July 22, 2014
For a long time, the general mantra was “you can’t cut your way to growth”. The belief has been that if you use cost-cutting as a mechanism for growth, you can kiss survival good-bye. That seems to be changing. In their report “Cost-Improvement Practices and Trends in the Fortune 1000“, Deloitte investigates this possibility.
The “Old School” Cost Cutting Belief
In the past, cost-cutting activities were usually initiated in companies that were struggling to survive. The results of those activities has generally been that companies either made cuts that were too deep or cuts in the wrong places, thus not achieving the desired result of growth.
It has been generally believed that if you cut costs, you are cutting valuable employees or programs that are helping the organization survive. Experts will tell you that cost-cutting gives you a short-term burst without long-term sustainability.
Those successful in cost cutting, including GE’s Jack Welsh in the 1980’s, did so with companies that were carrying around a lot of extra baggage. Unfortunately, that piece of the puzzle is often overlooked when cost-cutting attempts are made today. Often, cuts that should be made in order to improve the organization are overlooked in lieu of the ‘low-hanging fruit’ that often includes sales, marketing, R&D and other important areas.
Businesses forget where their revenue is being generated, and what their original purpose was. Take Sears as an example. Sears made significant cuts in capital spending while aggressively reinvesting those savings in financial markets. This shift from focusing on value-added activities to focusing on profit for shareholders has cost those same shareholders with a significant drop in their share price. Customers were left with dirty, outdated stores that carried very little product selection.
What Has Changed?
In years past, the Deloitte survey has shown that about 3/4 of the companies surveyed were planning to reduce cost over the next 24 months. That has remained consistent. What has changed is that in this survey, just under 2/3 of the respondents were reporting an increase in annual revenue over the past 24 months.
This means that it’s no longer just the companies that are in trouble that are considering cost-cutting, but those in a growth mode as well. Companies who participated in the survey indicated that they will focus on several growth-centered strategic priorities over the next 24 months:
- Product profitability (43%)
- Sales growth (36%)
- Organization and Talent (15%)
In 2008, when Deloitte conducted this survey, the failure rate for companies that had utilized cost-reduction initiatives was 14%. In 2010, it was 37% and in 2012 it was up to 48%, meaning that in 2012, nearly half of the cost-cutting initiatives resulted in failure!
The fundamental problem lies in where businesses are cutting. Respondents indicated that their cost-cutting efforts included:
- Administration (75%)
- Operations (67%)
- Process streamlining (54%)
- Organizational streamlining (50%)
- External spend reduction (41%)
Companies who responded said they were planning to focus on gaining competitive advantage and making investments in growth areas, emphasizing growth over the need to survive or remain solvent. Companies reported declining concerns in areas of reduced consumer demand, decreased liquidity and tighter credit – cost drivers usually considered by companies in distress.
The biggest barriers that survey respondents reported when it comes to effective cost reduction was a lack of understanding in the need for cost reduction and how the proposed improvements can help business growth. This is generally a problem in the early stages of cost-reduction, whereas erosion of savings, a second problem area identified, is usually seen in later stages of cost reduction.
What Lessons Have Companies Learned?
Companies seem committed to learning from past mistakes. Change management was cited as the most important lesson learned, with 52% of respondents in 2012 and only 44% in 2010. Companies continue to want to learn more about setting realistic goals as well, with 41% citing it in 2012, down slightly from 45% in 2010. Communication came in at next with 32% in 2012 and 27% in 2010. The biggest change from 2010 to 2012, however, comes in the form of implementation strategy, which rose from 12% to 31% over two years.
How Can You Effectively Implement Cost Improvement for Growth?
Understand Customer Needs
Cost-cutting should never be at the expense of the product or service that the customer is receiving. The focus should always remain on their needs and the value they place on company activities. Understand why it is your customers are currently buying from you and help them to achieve their goals of making more money, reducing their costs, mitigating risk and last, but not least, satisfying an emotional need.
Don’t Focus on the Same Thing Year After Year
Administration costs is a common area where cuts are made, year over year and operational costs usually follows close behind. Using the “same old” strategies year over year hurts a company’s ability to cut costs as it gets harder and harder to find areas for savings.
Instead of focusing on these areas, which have proven themselves to be ineffective, companies may be better served to work a little harder in order to realize better results. These cuts may include redefining or resetting a company’s overall business model, a method that can result in longer-lasting improvements.
Don’t Be a Follower – Know Your Situation
You may be familiar with other companies that are undergoing cost improvement strategies, however it is important to remember that your company is not the same. Another company may be in distress, where you are positioned for growth. The strategies necessary are completely different and the results won’t be the same. A company in distress will be more focused on short-term survival. A company positioned for growth should look at finding an appropriate operating model, followed by looking for ways to save money and support that new model. A company that is already experiencing steady growth might look to strengthen competitive advantage with M&A, investments or management of customer or product portfolios.
The important take-away is that today, cost-cutting done right might just be the way to growth for your organization. The report provides more detailed statistics on the results and on methodologies to properly implement a cost improvement strategy. PolymerOhio is positioned to help you find the best way for your organization to grow. Contact Us today to find out how we can help!