At the sharp end of cost-cutting

Under constant pressure to reduce costs, many businesses find it hard to do
so in a sustainable fashion. The typical cost-cutting strategy exhibits a
distinct lack of ambition.

Even though cost reduction targets are often as low as 3% a year, a worrying
nine out of ten programmes fail to deliver and any gains that are made turn out
to be short term.

Even when cost cutting strategies are adopted there is a distinct lack of
ambition shown by the companies surveyed, who typically set cost cutting targets
as low as two to three per cent per year.

Despite these relatively low targets, a worrying nine out of 10 programmes
fail to deliver target savings and any gains are often only achieved on a short
term basis.

Many organisations fall into the trap of choosing the easy option or the
‘lowest hanging fruit’ for cost-saving initiatives, rather than those that will
yield the most substantial savings. Finance directors need to be more ambitious
and may have to make painful choices, such as closing unprofitable divisions,
offshoring or adopting shared service centres.

Many of the business innovations of recent times such as low-cost
procurement, process standardisation and some internet sales models arose
largely out of cost concerns.

It is impossible to set an ambitious target unless a business has visibility
of its entire cost structure. Yet many companies do not make the costs and
profitability of individual units transparent across the enterprise.

Without access to this insight, an FD is unable to ensure that cost cutting
is targeted at the right places. Addressing cost challenges requires an
extraordinary focus, and often demands cross-organisational thinking outside the
‘safer’, functional cost boundaries.

The FD needs to create and carefully communicate a clear strategy. This is
even more vital when overseeing cost-cutting initiatives where employees, quite
understandably, may feel threatened by change.

Embedding cost discipline into the corporate culture is key to achieving a
sustainable competitive advantage.

Offering staff incentives for eliminating waste and focusing on costs in the
good times gives an FD the time and space to create such sustainable change.

FDs who allow cost disciplines to slip as corporate revenues and profits rise
are putting at risk their own position as much as that of their company.

Gerald Fox is a partner in the performance group of KPMG Advisory
Services