Cost cutting

45% of respondents report cutting costs by optimizing processes and implementing cost controls.

Summary: Much of the pressure driving the rise of cost cutting appears to be coming from government austerity programs. Most survey respondents are opting for process optimization to manage the risk.

After two years as the sixth risk, the challenges associated with cost control have risen to second.

Key factors

A review of our survey results suggests that the rise of this risk to second position is driven by developments in the public sector (although cost inflation triggered by the recent rise in commodity prices surely plays a role).

Government sector respondents, grappling with national austerity measures, have assigned this risk the highest average rating of any risk across all the sectors. This relatively extreme pressure to cut costs in the public sector has fed through into other sectors where regulation has a strong influence on pricing — in health care this risk ranks first; in power and utilities it ranks second.

The high ranking in health care and power and utilities can in part be attributed to government efforts at cost control.

By contrast, banking executives gave lower priority to challenges relating to cost cutting than any other sector, even though political pressures not to cut staff during the downturn were the second most frequently cited driver of this risk.

In light of the public sector origins of much recent cost cutting pressure, it is logical that the global regions where cost cutting is of greatest concern are those that are most exposed to the sovereign debt crisis: notably the UK, France, Italy and Germany. (Ireland, Portugal, Greece and Spain are not covered in our survey.)

Drivers of cost cutting risks, as reported by organizations surveyed

2013 forecast

• Respondents in most sectors expect challenges associated with cost cutting to decline in importance as 2013 approaches.
• Banking is the extreme exception; these challenges are expected to rise fairly dramatically.

Managing the risk

In light of the high priority given to cost cutting risks, it is reassuring that over 7 in 10 companies surveyed report that the measures they have taken to mitigate cost cutting risks are reasonably effective.

• 45% cut costs by optimizing processes and implementing cost controls
• 13% of organizations had reduced headcount

Cost cutting

Geographic approaches

• US and European organizations were, in general, strongly proactive in managing costs.
• In India and China, firms and governments were significantly less likely to report having implemented measures to control costs. Executives in these countries may remain strongly focused on growth, and also face less pressure from national austerity measures.
• Respondents from the Middle East were exceptional in emphasizing reduction of costs of goods and services (COGS).
• Selling, general and administrative (SG&A) expenses remained the overwhelming focus in most geographies.

Sector strategies

• Respondents in the public sector appeared most likely to report that their efforts to respond to this challenge are as yet unsuccessful.
• Organizations in the health care sector, which also face serious cost cutting pressures, are particularly likely to say that measures for cost control are still in the planning stages. Less than 50% of health care respondents report that mitigation measures have already been taken, against nearly 70% in life sciences.

Factors mitigating cost cutting risks, as reported by organizations surveyed

Organizations' responses to cost cutting

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