Cost cutting - a quick fix or strategy for life?

Despite a handful of indicators suggesting that the speed of the economic decline is starting to slow, it remains a difficult environment for businesses. Companies of all size and across all sectors are facing their biggest cost and cash challenges in decades as sales volumes decline and pressure on continued margin improvement increases. Just last month, global giant Microsoft reported a nine percent cut in operating expenses and watched their shares rise three percent following the announcement.

Working with local clients we know that most organisations are already embarking on cost reduction programmes and our recent National Business Confidence survey revealed that 76% of businesses across the UK had a specific strategy in place to cut business overheads. Many have already reduced their cost base through quick-fix initiatives which focus on the 'low hanging fruit'. Whilst this can achieve a short term gain, the bigger benefits are achieved through more strategic options, looking across the entire business.

The challenge is not to take an axe to the cost base, such cuts can compromise brand integrity, negatively impact the viability of suppliers and do nothing to position a company well for recovery. The real skill is in carefully using a scalpel to cut out the fat. It's about protecting what makes the business unique, and not restricting the ability to react to change and growth in the future.

Ultimately cost cutting is fraught with challenges and requires careful planning. Whilst businesses can often deliver the quick wins themselves, delivering the longer term strategic initiatives require technical skills often not found within the existing workforce. Advisors bring the knowledge of what others are doing in your sector and innovative ideas from other industries which may otherwise not be considered and will look at previously unexplored areas of a business.
You may have been successful in stripping out 20% of your costs, but what about the other 80%? Have you, for example, looked at all direct and indirect controllable spend, shared services and sourcing options; tax efficient supply chains, efficient financial management and IT (procurement, programme management and infrastructure and software strategies)?

We would never claim to know your business better then you, but we do know how to get the most out of cost optimisation programmes.

Just some of the recent work we've completed for local companies includes;

Automotive company - review of manufacturing, cash generation, inventory holding and organisational structure to identify savings of c£9m. Company was able to report operating profits for the first time in years.

Printing company - review of overhead cost base to identify cash savings of over £8m. Allowed company to renew banking facilities and post a profit increase in excess of 50%

With the poor economic environment likely to continue throughout this year, companies need to look beyond the obvious to create leaner and more nimble businesses. Using advisors as a business partner, to plug the skill and experience gaps, can ensure your business maximises the benefits of any cost reduction programme. External assistance can ensure your company is well positioned to react to the economic recovery when it happens and ensure the fat does not creep back in future.

Paul Webster is KPMG's Regional Market Leader for their UK Corporates Advisory team in East Anglia and can be contacted via e-mail at paul.j.webster@kpmg.co.uk