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Us Consulting Debates Re Sizing Downturn 050209v2
Us Consulting Debates Re Sizing Downturn 050209v2
Point Tactical improvements such as hiring freezes, reduced travel and training, and across-the-board budget cuts deliver fast results. Across-the-board reductions are the fairest way to cut costs.
Counterpoint True. But theres a good chance most of the easy improvements have already been done. What do you do next?
Trim costs through tactical improvements. Focus on areas such as discretionary spending, SG&A, and incremental process improvement.
These types of cost reduction programs invariably cut too much in some areas and not enough in others. A more thoughtful approach can better position you to cut fat without cutting muscle. It can also deliver greater savings. Continuous improvement is a good way to boost operating efficiency; however, because it focuses on detailed improvements, it often overlooks many of the biggest savings opportunities that span organizational boundaries. Continuous improvement is certainly worth doing, but its not a cure-all.
The company is already managing costs through continuous improvement. Isnt that enough?
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Point Focus on structural cost reduction. Pursue sustainable improvements such as streamlined infrastructure, reduced product complexity, and new business models. In a deep recession, companies need big savings. Attacking structural cost is the only way to resize the business and achieve step-change improvements in underlying costs. Focusing on structural costs addresses areas that a tactical approach overlooks.
Counterpoint Unless you manage structural costs aggressively from the top-down the results may not show up fast enough.
A structural approach requires new cost reduction initiatives. Where will you find the time and money? Also, are you willing to take on the sacred cows? Thats true in theory. But such benefits only matter if you survive the short term. You need improvement now not a year from now. Tactical improvements should be job one.
Structural improvements such as reducing product complexity, rationalizing the customer base, exiting geographies, and changing the operating model can make your company more agile and responsive, not just more cost efficient.
My take
Omar Aguilar Principal, 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 finding they must become more aggressive about reducing costs and resizing the business to operate efficiently at reduced volume. Tactical improvements alone are unlikely to deliver the necessary savings. To achieve the required reductions, most companies must apply a structural approach that focuses greater attention on strategic improvements such as streamlining their infrastructure, adjusting their service delivery model, and redesigning their business model. These types of improvements can deliver cost savings that are larger and more sustainable. And the good news is that a structural approach doesnt have to take a long time. If done right, it can start delivering results just as quickly as a more tactical approach. Here are some tips for getting started: Know where you stand. Many companies are in worse shape than they think. For example, debt covenants often have strict requirements for cash flow and profitability, which means that even a company that is handling the downturn gracefully may find its existing loans suddenly withdrawn leaving the business desperately short of cash. Dig deeper. Companies must accept the fact that their initial 10-0% cost reduction targets may not be sufficient to weather the storm. In many cases, a total reduction of 30-50% could be needed. The sooner a company faces reality, the faster it can start seeing results and the greater its chances for survival and competitive advantage. Look at everything. In a deep and prolonged recession, traditional belt-tightening activities such as hiring freezes, expense deferrals, reduced travel and training, and across-the-board budget cuts wont be good enough. Companies must look at structural improvements such as direct spend and COGS reduction, infrastructure optimization, and financial restructuring. They must also give more attention to their balance sheet and cash flow. Focus on major cost drivers. When resizing your business, focus on the structural drivers that drive complexity and cost. Customers, product mix and number of SKUs, geographic footprint, and physical assets can all play a significant role in determining a companys structural costs. Rethink what you can afford for the current and expected market conditions, while preserving your core business and capabilities.
Deloitte Debate
Shed non-core operations. As the economy contracts, many companies are finding they have become too large and diversified for their own good. Divestitures and portfolio rebalancing are critical tools in the resizing arsenal. However, its important to consider the impact that a spin-off or carve-out might have on sales, the supply chain, and supporting business functions. Take a holistic approach. Different cost reduction initiatives have different timelines and produce different results. By applying a comprehensive and integrated approach, companies can better manage the overall effort to achieve both 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 free up resources to invest in new products and services, marketing, and advertising. These activities can help a company survive the downturn and get a jump on competitors when the economy turns around.
Deloitte Debate
On the equipment side, although many providers have already announced significant lay-offs, they should continue to focus on improving efficiency and reducing external spending particularly in light of increasing demand from very low cost overseas providers. However, they should not do this in a vacuum. Every equipment manufacturer must take a critical look at its product portfolio and R&D investments and ensure both are aligned with its longterm strategy. This focus combined with a continued, relentless focus on costs will better position equipment providers to emerge from the current crisis stronger, even if smaller. For more information, please visit: www.deloitte.com/us/debates/resizing. For further information about this debate, please contact: Omar Aguilar Principal Enterprise Cost Management Leader Deloitte Consulting LLP oaguilar@deloitte.com Sanjay Behl Principal Health Sciences & Government Deloitte Consulting LLP sxbehl@deloitte.com Sampat Prakash Principal Oil & Gas Sector Leader Deloitte Consulting LLP saprakash@deloitte.com Michal Locker Director Technology, Media & Telecommunications Deloitte Consulting LLP miclocker@deloitte.com
Related Insight: Seven Secrets to Downturn Survival Existing cost management programs may not be sufficient to survive and thrive in a downturn. Cutting Costs Effectively: SG&A Cost Reduction Finding a way to lower selling, general and administrative (SG&A) expenses even a little goes a long way toward cutting a companys overall spend. Enterprise Cost Reduction As Part of a Divestiture The divestiture or spin-off of a peripheral business often provides companies with an ideal opportunity to reevaluate existing cost structures and enhance shareholder value. Related Content: Library: Deloitte Debates Services: Consulting Industries: Life Sciences, Oil & Gas and Telecommunications Overview: Enterprise Cost Management
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