Enterprise Cost Management: Save or Grow?
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Should cost savings be used to drive growth or taken to the bottom line?
Many companies today continue to report healthy operating earnings, even in the face of declining sales and increasing price pressure. Much of this can be attributed to a strong and continued focus on cost reduction, along with more stable economic conditions. The question now is what should companies do with all of the money they are raising from cost reduction? Should they invest it in growth, or take it to the bottom line (and then either stockpile it or return it to shareholders)?
Explore all sides below by clicking on each button:
|Growth should be our top priority.
With the economy turning around, this might be an ideal time to invest in growth. Companies should be plowing the money back into the business – strengthening their brands and pursuing new opportunities they couldn’t afford before. A business can’t shrink its way to greatness.
|Growth investments are risky.
The success or failure of a growth investment hinges on a wide range of factors, including economic conditions, market positioning, competitor responses and the quality of the growth opportunity. On the other hand, cost savings are literally money in the bank.
|Requiring business units to fund growth from cost savings is a good motivator.
Telling business units that if they want to invest in growth, they will need to come up with the money themselves through cost savings can encourage them to be efficient. It may also encourage them to be more responsible with how they invest.
|Investment strategy and operating strategy should be independent.
If a growth investment makes sense, it shouldn’t depend on cost savings to fund it, especially since the cost of borrowing is so low right now.
|Investing in growth creates a virtuous cycle.
The returns on growth investments can enable a company to pursue additional growth investments, creating a virtuous cycle that is self-perpetuating – as long as a business maintains its cost discipline and continues to operate efficiently and invest wisely.
|It’s hard to maintain cost discipline during times of growth.
Businesses that focus too much on growth can easily find themselves spending money like drunken sailors. Cost discipline should be a core principle and from that strong foundation, a business can then make selective investments to drive growth.
Shashi Yadavalli, Principal, Deloitte Consulting LLP
When it comes to choosing between savings and growth, every business is different. Factors that might cause a company to lean toward one side or the other include:
- Health of the business. Is the company financially sound, or is cost reduction a survival issue or top-three priority? Is the business already sitting on tons of cash?
- Macro-economic factors. Is the economy improving and how is it affecting the company’s fundamentals? What are the growth prospects for the overall industry?
- Growth opportunities. Are the available growth opportunities worth investing in? Is the risk-adjusted return on investment above the required threshold?
Even companies that decide to invest heavily in growth still need to maintain a certain level of cost discipline – both in terms of their day-to-day operations and future growth investments. They should keep their operations as lean and efficient as possible. They may also need to apply rigorous criteria – especially risk-adjusted ROI – to make sure they are spending their money wisely and not just spending for the sake of spending.
In the end, most companies would be well-served to consider a coordinated program of growth initiatives and cost savings. This approach can allow for the flexibility to reinvest in growth whenever possible, while making sure that, at a minimum, certain performance commitments are met. In cases where growth doesn’t materialize, companies know which cost levers can then be pulled to deliver against bottom-line expectations.
But for companies with flexibility or the right positioning, putting cost savings partly or fully on growth initiatives can provide a unique opportunity for competitive advantage against peers.
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As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.