MAGAZINE - Realview

STRATEGY
Cost-cutting:
a permanent
corporate fixture?
It’s a disquieting scenario, but the
concerted focus on reducing costs may
well become a continuum even as the
economic environment improves.
While economic “green shoots” seem to be
sprouting in the local economy, prospects
on the economic front in some overseas
locations look as grim as the impending
northern winter. Latest forecasts suggest
that GDP in the UK is likely to decline this year by a massive
4.5 per cent – the largest amount in a single year since the end
of the Second World War.
In response, many companies are expecting to make further
cuts of up to 25 per cent in the next couple of years,
ushering in what some analysts believe will be a new era of
“permanent cost-cutting”. According to predictions, the
painful cost-cutting and curbing of discretionary expenditure
endured over the last 18 months may yet prove to be
the “easy bit”.
A study by CFO Europe Research Services for KPMG has
found that firms have focused on the short-term as they try to
weather the economic storm, with 86 per cent of respondents
requiring cost initiatives to deliver a payback within 12 months.
Unfortunately, while this may be a natural reaction to intense
market pressure, it does not always deliver a strategy for permanently
lower levels of cost in an organisation.
Perhaps the biggest challenge now facing organisations,
however, is how to make changes to the cost base that are both
sustainable and generate cash for future growth.
“It seems that the next 24 months will see organisations
stepping up their focus to deliver further cuts to the cost base
to create a sustainable advantage,” says a partner in KPMG’s
European Operations Strategy Group, Jeremy Kay. “This
requires a bolder longer-term commitment to a lifecycle
change, not merely a short-term diet, as old habits can easily
creep back in.
“In a more prudent economic environment, the emerging
winners will be those that successfully and regularly recycle
funding from cost initiatives to generate cash for growth.”
Just over a quarter of respondents said they were using
organisational restructuring strategies, including headcount
reductions, to cut costs. But while such strategies deliver the
biggest savings, they are not the most sustainable for the
majority. One-fifth said improving process efficiency was
their second most important strategy, while just less than 10
24 RISK August 2009
“A new focus on
cost management
is here to stay
and it must
become a
continuum even
as the enonomic
environment
improves”
per cent claimed that using better risk management was a priority
in cutting costs.
“A new focus on cost management is here to stay and
it must become a continuum even as the enonomic environment
improves,” Kay warns. “More than half (53 per
cent) the respondents in our survey agree that it has become
a permanent and more prominent feature of day-to-day
business, both now, and as and when we move out of the
economic downturn.”
The survey also showed that organisations have already
taken steps to embed better cost management, such as making
cost leadership an explicit part of the overall strategy.
However, there is still work to do in broadening ownership
of cost management. A mere 5 per cent of respondents
said that all employees were responsible for cost management
initiatives. The survey shows that cost management
still remains in the domain of the C-level executive, with
more than 40 per cent of CFOs and an additional 20 per
cent (CEOs) saying they were responsible for these programs.
“The survey shows there are winning themes emerging,
with a focus on building commercial capability and prioritising
sustainability – but there is still a long way to go,”
Kay says.
Adds partner and leader of KPMG’s European Operations
Strategy Group, Martin Scott: “Many businesses probably
feel as if they have done enough, in cost reduction terms,
to survive the current downturn. But as only a fifth of respondents
said they were looking at more radical options than they
were 12 months ago, shareholder expectations to deliver
bolder and more sustainable cost strategies may take some
time to be met.
“The winners will be those that create adaptive approaches
to cost management so they can continually rebalance
resources from underperforming areas into those that promise
growth. A new era of ‘earning the right to grow’ is here
to stay.” R