Save-to-Grow-Strategies Gaining Popularity

Thursday, 08. September 2016

"Save to grow!" - What may sound like a slogan of Wolfgang Schäuble’s austerity politics turns out to be a promising strategy for more and more companies to remain globally competitive in times of increasing economic and political uncertainty. Studies conducted by the consulting firm Deloitte show that the trend of using cost reductions to fund growth initiatives has been on the rise in the past few years, regardless of the recent financial performance of the companies.

In 2012 and 2016, Deloitte investigated the cost management of more than 200 multinational, US-based Fortune 1000 companies from different industries and found that the percentage of companies that plan to implement some kind of cost reduction program within the next 24 months has increased from 76 % to now 88 %. And this applies to both companies with increasing and decreasing revenues. It may seem paradoxical, the authors say, but companies are seeking aggressive growth and aggressive cost improvement simultaneously. Some 26 % of the respondents of the current survey said their annual cost reduction targets were between 10 and 20 %. A third of the companies (33 %) even aimed at savings of 20 % and more. Back in 2012, only 11 % of the companies were pursuing such ambitious cost reduction targets. As top cost reduction drivers, they cited “to gain competitive advantage over peer group” (57 %) and “required investment in growth areas” (43 %), which are both growth-oriented business factors.

The authors argue that the key driver behind the “cost-growth paradox” is the fact that although the US economy has grown significantly stronger over the past few years, many other countries are continuing to struggle economically, or even regressing. Accordingly multinational, US-based companies are pressured to cut costs in order to stay competitive globally. A development which is applicable to German companies as well. Besides macroeconomic concerns, there are also other factors that are forcing companies to take cost management to a new level, such as fluctuating commodity prices, digital disruption, political instability, government regulations, and increasing competition.

Another interesting finding of the study is that not only cost reduction targets are rising, but also cost program failure rates. While in 2012 about half of the cost programs have failed (48 %), in 2016 it was nearly two-thirds (58 %). The main reason why cost programs fail, the authors argue, is that companies focus too much on tactical measures, such as streamlining business processes, reducing external spend, or improving policy compliance. Such measures may be “valuable and important,” the authors say, “but they are unlikely to deliver a 10 percent reduction in overall costs, much less 20 percent [...].” Rather, companies should take strategic measures, such as reconfiguring their businesses or restructuring how they operate through major changes like increased centralization or outsourcing/offshoring of non-core competencies.

To make cost programs more effective, the authors recommend to assign a dedicated executive who is responsible for overseeing cost management, improve processes for forecasting, budgeting, and reporting, and use modern IT infrastructure as well as business intelligence software.