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Deloitte - Resizing in a Downturn

Deloitte - Resizing in a Downturn

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Published by: lacengear on Feb 14, 2010
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05/26/2011

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Resizing a business in a downturn
Tactical or structural cost reduction?
PointCounterpointTrim coststhrough tacticalimprovements.
“Focus on areas such asdiscretionary  spending, SG&A,and incremental  processimprovement.” 
Tactical improvements suchas hiring reezes, reducedtravel and training, andacross-the-board budgetcuts deliver ast results.True. But there’s a good chance most o the easyimprovements have already been done. What doyou do next?Across-the-board reductionsare the airest way to cutcosts.These types o cost reduction programs invariablycut too much in some areas and not enough inothers. A more thoughtul approach can betterposition you to cut at without cutting muscle.It can also deliver greater savings.The company is alreadymanaging costs throughcontinuous improvement.Isn’t that enough?Continuous improvement is a good way to boostoperating eciency; however, because it ocuseson detailed improvements, it oten overlooksmany o the biggest savings opportunities thatspan organizational boundaries. Continuousimprovement is certainly worth doing, but it’snot a cure-all.
Deloitte Debates
The recession and credit crisis are causing precipitous declines in consumer and business demand. In response todeclining sales, many companies need to resize their business and reduce costs in order to maintain acceptablemargins — or even just to stay afoat. The main question is how ar to go. Should you ocus on a tactical approachthat delivers incremental savings in a relatively short time? Or a structural approach that delivers results that arelarger and more sustainable?
As used in this document, “Deloitte” means Deloitte Consulting LLP. Please seewww.deloitte.com/us/aboutfor a detailed description of the legalstructure of Deloitte LLP and its subsidiaries.
 
Deloitte Debate
My take
Omar AguilarPrincipal, Enterprise Cost Management Leader, Deloitte Consulting LLP
The current economic crisis is shaping up to be worse than expected. As a result, many companies are nding theymust become more aggressive about reducing costs and resizing the business to operate eciently at reducedvolume. Tactical improvements alone are unlikely to deliver the necessary savings.To achieve the required reductions, most companies must apply a structural approach that ocuses greater attentionon strategic improvements such as streamlining their inrastructure, adjusting their service delivery model, andredesigning their business model. These types o improvements can deliver cost savings that are larger and moresustainable. And the good news is that a structural approach doesn’t have to take a long time. I done right, it canstart delivering results just as quickly as a more tactical approach. Here are some tips or getting started:
Know where you stand.
Many companies are in worse shape than they think. For example, debt covenants otenhave strict requirements or cash fow and protability, which means that even a company that is handling thedownturn graceully may nd its existing loans suddenly withdrawn — leaving the business desperately short o cash.
Dig deeper.
Companies must accept the act that their initial 10-0% cost reduction targets may not be sucientto weather the storm. In many cases, a total reduction o 30-50% could be needed. The sooner a company acesreality, the aster it can start seeing results — and the greater its chances or survival and competitive advantage.
Look at everything.
In a deep and prolonged recession, traditional belt-tightening activities such as hiringreezes, expense deerrals, reduced travel and training, and across-the-board budget cuts won’t be good enough.Companies must look at structural improvements such as direct spend and COGS reduction, inrastructureoptimization, and nancial restructuring. They must also give more attention to their balance sheet and cash fow.
Focus on major cost drivers.
When resizing your business, ocus on the structural drivers that drive complexityand cost. Customers, product mix and number o SKUs, geographic ootprint, and physical assets can all playa signicant role in determining a company’s structural costs. Rethink what you can aord or the current andexpected market conditions, while preserving your core business and capabilities.
PointCounterpointFocus on structuralcost reduction.
“Pursue sustainableimprovements suchas streamlined infrastructure,reduced product complexity, and new business models.” 
In a deep recession, companies needbig savings. Attacking structuralcost is the only way to resize thebusiness and achieve step-changeimprovements in underlying costs.Unless you manage structural costsaggressively — rom the top-down —the results may not show up ast enough.Focusing on structural costs addressesareas that a tactical approachoverlooks.A structural approach requires new costreduction initiatives. Where will you ndthe time and money? Also, are you willingto take on the sacred cows?Structural improvements suchas reducing product complexity,rationalizing the customer base,exiting geographies, and changingthe operating model can make yourcompany more agile and responsive,not just more cost ecient.That’s true in theory. But such benetsonly matter i you survive the short term.You need improvement now — not a yearrom now. Tactical improvements shouldbe job one.
 
Deloitte Debate 3
Shed non-core operations.
As the economy contracts, many companies are nding they have become too largeand diversied or their own good. Divestitures and portolio rebalancing are critical tools in the resizing arsenal.However, it’s important to consider the impact that a spin-o or carve-out might have on sales, the supply chain,and supporting business unctions.
Take a holistic approach.
Dierent cost reduction initiatives have dierent timelines and produce dierent results.By applying a comprehensive and integrated approach, companies can better manage the overall eort to achieveboth immediate savings and large-scale improvement.A structural approach to cost reduction can better position a company to protect its margins, capture market share,and capitalize on opportunities such as bargain-priced acquisitions. It can also ree up resources to invest in newproducts and services, marketing, and advertising. These activities can help a company survive the downturn and geta jump on competitors when the economy turns around.
A view from the life sciences sector
Sanjay BehlPrincipal, Health Sciences & Government, Deloitte Consulting LLP
Lie sciences companies are wrestling with a wide range o challenges, including major product ailures, slowingsales, price pressure, and weak product pipelines. In addition, many pharmaceuticals companies ace expiringpatents that in the near uture could signicantly reduce their sales. These challenges have caused most lie sciencescompanies to underperorm the S&P 500 over the last ve years.Typical responses include mergers and acquisitions, as well as licensing to strengthen product pipelines. However,cost reduction must also play a key role. An eective cost reduction program can improve earnings and sharevalue while the company waits or uture revenue to kick in. It can also boost long-term margins and improvecompetitiveness.Recently, large pharmaceutical companies have announced layos in SG&A, R&D, and manuacturing as part o anongoing eort to keep costs in line with revenue. They are also signicantly reducing costs in other areas. Someleading medical device companies have taken similar steps. Yet, many other companies in the sector have yet totake action. Here’s our advice:
Get started.
In this troubled economy, no company is immune rom cost pressure. I you haven’t put a costreduction plan in place, now is the time to start. Create a balanced mix o near-term tactical opportunities andlonger-term structural opportunities that give you the fexibility to respond to an uncertain uture.
Examine the core.
Many companies are understandably reluctant to cut costs in undamental areas such assales, manuacturing, and R&D. However, we believe there are ways to reduce costs without damaging the corebusiness. Companies should examine their operating models and identiy opportunities to reduce costs or generaland administrative activities and support unctions. For example, establishing a shared services model or supportactivities — such as sales operations or research operations — can save money while at the same time improvingservice levels by creating a critical mass o capabilities and greater cost fexibility. Also, it may be possible to reduceservice levels in ancillary areas such as market research, analytics, creative services, and alliance managementwithout signicantly undermining the company’s overall perormance.
Aggressively reduce spending.
Negotiate better prices on external marketing spend. Reduce expenses in areasthat lack a clear ROI, such as grants, investigator initiated trials, and eld medical team activity. Work with contractmanuacturers to secure better service levels and eliminate minimum order quantities that limit your fexibility.Reduce the scale and scope o existing R&D projects, keeping projects alive but eliminating non-essential activities.
Think big.
In some cases, structural change might be the best way to do more with less. For example, somecompanies are reducing the size o their sales sta — which is a huge expense — while at the same time investingto make the sales sta more eective through improved targeting, a stronger contracting strategy, and higherrequirements or education and experience.Actions like these can help companies compete successully in the rapidly changing lie sciences marketplace andposition them to thrive when the economy turns around.

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