Executive Briefings

Cost Cutting Now Seen as Way to Grow, Not Just Survive, Study Finds

Businesses today are just as committed to cost reduction as they were in the depths of the global recession. The main difference now is that many are focused on cost-cutting as a way to drive growth, rather than as a way to survive or avoid insolvency. This was one of the key findings from Deloitte's third biennial cost survey of companies in the Fortune 1000.

In this year's survey, 63 percent of respondents report an increase in annual revenue during the preceding 24 months "” compared to only 32 percent in 2010. Yet 76 percent of respondents expect their companies to reduce costs over the next 24 months "” roughly the same number as in previous years. This continued focus on cost reduction combined with a new emphasis on growth represents a significant shift in business strategy and mindset. In the past, cost reduction was largely associated with companies that were struggling or in distress. Now, growing companies are just as interested in reducing costs as those with declining sales "” if not more so. In fact, according to the survey, the likelihood of cost reduction over the next 24 months is even higher for companies with rising sales (78 percent) than it is for companies with sales that are flat or down (70 percent). Looking across the set of surveyed companies, the top strategic priorities cited for the next 24 months were product profitability (43 percent), sales growth (36 percent), and organization and talent (15 percent) "” all elements of a growth-oriented business strategy. Only 7 percent of respondents are focused on other cost-related strategic priorities such as balance sheet management "” compared to 20 percent in 2010. This change suggests that the vast majority of companies may be more comfortable with their balance sheets and may be using cost reduction as a growth lever to improve the efficiency and effectiveness of their businesses, and to generate cost savings that can be reinvested in growth initiatives such as new product development, innovation, research and development, and expansion into new markets.

According to the survey results, the top three drivers for cost management are "to gain competitive advantage" (65 percent), "required investment in growth areas" (54 percent), and "unfavorable cost position" (35 percent). Two years ago, there was significantly less emphasis on competitive advantage (52 percent), and the other top drivers were "reduction in consumer demand" (42 percent) and "decrease in liquidity and tighter credit" (33 percent). These numbers reinforce the notion that the strategic focus for many companies has shifted from financial survival to using cost reduction as a competitive weapon to drive growth.

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In this year's survey, 63 percent of respondents report an increase in annual revenue during the preceding 24 months "” compared to only 32 percent in 2010. Yet 76 percent of respondents expect their companies to reduce costs over the next 24 months "” roughly the same number as in previous years. This continued focus on cost reduction combined with a new emphasis on growth represents a significant shift in business strategy and mindset. In the past, cost reduction was largely associated with companies that were struggling or in distress. Now, growing companies are just as interested in reducing costs as those with declining sales "” if not more so. In fact, according to the survey, the likelihood of cost reduction over the next 24 months is even higher for companies with rising sales (78 percent) than it is for companies with sales that are flat or down (70 percent). Looking across the set of surveyed companies, the top strategic priorities cited for the next 24 months were product profitability (43 percent), sales growth (36 percent), and organization and talent (15 percent) "” all elements of a growth-oriented business strategy. Only 7 percent of respondents are focused on other cost-related strategic priorities such as balance sheet management "” compared to 20 percent in 2010. This change suggests that the vast majority of companies may be more comfortable with their balance sheets and may be using cost reduction as a growth lever to improve the efficiency and effectiveness of their businesses, and to generate cost savings that can be reinvested in growth initiatives such as new product development, innovation, research and development, and expansion into new markets.

According to the survey results, the top three drivers for cost management are "to gain competitive advantage" (65 percent), "required investment in growth areas" (54 percent), and "unfavorable cost position" (35 percent). Two years ago, there was significantly less emphasis on competitive advantage (52 percent), and the other top drivers were "reduction in consumer demand" (42 percent) and "decrease in liquidity and tighter credit" (33 percent). These numbers reinforce the notion that the strategic focus for many companies has shifted from financial survival to using cost reduction as a competitive weapon to drive growth.

Read Full Article