Companies take a less-than-clinical approach to cutting costs

Cost-cutting at companies is often haphazard, and budgeting is often misaligned with strategic planning, according to a new survey of global executives.

Twenty-two per cent of executives said their organisation’s budgeting was aligned with strategic planning, and just 17% felt their company’s strategy was well-understood across the company, according to a global survey of 511 executives conducted by PwC affiliate Strategy&, formerly Booz & Co.

Companies “seek to share the pain or cut what’s obvious,” Vinay Couto, a senior vice president at Strategy&, said in a news release. “Instead, they should determine the few things that are critical to supporting the key enterprise-wide capabilities and build excellence there. Everything else can really be just good enough.”

About two-thirds of respondents said lower-priority initiatives received more funding than they should, and only 27% of executives said their companies cut costs based on organisation-wide priorities.

“Companies need to be clinical about cutting back on non-priority areas so they’re able to constantly invest in critical capabilities and businesses,” Couto said. “Investing a little bit in everything is not going to allow companies to grow, but that appears to be what many companies are doing.”

PwC recommends four courses of action for organisations to rethink budgeting and cost-cutting:

• A rigorous review of the capabilities needed to achieve or keep a leading position in their industry.
• A dispassionate assessment of where the company stands against these capabilities on two fronts: its level of effectiveness and its relative levels of funding and investment.
• A periodic zero-basing exercise to scale back less critical areas and redirect money from those areas to more critical ones.
• A series of targeted organisational interventions to increase speed and quality of decision-making throughout the enterprise.

Related CGMA Magazine content:

“The Four D’s of Better Strategic Planning”: Instead of limiting scope and paying attention to issues that need fixing, companies should spend more time focused on their opportunities. The process of appreciative inquiry – discovery, dream, design, and destiny – can turn fix-it organisations into more strategic ones.

“Inspiring Collaboration Is Critical for Higher Growth”: “Network leadership” – the ability to facilitate employee collaboration across business silos – is a key to growth, and research suggests that many leaders are lagging in this important skill.

—Neil Amato (namato@aicpa.org) is a CGMA Magazine senior editor.