Companies are increasingly using cost reductions to fund growth initiatives, according to Deloitte’s 2016 Cost Survey Report, a biennial survey looking at cost management and cost improvement trends among U.S.-based Fortune 1000 companies. Of the 210 senior executives surveyed for this year’s report, 57% identified gaining a competitive advantage over competitors and 43% pointed to investment in growth areas as the top drivers of cost reduction. This cost management strategy, which Deloitte calls “save to grow,” was identified in the firm’s last biennial Cost Survey report, and the latest research shows it continues to gain steam.
“Save to grow is alive and well,” said Omar Aguilar, principal of Deloitte Consulting LLP and global leader for strategic cost transformation. He said companies are realizing growth “cannot come for free” and are looking to cost reductions to invest in growth strategies. This continues to be a main focus for U.S. companies.
While companies are pursuing this “save to grow” strategy, they are also operating in a time of uncertainty as global economies struggle or regress, the Deloitte report pointed out. The global economic landscape has created a paradox Deloitte calls “thriving in uncertainty,” in which U.S. companies are simultaneously looking to achieve both aggressive growth and aggressive cost improvements.
“The ‘save to grow’ strategy that emerged in our previous survey (using cost reduction to fund growth initiatives) remains prominent; however, it might now be viewed as table stakes for ‘thriving in uncertainty,’ which takes the idea of simultaneous growth and cost improvement to an entirely new level,” the report stated.
It is unclear at this point if this state of “thriving in uncertainty” is temporary or if it is here to stay. If global economies remain volatile in the near future, but domestic growth stabilizes in the longer term, business could remain in this new state. Regardless, the report said, companies need to implement a cost management strategy that aligns with the business’ needs and is able to hit cost reduction targets.
Failure Rates Rise
Another interesting finding of this year’s report, according to Aguilar, is how cost reduction targets are growing but so are failure rates. The majority of the executives surveyed, 59%, said they had annual cost reduction targets of 10% or more. Thirty-three percent alone have cost reduction targets of more than 20%. However, 58% also reported not being able to meet cost reduction targets, up from 48% in the previous Deloitte cost survey. Just 28% of executives said they met their cost reduction targets, down from 33% in the last survey.
One reason Deloitte gave for the increase in failure rates is that the more aggressive cost reduction targets become, the more harder they are for companies to meet. Aguilar, who is also one of the authors of the new report, said he was not surprised to see failure rates increasing, as some of the companies surveyed have set “significant” cost reduction targets.
A lack of strategic improvements in cost management is also contributing to higher failure rates, according to the report. Of the actions executives said they would take to reduce costs, the majority are tactical, not strategic. The most common cost action was streamlining business processes, identified by 45% of executives. Forty-two said they would reduce external spend, 36% pointed to improving policy compliance and 34% said they would streamline organization structure. These, however, are tactical in nature. Strategic cost actions like increasing centralization, outsourcing or offshoring business processes and changing business configuration were less popular, according to the survey. While tactical actions are still important and can provide value to an organization, they will fail to deliver a 10% reduction in overall costs, let alone a 20% reduction, the report stated.
“To achieve today’s aggressive targets, companies should consider focusing their efforts on more strategic cost reduction approaches such as reconfiguring their businesses or restructuring how they operate through major changes such as increased centralization, outsourcing, and offshoring,” the report said.
Implementing cost management initiatives is another barrier to hitting targets. More than half, 55%, of executives said they struggle to implement initiatives, preventing them from effective cost management. A lack of understanding was identified by 36% of survey respondents and 26% pointed to a weak business case as other barriers to improving cost management initiatives. However, over the past two years since the last Deloitte cost management survey, executives said implementation strategy and change management were the top lessons learned in trying to tackle key barriers to cost reduction.
Additional findings from the survey included:
- About 32% of survey respondents said their company created a new executive position within their organization to drive cost management.
- Zero-based budgeting is not as widely used in the past. Just 16% of executives surveyed for this year’s report used ZBB in the last two years. Additionally, of the companies that used ZBB, 65% said they failed to meet cost reduction targets.