Firms urged to ‘maintain the diet’ when cost cutting

COST cutting is going to get harder but needs to be done, according to research by accountants KPMG.

A survey of business leaders across Europe found that firms have focused on short-term survival with 86% of respondents requiring cost initiatives to deliver payback in 12 months.

However, KPMG is warning that although cost cutting is a natural reaction to intense market pressure, it does not always deliver a strategy for permanently lower levels of cost.

According to Mark Firmin, KPMG’s Leeds-based head of restructuring in the North, businesses across the region will now be stepping up their focus to deliver further cuts that deliver a “sustainable advantage” during the next two years.

“This requires a bolder longer term commitment to a lifestyle change rather than a short-term diet as old habits can easily creep back in,” he said.

“In this prudent economic environment, the emerging winners will be those that successfully and regularly re-cycle funding from cost initiatives to generate cash for growth.”

More than a quarter of firms questioned said they were using organisational strategies including headcount reductions to reduce costs.

But while such actions deliver big savings they are not sustainable. One fifth of respondents said improving process efficiency was their second most important strategy while around 10% claimed using better risk management was a cost cutting priority.

The survey also showed that organisations have already taken steps to embed better cost management such as making cost leadership an explicit part of the overall strategy.

But there is still work to do in broadening ownership of cost management with just 5% of respondents saying that all employees were responsible for cost management initiatives.

Mr Firmin continued: “Many businesses probably feel as if they have done enough in cost reduction terms to survive the current downturn.

“But as only a fifth of respondents said they were looking at more radical options than they were 12 months ago, stakeholder expectations to deliver bolder and more sustainable cost strategies may take some time to be met.”

He added: ” A new era of ‘earning the right to grow’ is here to stay, and Yorkshire’s businesses stand to benefit from adopting that challenging mind set.”

Cost reduction tips include:

Structural change: Remove geographic and organisational constraints when thinking about cost to provide new ways of generating efficiencies. For example, adopt pan European and pan business unit procurement processes.

‘Maintain the diet’: Going through the cost reduction process the focus becomes trying to keep the weight off by changing the behavioural and cultural aspects of the organisation. This is a leadership issue, for example, providing cost management training to staff so they think about every pound they spend.

Transparency: Measure true financial performance of different parts of the business or value, and ensure that costs are allocated in the right way, so that the business understands the true cost of running a specific business or manufacturing a certain product, or serving particular customers, including support-related costs which are often accounted for elsewhere.

Internal charges: Make internal costs transparent to those who consume them. We have experienced business units with up to 60% of their cost base provided for them with little control. Often this engenders an attitude of not caring about cost.