Short-term cost cutting is recognised as bad for the long-term future of most businesses – yet companies carry on with quick-fix cost reductions regardless.
A PricewaterhouseCoopers report*, which is based on a global survey of 600 finance directors and equivalent senior executives, shows the majority are conducting spend analyses, with 88% stating that businesses should be willing to invest to add long-term value – even in times of uncertainty.
However, most FDs appear to be carrying out various short-term and reactive cost-cuts – 58% are cutting staff, 58% are cutting investment, 71% are reducing inventory and 61% have stopped recruiting, while nearly three-quarters of respondents admit that a “survival instinct culture” is threatening their business.
The research canvassed FDs of companies from three turnover bands: $50 to $500m (52% of interviews); $500m to $1bn (23% of interviews); and $1bn to $5bn (23% of interviews).
It suggests that most of their companies are dangerously reactive, which undermines staff morale.
While 80% of UK companies favour recruitment freezes, only half of US FDs and 62% of European respondents do the same. Ironically, more than half of all respondents believe that most of the staff cuts made by a company during an economic downturn are negated by extra recruitment within two or three years.
Kevin Delaney, partner at PwC, says: “First the businesses cut costs, then they need to put things right, then they rebuild for the future.
This ambiguity and lack of direction has a severely negative impact on any staff loyalty and the best people will often be tempted away to more forward-thinking competitors.”
Targeted cost control is seen by the report as integral to avoid cutting into growth areas, or leaving bad costs in other parts of an organisation.
The report finds all eurozone countries, bar France, are more likely to impose targets on cost control than the UK.
The report says technology is viewed as one of the most important areas in which a cost-control programme can bring benefits. But it stresses that IT should be part of a business’s underlying process, not bolted on to an existing superstructure. Despite this, the survey finds only two-thirds of companies will invest more in IT-driven process development while in a downturn, and a third will cut back on web and e-business development.
Over half the businesses also believe the use of e-technology is founded on hype and peer pressure, rather than genuine long-term benefit**.
The use of intangibles – such as branding, trademarks, patents, software and design rights – is seen in the report as another key area which a business should foster and protect at all times. Only 34% of respondents assessed the value of their intangible assets in the last year, although the UK ranked highest with 46%. The eurozone polled just 23%.
* The Strange Days independent global survey of 600 CFOs and equivalents was commissioned by Pricewaterhouse-Coopers and undertaken by arnold + bolingbroke. A pdf of the report can be accessed at www.pwcglobal.com/ebusinessinsights
** See also last issue’s Financial Directions for more on short-termist IT strategy.