Executive Briefings

You Cut Those Costs, Now Let's See You Make Them Stick

Optimism is on the rise that a solid economic recovery is taking hold around the world, but the cost cutting so prevalent during the recent recession looks to remain a strategic priority for some time. Indeed, the number of executives reporting steps to reduce operating costs in the next 12 months increased significantly between February and April, even as confidence in the economy grew. Yet any successes companies have at cutting costs during the downturn will erode with time. Many executives expect some proportion of the costs cut during the recent recession to return within 12 to 18 months-and prior research found that only 10 percent of cost reduction programs show sustained results three years later.

On either schedule, any programs initiated in the early months of the downturn are already beginning to fail-just as savings would be most useful to finance growth. Sales, general, and administrative (SG&A) costs prove to be particularly intransigent. While manufacturing efficiencies have enabled an average S&P 500 company to reduce the cost of goods sold by about 250 basis points over the past decade, SG&A costs have remained at about the same level.

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Optimism is on the rise that a solid economic recovery is taking hold around the world, but the cost cutting so prevalent during the recent recession looks to remain a strategic priority for some time. Indeed, the number of executives reporting steps to reduce operating costs in the next 12 months increased significantly between February and April, even as confidence in the economy grew. Yet any successes companies have at cutting costs during the downturn will erode with time. Many executives expect some proportion of the costs cut during the recent recession to return within 12 to 18 months-and prior research found that only 10 percent of cost reduction programs show sustained results three years later.

On either schedule, any programs initiated in the early months of the downturn are already beginning to fail-just as savings would be most useful to finance growth. Sales, general, and administrative (SG&A) costs prove to be particularly intransigent. While manufacturing efficiencies have enabled an average S&P 500 company to reduce the cost of goods sold by about 250 basis points over the past decade, SG&A costs have remained at about the same level.

Read Full Article