SiCW Business Leaders Agenda Survey 

"I believe that if businesses really are serious about reducing their cost base and making that reduction sustainable in the long-term, then they must be prepared to challenge the accepted business model orthodoxy which underpins everything they do.

Otherwise, the current inability to see beyond long-held operational constraints will continue to restrict businesses’ ability to make real inroads into their cost base.

This manifests itself in different ways from sector to sector. For example, in highly regulated sectors, few demonstrate a willingness to proactively challenge and test the extent to which activities can sit above local market requirements.

This could mean using a new and different interpretation of the local regulatory requirements or the accounting separation requirements in order to avoid what would otherwise result in duplicated activities across the organisation – and in increased costs.

They should be thinking first about what costs the local markets or channels of trade can afford to pay while remaining profitable. Then they should drive this view back upstream into the overall design of the cost structure.

This is something that smaller, faster growing organisations constantly challenge themselves over. The new breed of generic drug manufacturers is a good example of where this can be seen.

In larger, more mature, organisations, too often we see costly, centrally dictated policies, gold-plated central services, complicated reporting matrices, complex operating model designs and complacency getting in the way of achieving cost leadership.

Without the willingness to challenge these operational sacred cows, businesses are limited in the scope they have to make substantive changes in areas which could deliver real cost efficiency - such as their operating models, geographic footprint or product mix. Unfortunately, such radical thinking rarely emerges from the conversations businesses are currently having around cost.

Without such unfettered thinking, then I believe businesses are left with nothing more in their cost-cutting armoury than the usual options of firing people and buying less.

Such has been the length of the downturn though that even these options are now widely exhausted. P&L has been screwed down as far as possible and going further and deeper would only pose a self-induced risk to a business’ future health.
To make matters worse, there will be a boomerang effect. In a forthcoming report, we’ll reveal how CFOs tell us that they expect 95 percent of the costs that have been painfully cut during the downturn to simply come flooding back into their businesses as growth again becomes a possibility.

That’s because the corporate world is typically indisciplined when it comes to cost. Stripping out cost is hard, dirty work. Given the briefest glimmer of hope that growth may be around the corner, the focus on cost diminishes rapidly. Despite plenty of talk to the contrary, I believe that only a handful of businesses will retain their cost focus in happier times.

Those that lose focus may well still achieve growth – but it will be unprofitable growth. Those that persist with cost as a Board level strategic concern will create space within which to grow their margins and secure a real competitive advantage.

The difference between the two camps is equivalent to the difference between the person on a fad diet and the person committed to long-term lifestyle change. Sadly, I believe that not enough are prepared to commit to the latter, despite everything we’ve been through."