Tag Archives: cost-cutting

Aristotle and economy

Almost 90% of worldwide executives made cost cuts during 2009, a percentage that is not surprising at all considering the economic downturn. However, according to PwC’s “2010 Global CEOs Survey”, almost 80% of executives realised that they need long term results, not just short term liquidity.

What does this have to do with Aristotle? You may find the answer in the article bellow published in the last issue of “Capital” (Romanian only):

Online: Capital.ro

How can we make cost cuts stick

54% of the executives surveyed by McKinsey in April indicated that they would take steps to reduce operating costs in the next 12 months, compared with 47% in February. In April, 2/3 of the respondents rated economic conditions in their countries as better than they had been six months previously, and another 2/3 expected further improvement by the end of the first half of 2010 (“Economic Conditions Snapshot, April 2010: McKinsey Global Survey results,” mckinseyquarterly.com, April 2010). Yet any successes companies have at cutting costs during the downturn will erode with time. Many executives expect some proportion of the costs cut during the recent recession to return within 12 to 18 months (“What worked in cost cutting -and what’s next: McKinsey Global Survey results,” mckinseyquarterly.com, January 2010) – and prior research found that only 10% of cost reduction programs show sustained results three years later (Suzanne P. Nimocks, Robert L. Rosiello, and Oliver Wright, “Managing overhead costs,” mckinseyquarterly.com, May 2005).

Why is it then so difficult to make cost cuts stick?

In most cases, it’s because reduction programs don’t address the true drivers of costs or are simply too difficult to maintain over time. Sometimes, managers lack deep enough insight into their own operations to set useful cost reduction targets. In the midst of a crisis, they look for easily available benchmarks, such as what similar companies have accomplished, rather than taking the time to conduct a bottom-up examination of which costs should be cut. In other cases, individual business unit heads try to meet targets with draconian measures that are unrealistic over the long term, such as across-the-board cuts that don’t differentiate between those that add value or destroy it. In still others, managers use inaccurate or incomplete data to track costs, thus missing important opportunities and confounding efforts to ensure accountability.

Some possible solutions:

Focus on how to cut, not just how much

Benchmarks matter. External ones on some measures may be difficult to get, but where they are available – for example, on travel expenses – they can enable managers to compare performance across different units and identify real differences, as well as trade-offs that may not be in line with the organization’s overall strategy. Internal benchmarks are easier to access and provide great insights, especially because managers are more likely to understand and adjust for differences among their company’s organizational units than among different companies represented by external benchmarks.

P&L accounting data is not enough to make lasting decisions

Unfortunately, few companies have the kinds of systems they need to track costs at a fine-grained level – and they face a number of challenges in establishing them. Multiple data systems may make it difficult to aggregate and compare data from different geographies. Inconsistent accounting practices between businesses or time periods may lead to significant distortions. Changes in organizational structure (as a result of acquisitions, divestitures, or even changes in the allocation of overhead costs) may similarly distort tracking.

Clearly link cost management and strategy

Strategy must lead cost-cutting efforts, not vice versa. The goal cannot be merely to meet a bottom-line target. Indeed, among participants in a November 2009 survey, those who worked for companies that took an across-the-board approach to cost cutting in the recent downturn doubt that the cuts are sustainable. Those who predicted that the cuts could be sustained over the next 18 months were more likely to say that their companies chose a targeted approach. (“What worked in cost cutting – and what’s next: McKinsey Global Survey results,” mckinseyquarterly.com, January 2010).

Yet, many companies do not explicitly link cost reduction initiatives to broader strategic plans. As a result, reduction targets are set so that each business unit does “its share” – which starves high-performing units of the resources needed for valuable growth investments while generating only meager improvements at poorly performing units. Moreover, initiatives in one area of a business often have unintended negative consequences for the company as a whole.

Aim at results for 2-3 years not just 12 months

Most companies treat cost management as a one-off exercise driven by the need to manage short-term profit targets. Yet such hasty cost-cutting activity typically goes into reverse once the pressure is removed and rarely results in sustainable changes in cost structure. A better approach is to use the initial cost reduction program as an opportunity to build a competency in cost management rather than in cost reduction.

60% of executives say R&D will be top priority this year

Scientist Nestlé R&D Centre Tours, France
Image by Nestlé via Flickr

Research and development has risen sharply on the corporate agenda in the wake of the global economic crisis, a McKinsey survey finds. Four in ten respondents report that both R&D budgets and activity levels are up this year relative to 2009. What’s more, executives are remarkably optimistic that the R&D moves their companies made during the downturn will serve them well in the coming three to five years.

Moreover, nearly 60% of executives say R&D will be either the top priority or among the top three priorities this year – significantly higher than the 47% of executives who said the same last year. Despite the increased levels of spending and activity, companies are taking a wait-and-see approach to R&D hiring. Relatively few respondents say their companies are hiring or firing; the most common approach is a focus on retention.

Executives recognize that delaying, reducing, and eliminating R&D projects can limit long term competitiveness. Still, 42% of respondents say their organizations cut R&D costs in 2009, perhaps reflecting the lengths to which some companies needed to go in order to survive the recent economic turmoil. Further, when compared to the moves companies had made in spring 2009 (when McKinsey’s first R&D survey was conducted) with the moves they made by year’s end, it becomes clear that for many R&D organizations, conditions worsened steadily. Far more companies eliminated projects, delayed spending, and instituted hiring freezes as the year progressed.

These actions may well haunt some companies for years to come. A significant share of executives whose companies cut costs expect that these moves will have adverse effects in the coming three to five years. The problems respondents are most likely to expect include reduced market share, a loss of technological ground to competitors, a weaker R&D talent pool, a loss of institutional knowledge, and damage to morale.

Meanwhile, a significant number of companies appear to have used the downturn as an opportunity to add a measure of discipline to their R&D organizations, infrastructure, or processes. Among the most frequent changes in 2009 were increased accountability for performance and spending, increased collaboration with outside R&D groups, increased use of global R&D resources, and the streamlining of core R&D processes. All these moves should help companies innovate more effectively over the long term.

Moreover, high performers in the survey appear more attuned to the “softer” aspects of R&D than other companies are. Executives at high-performing companies, for instance, are significantly more likely to say their organizations are focusing on retention of key employees (40% versus 29%). And while the majority of high-performing companies didn’t cut R&D costs in 2009 — 63% of high performers didn’t, versus 56% of the others — those that did are far more likely than other companies to fear weaker R&D talent pools, a loss of institutional knowledge, and damage to company morale. Finally, high-performing companies appear to be markedly more proactive than the others in two operational areas that represent significant long-term investments: the streamlining of core R&D processes and the expansion of R&D infrastructure.

You may find more details at:
https://www.mckinseyquarterly.com

PwC Global CEOs Survey results released at the World Economic Forum: 60% of CEOs said they expect recovery in their national economies only in second half of 2010 or later

Overall, the survey found that 81% of CEOs worldwide are confident of their prospects for the next 12 months, while only 18% said they remained pessimistic. The results compare with 64% who said they were confident a year ago and 35% who were pessimistic; 31% of CEOs said they were now “very confident” of their short term prospects, up 10% from last year, a low point in CEO confidence since PwC began its tracking.

The survey revealed striking differences in confidence levels – and by extension the impact of the global recession – among CEOs in emerging economies and those in developed nations. In North America and Western Europe, for example, about 80% of CEOs said they were confident of growth in the next year. That compared with 91% in Latin America and in China/Hong Kong, and 97% in India.
Looking at the longer term, the results were more even. Overall, more than 90% of CEOs expressed confidence in growth over the next three years. Those results, coming at the start of a new decade, were about on par with confidence levels of CEOs in PwC’s 2000 survey. But 10 years ago the economic split was very different, with 42% of North American CEOs extremely optimistic – twice as many as in Asia.
For the future, a total of 60% of CEOs said they expect recovery in their national economies only in second half of 2010 or later, while 13% said recovery was already underway, and 21% said it would set in during the first half of this year. Return to growth was fastest in China, where 67% of CEOs said recovery had begun in 2009. However, nearly 65% of CEOs in the US and more than 70% in Western Europe said the turnaround would not begin until the half of 2010.

Other key findings of the 13th Annual PwC Global CEO Survey:

Fears for the future
Protracted global recession remains the biggest overall concern of CEOs around the world (65%), followed closely by fear of over-regulation (60%). More CEOs are “extremely concerned” about over-regulation (27%) than any other threat to business growth. Other high-ranking potential business threats included instability in capital markets, and exchange rate volatility. At the other end of the spectrum, concerns over terrorism and infrastructure were cited by less than a third of CEOs globally as threats to growth.

Love-hate relationship with regulators
CEOs were very clear about the threat of over-regulation. Over 65% of CEOs disagreed with the notion that governments have reduced the overall regulatory burden. They also opposed government ownership in the private sector even in the worst of times – nearly half agreed that government ownership helps to stabilise an industry during a crisis. CEOs from two sectors that received considerable government support during the crisis – automakers and banks – were amongst the most appreciative of government ownership in troubled times.

At the same time, CEOs were optimistic about governments’ efforts to address systemic risks such as another economic crisis – 65% of CEOs agreed that regulatory cooperation will help successfully mitigate systemic risks.

Combating the effects of recession
To combat recession, nearly 90% of all CEOs said their companies had initiated cost-cutting measures in the past 12 months, led by those in the US, Western Europe and the UK. And nearly 80% overall said they would seek cost cuts over the next three years.

Public trust and consumer behaviour
Over one in four CEOs believe their industry’s reputation has been tarnished by the downturn. However, 61% of CEOs in the banking and capital markets sector said there has been a fall in trust in their industry.

Nearly half of CEOs are concerned that the recession caused a permanent shift in consumer behaviour. Most say that consumers will place greater importance on a company’s social reputation (64%), spend less and save more (63%), or be more active in product development (60%).

Risk management
Risk management took on greater importance among CEOs as a result of the recession; 41% of CEOs plan to make major changes to their company’s approach to managing risk, and another 43% report plans to make some change to their processes.

Boards of Directors are becoming more engaged in key aspects of management; such as assessing strategic risk, monitoring financial health, and overseeing company strategy.

Climate change
More than 60% of CEOs said their companies are preparing for the impact of climate change initiatives and believe those efforts will improve their company’s reputation. The recession had little impact on the green momentum; 61% of companies with climate change initiatives saw no effect of the recession on their strategies and 17% raised such investments last year.

The full survey report plus supporting graphics which can be downloaded are available at: www.pwc.com/ceosurvey

A year after the global economic system nearly collapsed (II)

McKinsey received responses from 1,677 executives, representing all regions, industries, company sizes, and functional specialties for their last Global Economic Conditions Survey, dated September 2009:

  • Executives in China are no likelier than others to say that an upturn has already begun, but they are particularly hopeful about their own country’s prospects: 82% expect its GDP to increase in 2009, and 30% expect its GDP to regain pre-crisis levels in 2010.
  • As has been true throughout the crisis, large public companies are much likelier to decrease the size of their workforce than small private ones – although these two kinds of companies don’t have different expectations for customer demand or profits.
  • Fears that countries will restrict international trade seem to have receded in the past six months: 42% of respondents now expect it to rise in the long term, compared with just 16% half a year ago.
  • Although just under half of all respondents expect tighter credit at the national level over the next five years, less than 10% expect sales to fall because consumers or businesses can’t get credit.

What’s next?

  • Most companies are managing in a new normal, with an enlarged role for government and lower long-term growth expectations.
  • Innovation is more important than ever; the companies that have the highest hopes for their own futures are likeliest to be focusing on it.
  • January was the month when executives expressed the direst views about the economy. They now look forward to economic growth, but few expect a quick, full recovery.
  • Executives indicate that the past year has slowed but not stopped globalization – and that skepticism about the value of free markets will continue as well.

For more details, you may find the full report at:
http://www.mckinseyquarterly.com

Virtual teams: opportunity during crisis. Tips & tricks on effectively managing virtual project teams.

Market Watch recently published one of my articles regarding virtual teams’ management seen as an opportunity of cost-cutting and performance improvement. However, significant issues could arise in managing virtual team communication; overcoming them is one of the most challenging tasks of any project manager.

Article headlines:
– Available technologies;
– Tips & tricks on effectively managing virtual teams;
– Virtual communication problems: how can we overcome them?

You may find a PDF copy (Romanian version only) at:
“Echipele virtuale: oportunitate in timp de criza”, Market Watch Nr. 116, Iunie 2009, 12-13

or you may read it online at:
http://www.marketwatch.ro/articol/4991/Echipele_virtuale_oportunitate_pe_timp_de_criza/

IT investments management: solutions in a downturn

“Ziarul Financiar” published today one of my articles in which I stated that the indiscriminate slashing of IT investments could be harmful to the current economic context.

I believe this to be one of the most common traps companies fall into these days as medium and long term perspectives are overshadowed by short term cash flow requirements. Within the article, I also offered some suggestions for a short, medium and long term approach to IT investments.

You may read the full article (Romanian only) in PDF:
“Managementul investitiilor IT: solutii in timp de criza”, Ziarul Financiar, 3 iulie 2009

and online:
http://www.zf.ro/opinii/managementul-investitiilor-it-solutii-in-timp-de-criza-4613097/

Reforming the public sector in a crisis: Göran Persson’s views on the Swedish Great Depression and crisis opportunities

NYC: National Debt Clock
Image by wallyg via Flickr

In the early 1990s, Sweden suffered its deepest recession since the Great Depression. Although the Swedish crisis was homegrown, its causes and effects resemble the events unfolding in the world today. After years of strong domestic growth driven by easy credit and high leverage, a real-estate bubble burst, leading to the collapse and partial nationalization of the banking sector. Domestic demand plunged as the household savings ratio soared by 13%. In three years, public debt doubled, unemployment tripled, and the government budget deficit increased tenfold, to more than 10% of GDP, the largest in any OECD country at the time.

Göran Persson was appointed finance minister after the 1994 elections, and became prime minister two years later. In order to regain the confidence of international lenders (and so pave the way for stability and sustainable growth) he knew that Sweden had to reduce its budget deficit dramatically. It took four years for the Swedish government to balance its budget. By 2006 the country had almost halved its public debt.

Persson recently spoke about what it takes to improve the way the public sector works and here are some of the lessons learned that he shared with McKinsey Quarterly:

  • First, as Persson says, you must make it clear that you are responsible for the process and that you are prepared to put your position at stake.
  • Second, the consolidation program must be designed so that the burdens are shared fairly. Public support for tough policies would quickly deteriorate if they were not perceived as fair.
  • Third, the consolidation program has to be designed as a comprehensive package: by presenting the measures together, it becomes clear to all interest groups that they are not the only ones being asked to make sacrifices. Also, by starting with the most difficult measures, you demonstrate your resolve and increase the chances of achieving the early results, which will be important for getting the continued support that is critical for sustaining the effort.
  • Transparency is the fourth lesson: never play down the effects of the program’s measures, be completely honest when you communicate with financial markets, clarify assumptions and calculations.

When talking about crisis opportunities, Persson admitted that the cuts in government consumption became a driver of improved efficiency, since public authorities were forced to do the same job on unchanged or reduced budgets and he mentions three of the strategies pursued:

1) One strategy aiming to improve productivity, service quality, and freedom of choice involved the liberalization of telecommunications, mail, railways, and other infrastructure industries. It also involved allowing privately run providers to compete with public ones in providing tax-financed services for the school system, health care, child care, and care for the elderly.

2) Another measure was to introduce information technology to broad layers of the population through a tax-deduction scheme that allowed workers to obtain a home computer under a favorable leasing agreement with their employers. The penetration of IT in Sweden during these years outpaced every other country in the world, which made it possible for authorities like the Tax Agency to go online at an early stage. More and more of the communication between Swedish public agencies and citizens now takes place on the Web, and many Swedes do their annual tax submissions over the Internet, allowing for a very efficient processing of taxes.

3) A third strategy was to give people with basic schooling the chance to complete a secondary education that would qualify them for university studies. More than 10% of the workforce seized this opportunity between 1997 and 2002. When the business cycle turned up again, they became a very good resource on the labor market, not least in the public sector. This education scheme served a dual purpose: it eased the pain of unemployment and increased Sweden’s long-term competitiveness by lifting the average competence level of the workforce.

Göran Persson also commented on his experience with trying to get the civil servants on board and making them partners in the initiative, changes in the way government worked and the way it developed and delivered its services, and influencing change at ministries that were not making good on their efficiency targets.

R&D opportunities in a downturn: creating new products to take advantage of competitors’ weaknesses

The McKinsey Quarterly surveyed 494 senior executives around the world in February and March 2009. Results show that research and development remains a strategic priority for executives, even in turbulent times: 40% of the respondents say their companies are actively seeking to reduce R&D costs – far fewer than are cutting operational costs overall (according to other McKinsey research). Some 34% of the executives report that R&D budgets are lower in 2009 than they were in 2008. Further, a large majority indicate that their companies are taking a new approach to R&D in the current economic circumstances; many are turning to shorter-term, lower-risk projects or focusing on minor changes to existing products.

While this tendency toward caution is understandable, other findings indicate that many companies may be overlooking longer-term opportunities to innovate. Notably, the companies that get the greatest benefit from innovation appear to be taking a different approach. The respondents from them not only indicate that, during the past 5 years, they have had high rates of organic growth as compared with competitors but also attribute more than 30% of that growth to new products developed in house. In the areas just described, these high performers are taking a very different approach – one that seems intended to fortify their existing competitive advantages.

Respondents at high-performing innovators are nearly twice as likely as the others to regard the current economic situation as an opportunity to upgrade R&D (24%, compared to 14%) and are more likely to say their companies are expanding some R&D activities (30% versus 21%). Indeed, they are more than twice as likely as other respondents to report that their companies’ R&D budgets are either “higher” or “much higher” this year than last (35% versus 17%). As for setting R&D goals, executives at these companies are more likely than others to say they are focused on creating new products to meet changing consumer needs and new products or services to take advantage of competitors’ weaknesses. Most notably, these companies are more than twice as likely as the others to seek projects that combine higher risks with higher returns.

R&D trends based on survey results:

  • Although the urge to reduce R&D costs is understandable, not all cuts are created equal. Top companies save money by optimizing and upgrading R&D processes and making them leaner – a path that improves the bottom line while raising productivity and speed to market.
  • A rigorous portfolio approach to managing R&D projects helps senior executives focus on strategically promising efforts while uncovering moribund projects that may otherwise go undermanaged – or even unnoticed.
  • Widespread layoffs and industry restructuring, though painful, offer opportunities too. An unprecedented pool of specialist engineering talent – for example, in the automotive industry – is available for companies looking to steal a march on competitors.

For more details:
http://www.mckinseyquarterly.com/Operations/Product_Development/RD_in_the_downturn_McKinsey_Global_Survey_Results_2342

Managing IT costs during crisis: four suggestions on how to generate revenue growth that exceed traditional cost-cutting

Many companies have built up complex application environments with ongoing support requirements and, unfortunately, companies rarely reach internal agreements on business priorities for information technology. Still, some companies nowadays have to improve their cash positions merely as a survival technique. Selling non-current assets, including IT, is a solution that companies needing to generate cash have already started to take.

Companies not yet confronting with critical cash generation strategies could use their current IT status to increase revenues and reduce operational costs. For instance, they can use data more effectively and optimize processes through technology. IT could improve supply chain management by enhancing logistics and inventory management. Similarly, better data can sharpen insights into customer segments, pinpointing opportunities to change prices or focus sales efforts.

James Kaplan and Johnson Sikes concluded, in one of the latest McKinsey Quarterly, that over 12 to 18 months, these kinds of projects may return up to ten times the bottom-line impact of simple IT cost reductions. In many areas, IT functions can realize further efficiencies by changing management practices and models and promoting more interaction with the rest of the business.

Let’s further look into four considerations while planning IT cost cutting:

1. Use technology investments that can have a substantial impact to develop insights into customer segments and increase revenues without increasing prices, to optimise supply chain processes and improve delivery scheduling and/or inventory management;
2. Use experienced IT specialists to find efficiency opportunities by combining a detailed understanding of business processes with straightforward analyses of consolidated data;
3. Optimise processes: Pareto’s 80/20 approach can highlight a fairly small number of activities that, once you correct them, you may deliver a substantial amount of value;
4. Use targeted technology investments to increase productivity as in many areas they generate revenue growth exceeding the savings from a traditional cost-cutting.

You may see above that a fresh perspective of your company’s activities and targets helps you focus on technology investments that can actually increase productivity proving an intelligent, business-driven cost optimisation process as your IT crisis strategy.