"Reducing spend is just the beginning. The key to future success is having the processes, procedures, and controls in place, even as the economy recovers," says Ken Esch, partner with PricewaterhouseCoopers Private Company Services practice. "Costs, particularly discretionary costs, tend to creep back in when times are good. The controls side of cost reduction is critical so that the action steps taken now do not revert back once the economic pressure is alleviated."
Keeping Costs Down
Trendsetter CEOs reported a focus on four major areas of cost-cutting: discretionary spending, streamlining operations, workforce reductions and employee compensation. The majority (57 percent) feel confident that their companies' cost-cutting efforts will be both effective through the economic recovery and sustainable over the long-term, with only 5 percent reporting that they are not confident. Interestingly, although larger private businesses reported lower average goals/targets to be impacted if cost-cutting measures are successful than smaller private firms, the large private firms also tended to be more confident of achieving their goals - 69 percent were very/extremely confident versus 52 percent for their smaller peers.
"Trendsetter CEOs are feeling confident that their cost-cutting measures are sustainable," adds Esch. "Given our experience with prior recessions and recoveries, cost reduction efforts are most sustainable when companies establish the right controls environment. This is the only way to guarantee these cost containment efforts will continue to improve their bottom-line profit during the economic recovery."
While companies reported a variety of approaches to cutting costs, a top-down approach to reviewing the business by identifying functions and processes where costs can be cut was cited by a majority of respondents (60 percent).
"Implementing a top-down approach, where senior management focuses on transformational opportunities to reduce costs, was found to be preferred in today's recessionary climate," adds Esch. "However, often in these cases, the company is hoping that a single solution - such as offshoring - will solve its long-term cost issue, without taking in to account the behaviors and decision-making processes that drive costs in the first place. This can create a problem with the sustainability of their solutions, as the existing behaviors must also change."
While many CEOs say their plans take a long-term view toward cost efficiencies - 44 percent characterize their approach as strategic and designed not only to carry through immediate challenges but also to streamline the company for longer-term sustained growth - only 26 percent of respondents report a re-evaluation of cost management and cost control processes and implementation of new accountability processes to measure performance results, which is a critical component of a sustainable cost reduction program.
PricewaterhouseCoopers works with a majority of the leading private companies in the U.S. Our 2,000 private company individuals focus on understanding the strategy and business objectives of private companies and their owners, working together to add value while reducing risk. Our professionals are provided with cross training to enable them to connect the dots across a number of private company issues such as compliance, controls, access to cash flow, expansion, exit strategies, succession, wealth management and the many areas that can help build or diminish long term success and value.
