Cost Cutting Practices in the New Normal

A recent survey of more than 130 Fortune 1000 senior executives found that roughly 90 percent of respondents expect their revenues to either grow or remain flat over the next 24 months, and of those same respondents, about 80 percent expect to pursue cost improvements. The simultaneous expression of optimism and cost control signals a new normal driven by economic and regulatory challenges. Tune into this episode of Deloitte Insights to learn about cost cutting practices in today’s business environment.

Speakers

Omar Aguilar, Principal, Deloitte Consulting LLP
Faisal Shaikh, Principal, Deloitte Consulting LLP

Transcript 

It’s time for Insights, a video news production of Deloitte LLP. Now here’s your host, Sean O’Grady.

Sean O’Grady (Sean): Hello and welcome to Insights. A recent survey of more than 130 Fortune 1000 senior executives found that roughly 90% of respondents expect their revenues to either grow or remain flat over the next 24 months, and of those same respondents, about 80% expect to pursue cost improvements. Now, to provide some context to these findings, we are joined by two guests, the first is Omar Aguilar, a principal in Deloitte Consulting, and second is Faisal Shaikh, he is also a principal of Deloitte Consulting. My first question for you gentleman — we can go with you Omar — and that is we’ve got this simultaneous expression of optimism and cost control, so I’m wondering what that signals to you about the marketplace?

Omar Aguilar (Omar): What that signals to us is that we are operating in a new normal. A new normal is a new reality, and new reality is characterized by challenges in the environment, challenges that are regulatory driven, challenges that are economically driven, and it is generally prolonged uncertainty.  So, what’s happening is whereas in the past we would expect companies to only take cost management actions during adverse and negative conditions, we are seeing them now taking actions during prolonged uncertainty or even during expected growth, as we saw in our survey results. They are preempting actions. They are taking actions because they expect that they would be operating under a challenge situation, challenge environment where cost is one of the tools they will use to manage their destiny.

Sean: So, if landscape changes, you have to change the game. Faisal, what do you think?

Faisal Shaikh (Faisal): I think Omar is exactly right. If you think about some of the external factors like consumer confidence, commodity prices, and even issues like regulatory and financial reform, they are either in the news every day or something is on the horizon, and so that indicates to us that there really is a new normal. So, even when a company thinks about its prospects for growth, it has to do so with a mindset that really thinks about cost and cost consciousness upfront as well.

Sean: Now, just because an organization might see something in the news and be able to identify, it doesn’t necessarily mean that they are going to act appropriately on it, so my question for you is what are you seeing executives grapple with?

Faisal: As you can imagine many executives have already looked to manage cost over the past couple of years and so our point of view is that they have already sort of picked the low-hanging fruit. What executives are grappling now is what’s next, and thinking about what next is really thinking about what are some of the strategic and structural changes that need to happen in order to really take it to the next level, and those are things that require a more significant executive alignment, more significant buy-in, and aren’t just as easy to do like the other things they have done in the recent past.

Sean: How about you, Omar? You agree with that?

Omar: I totally agree with that. I think it is not only our view, but facts indicate the same. If you look at our first cost survey, which we ran three or four years ago on cost management practices, failure rate for cost programs was about 14%. That is a very low failure rate, so by and large a lot of the cost programs were being successful. Our latest cost survey indicates a failure rate of about 37%, so it has increased drastically. So, what’s happened is if you like to understand the picture, companies were more successful early on because they were doing the easy stuff. They were picking the low-hanging fruit. Now, because of the situation continues, they need to undertake broader areas, they need to undertake broader programs, and they need to do more difficult things. As they do those more difficult things, of course failure rate increases and the problem is they are doing these programs and they are undertaking these programs the same way that they did them before and that exacerbates a failure. So, that is part of the problems that we are seeing, and companies and executives need to realize that they need to now focus on these programs differently, different capabilities, different way of doing it, so that they can be successful in dealing with these problems.

Sean: And thank you for that, as you were diving into the numbers there and I pulled some numbers from your survey as well that I think highlight some things and that is 73% of respondents stated that they are implementing new policies and procedures, strengthening their compliance mechanisms; about 67% are improving their processes for forecasting, budgeting reporting; and that about 17% are establishing dedicated cost czars.  So, my final question for you is in your experience, are these initiatives making sense to you?

Omar: Certainly, they make sense. I think that if you look at the reaction of executives and by and large businesses and executives react to environment and the environment, what you see is they are taking actions to make their cost reduction practices and actions sustainable. So, anything that will help make these things sustainable is being done. If you look at the leading practices, what we are seeing is three out of four companies are enhancing compliance; two out of three are enhancing planning, budgeting, and forecasting process. Now, interesting, you talk about the cost czar, and there were only I think less than 20% doing it. We are running a current survey on that practice by itself, but our current indication is that about three-fourth of companies and three-fourth of respondents expect that cost czars are valuable and they are going to be sticking for a while. So, you look at these actions being taken and then they represent actually an interesting component of one dimension of transformation which is capabilities. So, one of the things that we are seeing in this new reality is new capabilities are emerging in addition to the need to focus on cost. Those two dimensions need to be balanced not  only between capability and cost, but then there are two other ones that need to come into play — liquidity and the other one is growth. So, we expect that a company needs to balance these four dimensions — capability, cost, liquidity, and growth. What we do expect is that the most relevant dimensions in the new normal over the short to midterm are going to be balancing cost and growth, and that is what you are seeing in the early response to the question that you posed.

Sean: We have got a little bit of time left so we will turn it over to you Faisal, so how about you, are you hailing the czar?

Faisal: I think I am absolutely hailing the czar. I think anything that really is going to help drive sustainability in the organization is going to be an important component going forward, but ultimately I think for cost reduction and cost management to really be sustainable, it can’t be the responsibility of only one individual or just the executives. There’s got to be a way to figure out how to put that and make into a solution that permeates across the entire organization and really becomes part of the culture of the organization going forward.

Sean: So ultimately the responsibility is going to be across the entire organization for cost?

Faisal: It can’t be just the responsibility of one.

Sean: Alright, folks. Well, thank you very much for joining us.

Omar: Thank you.

Faisal: Thank you.

Sean: You are welcome. Okay, we have been talking about cost-cutting practices in the new normal with Omar Aguilar and Faisal Shaikh, both principals within Deloitte Consulting. If you would like to learn more about Omar, Faisal, or any of the topics discussed on today’s broadcast, you can find that information on our website. It is http://www.deloitte.com/insightsus.

For all the good folks here at Insights, I am Sean O’Grady. We will you see next time.

 

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