Majority of companies not yet ready for business recovery, says E&Y
December 11, 2009
By Yogesh Sapkale
Professional services provider Ernst & Young (E&Y) has said that despite the current downturn, more than 60% of global businesses have no active cost reduction programs. According to an E&Y survey titled ‘Save to Prosper: from cost reduction to cost optimization’, almost 25% of the businesses surveyed do not have a plan for cost reduction programs and only 17% view continuous cost reduction as a priority.
“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 optimisation need to become standard practice and be at the heart of any company’s business recovery agenda,” said Raju Lal, partner, E&Y.
The survey also revealed that the more fundamental, radical steps to cost reduction have yet to be fully addressed or implemented and realised. Only a third of companies are looking to achieve 20% or more cost savings over the next 12-18 months.
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 marginalised.
The report said that many businesses remain overtly concerned with maintaining or expanding market share at the expense of profitability. Smart cost optimisation, by contrast, may entail sacrificing customer numbers in pursuit of healthier margins and more fruitful business partnerships.
The survey also revealed some equally striking sector-specific results. For the question on whether the sectors regard cost reduction as a means to securing economic survival, 46% of insurance; 45% of telecommunications and oil and gas; 44% of real estate; 42% of power and utility and banking responded in the affirmative. By contrast, 34% of pharmaceuticals and consumer products and 33% of media and entertainment responded negatively.
Interestingly, the consumer products and telecommunications sectors both achieved higher scores than other industries in terms of cost savings relating to goods sold. For consumer products, 31% of companies reached 11-20% savings costs; for telecommunications 32% of companies reached 11%-20% savings cost.
The report also draws attention to the opportunities offered by innovative business models such as virtual worlds and the scope for environmental measures such as renewable energy to play a role in cost reduction. Both can improve a company’s reputation and its relationship with stakeholders.
Companies that neglect these two issues may be storing up trouble for the future and missing significant cost reduction possibilities.
“Cost reduction has to be considered as a fundamental business commitment. Companies’ focus now needs to move to beneficial cost optimisation. If companies treat it as a temporary and inconvenient phase, they risk losing out to more agile rivals. By recognising the competitive nature of the new commercial landscape, managements can ensure their businesses survive and prosper,” Mr Lal concluded.