Now's the time to focus on cost savings: Deloitte

Cost savings are the hottest topic among today’s business leaders and the CEO or CFO ares under the most pressure to develop and drive the strategies that will deliver them

Cost savings are the hottest topic among today’s business leaders and the chief executive or chief financial officer is under the most pressure to develop and drive the strategies that will deliver them, according to Donal Graham, who leads Deloitte’s CFO practice.

Graham, who recently launched a new guide from the professional services firm called Managing cost in a downturn – creating an agile cost structure, says as many companies face plummeting revenues and fading consumer confidence the guide is essential reading.

It outlines the cost reduction opportunities that successful organisations are using to survive, create agility and in some cases thrive despite today’s volatile economic environment.

"Depending on the level of cost improvement required and the time available to achieve it, the guide gives a brief overview of the short and long-term strategies that could be the difference between success and failure," he says.

"Although the longest term solutions outlined in the guide such as business model redesign offer the biggest rewards of around 20-30 percent reduction in the cost base, they require the largest cross-company commitment and only start to deliver returns after two to three years."

"This could be too long for some companies that need results now and don’t have the budget available to fund these more strategic projects.

"However, the guide also details belt-tightening efforts such as hiring freezes, deferred expenses and reduced travel which are almost immediate in their impact and could help to fund the longer-term projects that can sustain cost reduction long into the future.

"The potential savings of quick wins are relatively small when compared to the more strategic options but they can create breathing space and return confidence.

"Building momentum around smaller successes can also help to rally people around your bigger more ambitious long term cost reduction goals."

Caroline McGlashan, Deloitte Consulting Partner, adds: "The silver lining to the current economic cloud is that any barriers to change that may have existed previously should be a thing of the past. This should leave the way clear for the executives to break down organisational silos and begin to realise the biggest cost saving opportunities.

"Our advice to corporate leaders is don’t waste a crisis, use it to gather momentum, build agility and rally the whole company around cost reduction initiatives.

"With a flexible cost structure in place companies can scale back costs in response to slowing demand and can also take advantage of unexpected opportunities such as bargain-priced acquisitions.

"An agile company can also respond quickly when the economy rebounds by freeing resources to invest in new products and services, marketing and advertising which can help get a jump on the competition."

Although many businesses can benefit from a more aggressive approach to cost reduction during a downturn, the specific improvement opportunities vary from one company to the next.

Deloitte lists seven practical tips to help corporate leaders to choose the right approach and accelerate the benefits:

  • Decide how much cost improvement is needed
  • Start with the obvious
  • Take an enterprise view
  • Balance short-term and long-term improvements
  • Choose the right business model
  • Protect strategic investments
  • Actively manage change.

The list below shows the expected cost savings that are achievable based on the typical cost levers that an organisation can pull:

  • Focus on strategic sourcing, demand management and tax management to aggressively reduce external spend – save 10-20 percent
  • Focus on streamlining business processes via simplification, elimination or outsourcing – save 5-10 percent
  • Focus on IT and real estate portfolios, projects, platforms and support rationalisation – save 15-25 percent
  • Focus on re-aligning staff based on method of adding value and relationship to business – save 10-30 percent
  • Shift to a more cost-efficient business model - save 20-30 percent.

The full document can be downloaded

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