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What worked in cost cutting

What worked in cost cutting

The cost cuts effected in the face of economic meltdown have led to a complete overhaul of cost structures in several companies.

The whiplash of the economic downturn made cost cutting absolutely imperative for companies across the globe. Cost reduction was a natural corollary to lower demand for products and services. However, a McKinsey survey of executives across a range of industries and regions reveals that companies have also made important strategic moves in cost reduction to wrest a long-term advantage over competition.

CUTS EVERYWHERE

  • 48 per cent Non-labour costs, purchased goods and services, travel
  • 40 per cent Across the board
  • 36 per cent Overhead labour
  • 20 per cent Capital assests
  • 20 per cent Frontline labour

— A McKinsey survey of global executives

A large proportion of respondents asserted that company-wide improvement programmes aimed at pruning costs—such as Lean Six Sigma—would give a fillip to performance. This seems to indicate that many companies have an interest in making long-term, transformative changes to their cost structures. For example, about half of the respondents said their organisations plan to lower non-labour costs through the use of strategic sourcing or procurement effectiveness initiatives. Then, a significant proportion (20 per cent) of executives report that their organisations will reduce frontline labour costs by using leanoperating principles.

Clearly, for strategic sourcing and lean to work, concomitant cultural changes and long-term organisational commitment are required. Not surprisingly then, 57 per cent of all executives say their companies will focus on organisational effectiveness, including talent and capability building, as an operational priority in the coming months. Indeed, 21 per cent of respondents have "frontline talent and culture" as the single area where improvement will fundamentally lower their companies' cost structures. Interestingly, executives who describe their companies' past approach to cost cutting as both targeted and sustainable were far more likely to focus on organisational effectiveness than others—perhaps an indication that they may be in a position to further extend their cost advantages.

WHY CUT?
Factors that motivated cost cutting.

  • Reduce variable costs in line with lower demand for products/services.
  • Company-wide programmes to increase performance (Lean Six Sigma).
  • Free up cash/reduce need for short-term external financing.
  • Organisation restructuring (globalisation or product-based organisation).
  • New organisational leadership (new business or functional leader).