Large companies frequently cannot achieve their cost reduction targets because they keep focusing on the same business areas every year even if they don’t deliver the savings they once did, according to a new report from Deloitte.
The firm’s report on cost improvement practices and trends in the Fortune 1000 found that companies often use cost reduction as a way to improve efficiency and effectiveness instead of as a financial survival motivator as they had in the aftermath of the recession.
But even with this shift, the survey of 153 senior executives at Fortune 1000 corporations found that companies are still missing the mark when implementing cost management strategies. Survey respondents reported that last year nearly half (48 percent) of their companies’ cost initiatives failed to achieve their goals, compared with much lower failure rates in 2010 (37 percent) and 2008 (14 percent).
The respondents cited lack of understanding as the biggest barrier (74 percent) to effective cost reduction, and “erosion of savings” (73 percent) from cost improvements that are not feasible or sustainable.
The fundamental problem is that many companies focus their cost reduction efforts on the identical areas year after year. Among those surveyed, administration (75 percent) and operations (67 percent) lead the way. Companies also continue to focus on the same tactical cost reduction approaches of process streamlining (54 percent), organizational streamlining (50 percent), and external spend reduction (41 percent). This makes it increasingly difficult to find new ways to save.
Survey respondents indicated that their companies are attempting to overcome the barriers by focusing more attention on change management (52 percent), clearly defining goals and objectives (41 percent), and communication (32 percent).
Strategic cost improvements—such as changing the business configuration and increasing the level of integration—are oftentimes more complex to implement and are therefore not as prevalent as tactical cost reduction approaches, despite offering potential savings that are larger and more sustainable.
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