Ensuring that cost-cutting doesn’t affect long-term performance

Written by Aznita Ahmad Pharmy

Monday, 29 June 2009 11:25

The most common solution in an economic downturn would no doubt be cost-cutting but companies have the complex task of ensuring that the costs they cut today would not affect their performance in the long run, said Paul Prendergast, Accenture director of finance and performance management for South Asia.

“The key thing that we’re saying here is if you’re planning on cost-reduction, it’s important to be very mindful of having good budgeting, taking the information and acting on it a lot quicker,” he said at a briefing in late April on an Accenture study.

Accenture compared six-year results of companies that outperformed and underperformed its peers in the respective industry during the 1990-91 recession.

Prendergast said the results showed that high-performing organisations managed their cost-reductions strategically and strengthened their existing positions rather than doing “slash and burn” cost cutting.

“If you don’t have a strategic view of how you invest your capital, if you don’t have a good understanding of when you are going to get your return on investment, then how do you ensure that your spending is being optimised?” he asked.

Companies could stimulate their business growth to find which businesses would optimise their expenditure in the long run. Due to the trend of less people travelling on business class, Singapore Airlines did a simulation based on forecast ticket sales if they increased or decreased the size of its business class.

“If they simulate a 20% reduction in business class for certain routes, they can simulate what is the net impact on profitability on that route,” said Prendergast.

But not every business looks to cost cutting in a recession. Pharmaceuticals companies, for instance, are seeing a lot of M&A (mergers and acquisitions) activities.

“Pfizer bought a company and Schering-Plough is merging with Merck. That gives them access to pipeline drugs, which is cheaper than actually the overall research and development they may have to do themselves because the cost of developing drugs has gone up quite extensively,” said Prendergast.

Apple, on the other hand, focused on its new product and invested heavily in the iPhone. Over the last 18 months, it produced two generations of the iPhone, which has led Apple into direct competition with Nokia, Ericsson and Research In Motion.

“They adopted a strategy, a specific kind of focus, coming out and actually releasing that very successfully across the globe. It’s allowed them to have deep penetration very quickly,” said Prendergast.

Outsourcing or offshoring is another common trend. “It’s very popular in terms of driving cost-saving. Obviously, there’s a significant impact on business, but it actually takes 18 or 12 months to deliver benefits to the bottom line in terms of savings,” said Prendergast.

These companies prove that there isn’t necessarily one strategy to successfully emerge from the downturn.

“A lot of it (the strategies) depend on the industry you’re in, your predicament and strength of your balance sheet,” he said.

“It’s all about execution,” he added.

Companies need to execute fast due to the current environment that changes rapidly and in order to do that, they must integrate their strategic planning with operations.

“Assumptions we made six months ago are no longer valid. Maybe commodity prices, interest rates, exchange rates or demand are different. So organisations have to move a lot quicker, they need much more integration between the strategic planning and the budgeting process.”

Prendergast said because the strategic planning historically stayed at the executive level, it did not really get cascaded down. Organisations that were successful looked at getting the planning process down to those levels quickly.

And while businesses traditionally do their strategic planning once a year, Prendergast suggested increasing the frequency.

“It is important to have a clear programme in place that you map and track. Historically, the planning process may be once a year or two years but you need to have that on a more frequent basis to readjust how you’re doing on a quarterly basis and re-plan accordingly,” he said.

This article appeared on the Management page, The Edge Financial Daily, June 29, 2009.

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