McKinsey Study Discusses Effectiveness of Cost Cutting

During the recent financial crisis many companies turned to aggressive cost containment or cost cutting strategies to improve their bottom line. The fourth quarter profits for many companies had more to do with cost cutting than increasing revenues.For most companies cost cutting was to be a key strategy again in 2010. Many executives were also concerned about the sustainability of the cost reduction programs they had implemented. Would there organization slip back into the spending patterns of old?

The Chicago office of McKinsey Global Survey recently released a very interesting research study, " What worked in cost cutting and what's next," that examined this issue. They found that cost containment remains a very high priority for most companies but respondents to the survey said they are worried about maintaining the cost reductions this year and concerned about cost challenges yet to come. Respondents were also asked about the most significant cost structure risks that their companies would face in 2010 and whether the company is prepared to manage the risks.

Of the 300 companies interviewed for the study, many viewed cost cutting as a key strategic move to improve organizational structure, delivery of better service and operational efficiency. These efforts would lead to long term growth for the companies rather than a short term reaction to lower demand and decreased revenue.

Nearly 75% of executives said that cost cutting remains a top priority and more than 50% have cut costs by at least 10 % since September 2008. Although the majority of these cuts were labor related, executives looked at all areas for cost reductions. For example 48% made cuts in non-labor areas and 20% cut capital assets including facilities and transport assets.

Most of the companies that focused on Capital Assets were trying to reduce variable costs in line with lower demand/volume, institute a company wide program to increase performance, cutting cost as part of normal budgeting, freeing up cash/reduce need for short term external financing or organizational restructuring of some kind.

The larger organization were more likely to adopt across the board cost cutting approaches, while smaller and medium sized businesses used a more targeted approach. Among survey respondents who used this targeted approach to cost cutting- 75% say their company reduced operational expenses. Of these 31% made cost cuts in individual branches, facilities or plants and 75 cut costs across multiple branches, facilities, or plants( cut the same across all locations.)

The majority of the survey respondents felt their cost cutting moves were effective and two thirds said they met the cost reduction targets that were set.
One area of concern for companies is continuing to keep their cost structure at the new lower level. Some companies feel that the cost cutting will not be sustainable over the next 12 to 18 months. The survey results seem to indicate that companies that made structural changes and focused on reducing operational costs were more likely to feel that the cost cutting change will be long lasting. The biggest risk executives reported to maintaining the costs cutting is the continued sluggishness or decline in demand or volume.

Looking forward ,executives plan to address fixed costs( 23% of respondents) as a source of future cost savings. This will require organizational changes that could impact how the companies products are designed, produced and/or delivered.

For more information and complete survey results from the McKinsey Global Survey please visit their website www.mckinsey.com. The survey was developed by Kevin Dolan and Michael Murray in the Chicago office of McKinsey & Company.

Other than labor one of the largest costs an organization faces is the cost of leasing or owning their office and facilities. In this time of declining demand and sales many companies are rethinking their portfolios of products and service offerings and looking at improving operational efficiency. These strategic moves are driven by cost cutting and profit enhancement. At the end of this process a company may find itself with unused office, industrial or distribution real estate.

Unused and un-occupied real estate can quickly become a large drain on cash flow and the bottom line. It is not uncommon for companies to pay millions of dollars for commercial real estate space they do not need or are not using. One solution was to sublease this space. Subleasing creates another set of concerns for the companies and does not help improve the bottom line.

An advanced strategy some large companies are utilizing is a Negotiated Lease Buy-Out. Financial institutions such as Bank Of America, Key Corp and Ford Credit have used this approach very successfully. A Lease Buy-out creates an opportunity for the company to be released from any long term real estate lease commitments. The leading practitioner of this advanced finance tool is Cambridge Consulting.
For more information please visit their website at www.commercialleaseterminations.com