Cost-cutting during crisis could spark legal rows- BDO

Three quarters of businesses surveyed by BDO are unaware that cost-cutting
moves such as outsourcing has increased the risk of being drawn into legal
battles.

Nearly 80% of UK CEOs and FDs polled also believed the recession had
increased the number of risks that their business faced and more than 50% of
them have sought to reduce costs or share financial risk since the beginning of
2008, the firm found.

The survey, commissioned by the BDO’s Forensic Accounting Team found
companies have looked to reduce costs by using more subcontractors and
freelancers, by outsourcing activities such as support services or relocating
facilities offshore and granting product licenses.

Three quarters of all businesses surveyed have cut costs by reducing
headcount, either through natural attrition – not replacing roles – or through
formal redundancy programmes.

Gervase MacGregor, National Head of Advisory at BDO and a partner within the
Forensic Accounting team said the cost of legal battles after taking measures to
streamline businesses had to be factored into a company’s thinking.

“The speed and extent of the recession has forced many to make tough choices
and to find innovative ways to cut costs and manage their business,” said
MacGregor.

“It is evident from some of the disputes that we have been instructed upon
that businesses often expose themselves to enormous commercial risks which can
result in disputes and litigation.

“Measures, such as redundancies, outsourcing support services, relocating
production facilities offshore or joint venture arrangements have the potential
to deliver significant cost savings but measures that focus purely on the
cheapest solution can sometime have unwelcome side effects on service delivery
and profits.

“It can be extremely difficult for businesses to extricate themselves from
such arrangements and the claims and counter claims require careful
quantification.”

Almost half of these companies believe that poor performance and conduct of
subcontractors, franchisees or sales agents could in fact damage the company’s
market reputation or brand.

Reliance on outsourcers could also interrupt the quality or continuity of
supply and cause commercial harm because of damage to intellectual property or
relationships with key customers.

All of these issues are frequently the basis for disputes that can end in
damaging and expensive litigation, BDO added.