Senior executives are missing key opportunities for cost containment and revenue growth during the current recession, finds a recent survey by Booz & Company. The management consulting firm surveyed 155 senior executives at Fortune 500 companies and found widespread concern that traditional cost-containment measures are falling short during this downturn, as well as clear evidence that new approaches are needed.
[Booz & Company] The survey found that chief executives and other senior managers are struggling with the downturn’s scope, timeline, and solutions and often trying to apply traditional solutions to a very non-traditional recession. Ninety-two percent of senior respondents cited “constantly changing objectives due to unstable economic conditions” as a major challenge to achieving their cost-reduction goals. This indicates that such unusual economic circumstances may leave senior executives stymied about implementing new solutions with any degree of certainty that they will work.
As a result, many companies are turning to traditional spending cuts and layoffs. Almost 40% of companies surveyed are focused on cost reduction alone, and most senior managers have already exercised their default plans. Measures such as across-the-board cuts, working capital management, marketing spend reductions, and renegotiating purchasing contracts have been widely employed among respondents. Since these measures typically realize significant savings within six to eight months, they are often the first actions taken by companies during downturns.
The survey data shows that while industry leaders in cost competitiveness also prioritize layoffs and large scale cost cuts, they are twice as likely to adjust compensation levels than less cost competitive companies. The data suggests that successful companies are more balanced in their approach.
In addition, one in five companies is making capital expenditure cuts of 25% or more. By relying primarily on a short-term, cash-conservation view and cutting new investment to the bone, companies risk destroying their fundamental ability to compete once the economy starts to rebound. And at a more basic level, it’s not clear whether the strategy is even feasible or sustainable in the short run; 86% report that they have already implemented their cost-cutting toolbox and are running out of options for further action, and 72% acknowledge that the cost-cutting culture is hurting morale.
Since economic downturns typically eliminate weaker competitors, the survey authors argue that only companies that make strategic cuts and place careful bets on areas of short- and long-term revenue growth are in a position to emerge from this recession stronger than ever. The survey findings support that view in a number of ways:
Cuts needs to be more thoughtful. More than 72% of companies indicated they are pursuing traditional, “big bang” cost-cutting methods such as across-the-board layoffs. However, only 30% of respondents are taking measures to freeze salaries or bonuses and better align compensation with the market. This reluctance to take a creative approach to compensation and bonuses risks a backlash from stakeholders who are increasingly scrutinizing compensation levels.
Necessary cuts need to be bigger and faster. The study’s authors recommend larger savings targets and faster timeframes. Companies reported expected savings of 4% to 9% across business segments, but Booz & Company analysts believe average program savings between 10% and 20% are within reach for most companies. This paradox –companies feeling “maxed out,” while setting insufficient savings targets–presents a real challenge. Savings can also be achieved more quickly. For example, survey respondents expect to see results from working capital management in eight months, but Booz & Company has found that an aggressive approach can bring results in three months.
Cross-functional, coordinated cost-cutting is more effective. Nearly 40% of respondents whose companies adopted a formal, enterprise-wide, and cross-functional approach to cost-cutting expect to achieve savings of 20% or more. This compares to a similar expectation for only 20% of companies who leave cost cutting to the business units.
Revenue enhancement should also be a focus. With so much attention being paid to cost-cutting, revenue enhancement has largely been placed on hold. The survey found that programs to grow revenue being contemplated or pursued by respondents are far down the priority list and mostly long-term, such as acquisitions, market diversification, and new product development. More immediate revenue-generation opportunities that are not investment-heavy, such as aggressive management of pricing and promotions, are not being actively pursued.
Relying on emerging markets is risky. Companies that continue to make investments are typically doing so in emerging markets, pulling money out of the U.S. and Europe in favor of investments in Asia and the Middle East. Sixty-two percent of multinational corporations report plans to invest in growth in the Asia Pacific region, compared to 24% planning growth investments in North America and 22% in Europe. However, this recession has also hit export markets, and it is not clear that domestic demand will be a sufficient shock absorber for shrinking exports.