Why cost-cutting will never stop

aksaroya —  3 June 2013 — Leave a comment

By Cesar Bacani, editor in chief of CFO Innovation Asia

Having already made basic post-financial crisis cuts in headcounts, procurement and discretionary spend, companies are now coming under pressure to take more radical approaches.


In economically trying or uncertain times, the default response is to cut costs. We saw this happen in 1997, during the Asian financial crisis, and in the 2008 global financial crisis.

You would think that by this time, as the European crisis and uncertainty in the US continue to threaten Asia, business would have done all the cost-cutting they could absorb. Apparently you would be wrong.

‘A lot of the low hanging fruits are already gone,’ Nigel Knight, managing partner at Ernst & Young’s Advisory Services in Asia, recently told me. These include basic headcount management, working capital improvement around purchasing and procurement, and slashing discretionary spend such as travel and expenses (T&E).

But the pressure to cut remains intense. Resources firms in Australia, for example, and many enterprises in China face regulatory headwinds and slowing economic growth. With the top line stalling, companies must improve their bottom line to keep shareholders happy.

What consultants like Ernst & Young are seeing, says Knight, are companies moving to a new ‘level of sophistication’ in cutting costs. ‘For example, T&E spend was traditionally just putting arbitrary controls on travel,’ he notes. ‘Now the initiatives that are taking place are much more analytics-based’.

The Big Four firm is working with a large pharmaceutical firm to harness analytics, and track and analyse T&E spending in all business units across the region to find a way to leverage on total spending to maximise discounts on hotel nights, for example, flights and telecom expenses.

A similar approach is being applied to shared services. The first round of cost-cutting involved outsourcing basic finance and procurement activities. ‘Now we’re seeing another round’, says Knight, ‘which is extending the scope,and also using the information to generate further reductions.’

Another effort focuses on the supply chain. ‘There’s a lot of fat to take out’, says Knight, ‘just in the way in which companies globalise spending between countries and also in manufacturing strategies. There’s quite a push even in China, which is becoming more expensive, to move manufacturing capability to Vietnam, Laos and so on’.

‘Multinationals are also looking at their processes much more from an end-to-end perspective, looking to simplify and standardise core processes – procure-to-pay, order-to-cash, and so on – right across the business. They are trying to take advantage of savings not generated in individual business units or countries, but across geographies and business units’.

At this point, I could almost expect cloud computing services providers to chime in, software-as-a-service purveyors, managed IT services guys, teleconferencing providers, business intelligence and analytics software makers…

For plucking the cost-cutting fruits higher up on the tree can mean spending money first for new infrastructure, software and expertise – which may end up costing more if the implementation is not done right. The consultants will be there to help, but they, too, will require paying.

‘You need to spend to save,’ argues Knight. Maybe. The business will be depending on finance professionals to make sure the more sophisticated ways of cost management do not use more money and other resources than the savings they will bring in.

This article first appeared in Accounting and Business magazine, May edition, 2013.


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