Continuous cost reductions – the new trend
A large percentage of my conversations lately with clients has been focusing on how cost reduction can improve performance. This trend peaked my curiosity and I wondered if this is a regional focus or something bigger. So, I began to investigate whether what I am witnessing is being seen by others.
An online Google search for cost reduction gave me over 9,000,000 hits, a good indicator that I was on to something. After about 45 minutes of hard searching and narrowing down of my criteria I found a current research report prepared by Deloitte in the last year dealing with this phenomenon.
Deloitte’s report ‘Thriving in Uncertainty’ was prepared in April of 2016. In it, 210 senior executives of US-based Fortune 1000 companies were interviewed and their responses all accumulated. This report is the fourth biennial cost improvement practices survey they have prepared. In the report, the traditional three business states of Distressed (Decline), Positioned for Growth (Stability) and Growing steadily (Growth) have evolved to now apparently include a fourth state – that of ‘Thriving in uncertainty’.
Previously companies only exhibited a highly-weighted business desire for cost control and reduction when the business was experiencing some sort of decline. What Deloitte found was that the clear majority of companies that were surveyed (88%) expected to pursue cost reduction over the next 24 months regardless of whether their revenues were increasing, stable or decreasing. Basically 9 of 10 companies in the survey were focusing on cost management as a Core Competency for their business.
At the same time many companies planned to grow in the next 24 months. There is therefore a conflict between in Decline and in Growth companies existing in the same organization, which is a new pursuit for all companies; hence the new state of Thriving in Uncertainty.
The basic rational for this new state is that companies have in the past failed to effectively cost cut enough using the traditional tactical methods like reducing external spend and streamlining business processes. Traditional cost cutting steps did not achieve the right level of savings targeted.
The conclusion is that more strategic methods of cost reduction are required. Examples of strategic methods include: reconfiguring business, restructuring how a company operates, increased centralization, off-shoring and outsourcing. New thinking is required to offset the lack of understanding in businesses caused by the lack of suitable depth of experience in new company leadership.
The typical tenure of a business executive is two to four years in a company. When a person leaves the company, the lessons learned by that individual are not usually transferred or retained by someone else in the organization. Companies find that they need to find or assign a dedicated executive to provide the experience and benefits that longevity creates. Outsourcing this function and others to control costs helps to bring in the requisite expertise, as well as to create a new business model of operation. Deloitte highlighted that any talent that a company acquires needs to continue to emphasis flexibility to ensure nimble growth.
Hence, a new business model that focuses on cost control by strategically changing the way business is done using outsourced and other transformational methods has been created.
I believe that what I originally saw in my client base of a focus on cost reduction is also prevalent on a wider basis to the North American economy. This focus is a new tactic by management and a state of business that we will start to see more and more in our daily lives.