Companies Shifting Cost Strategies In Turbulent Global Markets

While economic indicators and annual revenues demonstrate business is booming in the United States, Deloitte’s fourth biennial cost survey has found that global economic factors are having a major impact on cost improvement priorities and actions for large multinational companies. The survey evaluated cost improvement practices and trends in the Fortune 1000, and found that even companies that are seeing high growth are now taking cost actions more typically associated with businesses in distress.

cost strategies
(Source: Deloitte)

The fourth survey installation, titled “Thriving in Uncertainty: Cost improvement practices and trends in the Fortune 1000,” surveyed 210 senior executives of U.S.-based Fortune 1000 companies, many of whom are simultaneously pursuing aggressive growth and improvement while cutting costs. Eighty-eight percent of survey respondents expect to pursue cost reductions over the next 24 months, regardless of company performance, a more than 10 percent increase from Deloitte’s previous survey. While a strong U.S. economy provides the impetus to grow, respondents selected ongoing worries about the global economy as their top concern, from lower international consumer demand to foreign exchange volatility.

The previous third biennial survey indicated that companies are using cost reduction continuously, regardless of financial condition, and are using it to fund growth and to gain competitive advantage, a “save to grow” paradox. This year’s biennial survey found that while the “save to grow” strategy persists, it is now accompanied by actions not seen since the 2008 global recession, including focusing on balance sheet issues such as working capital, treasury, credit and cash flow. These cost actions are more typically seen in “distressed” companies and are not traditionally associated with a “save to grow” mentality.

“After the survey was complete, Deloitte developed the viewpoint of ‘Thriving In Uncertainty’ as a way to confront this environment, since survey results portrayed a landscape where companies are not confronting their cost management programs with the most effective strategies,” said Omar Aguilar, principal, Deloitte Consulting LLP, author of the report, and Deloitte’s global leader for strategic cost transformation. “The report concluded that companies are not selecting a cost-management strategy that aligns with their company’s needs. This contradiction, and its resolution, are the core issues in our survey, and they show where businesses will continue to struggle with cost initiatives in the coming months.”

This was evident in respondents’ ranking of cost-reduction drivers such as competitive advantage (57 percent) and required investment in growth areas (43 percent), both of which are growth oriented. The next highest drivers were more defensive in nature: international portfolio performance (37 percent) and reduction in consumer demand (35 percent).

The survey also found that as cost-reduction targets become even more aggressive, cost program failure rates have risen. Cost reduction targets continue to rise, with 59 percent of companies now trying to reduce costs by 10 percent or more, yet almost two-thirds of company cost reduction initiatives are not meeting targets. In addition, the percentage of cost programs that failed to meet their targets over the past two years rose significantly, from 48 percent in the 2013 survey to 58 percent this year. Companies are using tactical cost reduction strategies, such as streamlining business processes and reducing external spend, rather than more strategic cost reduction approaches, such as increasing centralization, outsourcing and offshoring.

To address cost improvement challenges, 32 percent of respondents created a dedicated executive position to oversee cost management in the past 24 months, an increase of 16 percent from 2013. The survey found that tackling this new, daunting cost management landscape requires a new approach featuring a broader playbook and bolder actions to achieve the ambitious goals executives are setting for their companies.

“Businesses can no longer afford to apply a tactical patch-work approach to cost reduction. Aggressive targets require strategic improvements,” Aguilar said. “One of the keys to cost program success is choosing a cost management strategy that aligns with your company’s needs and is capable of delivering the required level of savings, whether those targets are aggressive or conservative. Without it, companies will continue to fall short of their growth goals.”