Businesses making damaging, indiscriminate cost-cuts

According to Hay Group, which surveyed senior finance managers in 140 of the largest 1,000 listed and privately held companies in the UK and Ireland, 90% plan to make operational cuts in 2009-10 and many admit they will make cuts purely to demonstrate strength of leadership.

Hay also suggests one-fifth will undertake fundamental company restructuring to survive the recession, and almost half will reduce headcount by 10%. Additionally, some companies will cut between 11% and 30% from pay and benefits as a decline in profits of 4.2% is expected and factored in over the coming financial year.

A worrying statistic reveals that 28% of companies plan to slash costs across the board rather than strategically addressing under-performing units. Hay predicts many companies will cut the “wrong” costs ­ which could create long-term damage.

“There is a right way and wrong way for companies to take out costs,” says Hay’s associate director Russell Hobby “Successful companies will focus on underperforming areas and look to increase productivity throughout.”

Disturbingly, 52% of financial controllers in publicly-listed companies (and 41% in privately-owned businesses) reported that they were making cuts to reassure their shareholders, even though their business was in a stable condition.