Cost Reduction Strategies not a continuous process for majority –Ernst & Young survey

 

Survey Conducted by Ernst & Young  on “Save to Prosper: from cost reduction to cost optimization. “

A total of 561 senior executives were interviewed for the survey, which covered 11 industry sectors in 11 of some of the largest economies. The results show that the most common reason for implementing cost reduction is "to ensure survival", implying that once survival is achieved, cost reduction will be marginalized.

Raju Lal, Partner at Ernst & Young, said, "Our survey highlights that many businesses are dangerously complacent about cost reduction and are as a result not ready for the eventual economic recovery. Although cost-consciousness has become a top priority during the last year, the majority of company efforts so far have been on tactical and temporary measures, delivering no more than 10% cost reduction for most businesses. Sustainable cost reduction and optimization need to become standard practice and be at the heart of any company’s business recovery agenda."

 

• The management considers that cost reduction and sustainability are one of the main strategic objectives to their organization.
• 49% of companies indicate that securing economical survival is the reason why they decide to set up cost reduction programs. But some countries like Switzerland, China or sectors like pharmacy / bio technology or consumer products are less concerned. These sectors indicate that cost management is a continuous process or a good leeway for investment.
• 2/3 of the Management of companies indicate to be actively engaged on CRP.
• 55% of companies address a complete cost reduction programme (sales, general and administrative cost as well as cost of goods sold). It’s even more important for some sectors (consumer products, pharma/ biotech technology) or countries (Switzerland, Germany, Netherlands, USA, Spain).
• Concerning the sales, general and administrative costs (SG&A) companies mainly focus on human resources, facilities management or information technology.
• 60% companies state that they can only achieve up to 10% SG&A savings today. They are 65% of companies in the next 12-18 months.
• Concerning cost of goods (COGS), companies mainly focus on procurement, manufacturing or distribution spend. Some countries like China or France cut costs on research & development.
• 70% companies state that they can only achieve up to 10% SG&A savings today. They are 65% of companies in the next 12-18 months.
• Companies assess cost savings analysis as their main technique to set tactical cost reduction programme.
• Companies assess service effectiveness improvement as their main technique to set strategic cost reduction programme.
• 81% of companies are at the completed in progress stage of reduction cost but less than half of companies indicate they are quite close to achieve the benefits.
• 11% of companies are not tracking or planning to track their cost reduction programme all the way down into their profit and loss statement (53% of Chinese companies) and when asking what is preventing them from doing it, 39% state it is not feasible or does not make sense.
• 89% are tracking or planning to track their cost reduction programme and state clear ownership and accountability, right team in place, clear business case as the the main factors to reach the cost reduction targets.
• 86% of companies declare being confident in retaining sustainable the cost saving benefits achieved by cost reduction programme. However, when companies have to explain, only 28% of them mention continuous cost management and only 26% of companies mention structural adjustments completed.
• 68% of companies are convinced that the cost consciousness developed in the last year (year of crisis) in comparison with the previous two years.

 

Source: Ernst & Young