Massive investments in cost cutting fail to deliver the intended result. Restructuring charges are commonly 125% of the savings actually realised, based on an analysis on restructuring charges reported by the Fortune 500, by the global strategy and management consulting firm A.T. Kearney.
The analysis was done in 2016 by Daniel Mahler, head of Americas and a partner in the New York office of A.T.Kearney and Greg Portell, lead partner in A.T. Kearney’s consumer and retail practice, Americas Region.
Mahler and Portell argue that the cost involved in cost cutting programs – often via strategies shaped by the CFO – “makes cost cutting a losing proposition”.
“Serious efforts to shed costs require substantial investments, as evidenced by the ratios of cost cutting charges versus realised savings, that are often far worse than 125%. We know of one consumer products company that invested $125 million in a cost cutting program that delivered just $20 million in cost savings. Compounding the problem, costs that were successfully taken out via cost cutting programs tend to creep back in before long, making the entire effort an expensive exercise in futility.”
There are many reasons why cost cutting programs underperform, but there are strategies the CFO can use to help ensure that your company really cut cost:
Differentiated initiatives. Before committing to any program, distinguish high leverage opportunities from cost cutting initiatives that will merely sap the company’s resources while yielding few or no net savings. If you fail to identify such high cost elements and account for their drag on your results, your overall cost cutting initiatives will not deliver the benefits to cover those expenses.
Shared accountability. Shared accountability can stop costs from merely shifting around from one part of the company to another, which defeats the whole purpose of cost cutting. Set a single, overarching cost reduction goal, then hold everyone mutually accountable for its fulfillment. If targeted costs cannot be eliminated in one part of the organization, the unmet share is not taken out of your program scope. Another part must make up the difference. Shared accountability replaces unproductive cost migration with cross-fertilization of creative problem-solving, aimed at achieving true cost reduction.
True cost-benefit analysis. Your cost cutting strategy should be based on at least a rough calculation of the costs the company will incur beyond restructuring charges and the direct costs of strategy execution. What does the company give up when people spend time on cost cutting programs rather than on their regular jobs? Are the targeted savings large enough to justify that trade off?
Bold action. False assumptions and compromised thinking often lead companies into year after year of serial cost cutting that actually costs the company money. Our research suggests it is far better to implement fewer, bigger programs. Fortune 500 companies that channeled their energies into a few highly ambitious and thoroughly integrated programs generated 78% market cap growth between 2010-2015, while companies pursuing more fragmented serial transformations achieved only 26% market cap growth over the same period.