest in technology and embrace digital and AI. You may need to rethink your supply chain and physical footprint to become more resilient or improve operations. You likely need to invest in climate and sustainability initiatives—or expand the business to capture new opportunities.

All of that requires money, which has to be found somewhere in the P&L, meaning that it has to be saved from other activities. That’s why cost is such a priority right now.

Where are European companies already strong in terms of cost management, and where can they improve?

Typically, companies are stronger at implementing a one-off cost exercise. They can capture short-term savings targets and improve their margins. What’s harder for many organizations is making these gains sustainable over time. A recent BCG survey of CEOs found that while European companies were able to meet or exceed their initial cost savings targets, one in three leaders said that costs eventually crept back.

Culture change is a big factor in making a transformation stick. That’s true everywhere but especially in Europe, where there is typically less turnover. You need to change the way people work—through change management, workforce engagement, and empowering leaders—and that’s not a short-term endeavor. If you don’t get that right, even when you succeed in a short-term cost initiative, the costs increase again over time. That’s why we talk about cost management and not just cost cutting.

How does labor factor into the cost equation in Europe?

When a European company competes with players from a lower-cost country, they have a big cost disadvantage because their labor costs are higher. And because there’s a shortage of talent in Europe in many industries, for both blue-collar and white-collar roles, wages and salaries have to be competitive, or you won’t find and keep the right people.

To offset this, European players need to think less about labor costs and more about labor productivity. They need top-notch technologies and systems, particularly those based on automation and digitization, which can enable a workforce to accomplish far more. Companies also need to invest in building a highly skilled workforce to run those sophisticated processes and systems. That requires upskilling and reskilling initiatives to make sure they get the most from their existing workforce.

Can you talk about a European company that took specific steps to manage costs more effectively?

One example is an automotive supplier focused on variable costs. They’re not looking at fixed costs or the organizational structure, but they are looking at materials costs and the supply chain. That project is ongoing, but the company has already reduced costs by about 5%.

Another example is a large appliance manufacturer taking a more holistic approach. We’re working with them to find cost-optimization levers across the whole business—variable and fixed costs. That work is also still in progress, but the company is looking at savings of more than 10%.

How can technologies like AI make employees more productive?

It's well-known what AI can do in support functions or customer call centers. But AI—and particularly GenAI—can be used to help organize marketing campaigns or help engineers improve their drawings. GenAI-based pricing can also support sales teams. Inventory management and operational-planning solutions can use AI to make their companies leaner and improve service delivery. AI can even help negotiate contracts with suppliers, making procurement more cost-effective.

A consumer goods company that we worked with recently transformed its marketing function using GenAI to produce and adapt content more efficiently, leading to better productivity and reduced agency costs. That effort generated about $250 million in projected savings through 2026. A global pharmaceutical company was even more ambitious. It transformed five key areas using GenAI—including R&D, support functions, commercial teams, and the employee experience—and identified more than $1 billion in projected cost reductions.

All of these solutions require employees who are ready and able to use new technology. Again, that’s where upskilling comes into play.

How can European companies create the right culture for cost management?

To build the right culture, you need to train people to think about cost and develop new incentives and ways of working. You need to put systems and procedures in place to govern how and where people spend, and you need to think about whether you have the right organizational design.

For example, companies can make product managers more accountable for cost performance, giving them ownership over the full cost of a product line. Some companies make entire functions accountable, such as tasking procurement with hitting a spending-reduction target or pushing manufacturing to own the operational cost reduction.

And because costs are so pervasive, that effort has to be ongoing. Cost needs to be everyone’s responsibility, all the time.