Companies still tightening belts despite return to growth

The cost-cutting that took place during the recent economic downturn shows no signs of abating, according to a survey of large US companies.

Instead of trimming to survive, though, companies – many of which have seen a return to growth – are using cost-cutting tactics in an effort to fuel more growth.

Sixty-three per cent of the 153 senior executives from Fortune 1000 companies participating in Deloitte LLP’s biennial cost survey in 2012 reported an increase in annual revenue over the past 24 months, according to a new report. That’s almost double the 32% who reported annual revenue increases in the previous survey two years earlier.

Optimism also was found in the American Institute of CPAs (AICPA) Business & Industry Economic Outlook Survey for the first quarter, in which CPA executives reported that they expect revenue to rise by an average of 3% in the next 12 months.

But business leaders remain cautious. About two-thirds of respondents in the AICPA survey who said they have too few employees are reluctant to hire. And 76% of the Deloitte survey participants expect to pursue cost reduction, even as growth has returned.

Omar Aguilar, a Deloitte LLP principal, said in a webcast on the firm’s website that general economic uncertainty continues to fuel cost-cutting. But compared with the 2010 survey, such cutting is being driven more by the desire to gain a competitive advantage than by decreased consumer demand.

“Whereas in the past we would expect companies to only take cost management actions during adverse and negative conditions, we are seeing them now taking actions during prolonged uncertainty or even during expected growth,” Aguilar said.

Returns from cost-cutting are diminishing, though. Respondents reported failure rates for cost-cutting strategies of 14% in 2008, 37% in 2010, and 48% in 2012.

The failure may be a result of repeatedly targeting the same areas of the business for cost-cutting. Administrative costs (75%) and operational costs (67%) were identified by executives as targets for repeated reductions.

“Companies were more successful early on because they were doing the easy stuff,” Aguilar said in the webcast. “They were picking the low-hanging fruit. Now … they need to do more difficult things. As they do those more difficult things, of course [the] failure rate increases, and the problem is that they are doing these programmes and undertaking these programmes the same way that they did them before.”

At this point, according to the report, most companies fit into the category of being positioned for growth. They are not considered distressed, but they also are not in a period of what could be called “steady growth.” Companies that are positioned for growth should have cost-cutting objectives, according to Deloitte, that include:

• Transforming operating models.
• Optimising business processes.
• Right-sizing staff structure.
• Fuelling growth through capital efficiency.

“What executives are grappling with now is what’s next,” Deloitte principal Faisal Shaikh said during the webcast. “And thinking about what’s next is really thinking about what are some of the strategic and structural changes that need to happen in order to really take it to the next level. And those are things that require a more significant executive alignment, more significant buy-in.”

—Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine senior editor.