Contact: Katie Broome
Deloitte
Public Relations
+ 44 (0) 207 303 6359
According to a survey of British companies commissioned by Deloitte, one in four organisations in the FTSE 100 has carried out five or more cost reductions in the previous three years. Deloitte, the business advisory firm, warns that too many businesses damage their ability to achieve greater efficiencies and competitive advantage by cost cutting in fits and starts.
Patrick Doherty, head of cost reduction for the consulting practice at Deloitte, said: “For too many firms cost reduction activity is strictly for the bad times, only to be abandoned as soon business conditions get better. But companies need to think of cost-efficiency as a goal for all seasons.
Most companies say they initiate cost reduction activity because their profits and profitability are below expectations. Another significant spur to cost cutting is mergers and acquisitions (M&A), particularly among larger companies. As M&A activity has increased, so have CRPs designed to capture the synergies that many of the deals are based on.
The effectiveness of any type of cost cutting cannot be determined without proper measurement. Yet one in three companies surveyed said that they set no target for their CRP. For smaller companies the figure was even higher - four out of ten set themselves no target at all. Without targets business will struggle to know whether the cost reduction activity is successful or not.
It is as important for companies to know where they are coming from as to know where they are heading to. Yet about a quarter of the firms in our survey did not establish a financial baseline to measure the success of their cost reduction programme.
Doherty added: “If targets have been achieved it is important to ensure that the achievement is sustained. It is common to cut costs and then have them creep back up again. The results of a CRP need to be carefully monitored after the event to stop them slipping backwards.”
Success must always be reflected in the pay and rations of the employees. Yet very few companies align the aims of their cost-cutting programmes with the rewards that they offer to the people charged with achieving those aims. Reaching a programme's targets (or failing to) is rarely integrated into an executive's bonus scheme.
Doherty commented: “Too many firms still rely on short-term tactical measures while too few look to longer-term strategic solutions. If cost-cutting is to be continuous, it must be weaved into the fabric of the corporation and its culture so that it does not cause a major disruption every time.
“But for that to happen, companies must stop thinking of CRP as a quick and dirty solution to a short-term problem. They need to think of cost-cutting as a core capability and entrench it into everyday management attitudes.”
Too many CRPs rely on part-timers. Half the companies in our survey stated that they use part-time resources for their programmes. Only a quarter had a full-time dedicated internal team. More and more companies will have to follow their example. Part-time teams are disbanded when a programme ends. They leave the cuts they have made untended, which allows them too rapidly to fester.
Doherty comments: “Removing costs from a company's operations requires courage, endurance and consistency. It’s vital for the success of the cost reduction programme that the CEO is seen to be behind it. It is not a task for the faint-hearted. Cutting costs and searching for growth are too often seen as mutually exclusive activities.”
The most common approach to cost-cutting is by function – IT, finance, operations, etc. Larger firms' programmes tend to involve more functions than smaller ones'. For the sample in our survey, the mean number of functions in larger firms' programmes was almost six, while for smaller firms it was only 2.3.
Larger firms tend to set themselves more ambitious cost cutting targets. The average target for the largest companies in the survey was 6.4%, whilst 4% of them set the highly ambitious target of 20% and over.
Doherty comments: “There are three distinct types of cost cutting. First there is what we call tactical improvements, short term savings that often involve the typical head count reduction but all too often leaves firms short of essential resources when business picks up again. Secondly there are operational savings which comes from streamlining functions or processes, and thirdly there are strategic improvements. This is where low-cost thinking and working becomes a way of life and is embedded into the way organisation does things.”
“We believe companies need to take a broader view when it comes to cost reduction which looks at a businesses entire cost base – identifying both short and long-term cost efficiencies that improve an organisations’ competitiveness.”
Ends
About this survey
The findings were based on data obtained through 120 telephone interviews with senior executives in the telecommunications, consumer goods and financial services sectors. The interviews were carried out between October 1-31st 2006 by Lighthouse Research.
About Deloitte
In this press release references to Deloitte are references to Deloitte & Touche LLP which is among the country’s leading professional services firms, providing audit, tax, consulting and corporate finance services. Deloitte & Touche LLP is the United Kingdom member firm of Deloitte Touche Tohmatsu (‘DTT’), a Swiss Verein whose member firms are separate and independent legal entities. Neither DTT nor any of its member firms has any liability for each other’s omissions. Services are provided by member firms or their subsidiaries and not by DTT. Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority. The information contained in this press release is correct at the time of going to press.
Deloitte & Touche LLP is authorised and regulated by the Financial Services Authority.
The information contained in this press release is correct at the time of going to press.
