60% of companies lack active cost reduction strategy

Global survey warns that majority of companies not ready for business recovery

LONDON, MOSCOW, 17 November 2009 – Despite the current downturn, more than 60 percent of global businesses have no active cost reduction programs. Furthermore, a quarter have no plans to engage in them and only a small minority (17 per cent) view continuous cost reduction as a priority, according to an Ernst & Young survey, Save to Prosper: from cost reduction to cost optimization.

Jean-Benoit Berty, EMEIA Advisory Partner at Ernst & Young, said, “Our survey highlights that many businesses are dangerously complacent about cost reduction and are as a result not ready for the eventual economic recovery. Although cost-consciousness has become a top priority during the last year, the majority of company efforts so far have been on tactical and temporary measures, delivering no more than 10% cost reduction for most businesses. Sustainable cost reduction and optimization need to become standard practice and be at the heart of any company’s business recovery agenda.”

The survey also revealed that the more fundamental, radical steps to cost reduction have yet to be fully addressed or implemented and realized. Only a third of companies are looking to achieve 20% or more cost savings over the next 12-18 months.

Vadim Balashov, Partner at Ernst & Young, Head of the Performance Improvement Practice in the CIS, says: “We emphasize cost optimization, rather than simple reduction, using a series of examples to aid businesses in their push to improve profits with limited resources.”

A total of 561 senior executives were interviewed for the survey, which covered 11 industry sectors in 11 of some of the largest economies. The results show that the most common reason for implementing cost reduction is “to ensure survival”, implying that once survival is achieved, cost reduction will be marginalized.

The report reveals that many businesses remain overtly concerned with maintaining or expanding market share at the expense of profitability. Smart cost optimization, by contrast, may entail sacrificing customer numbers in pursuit of healthier margins and more fruitful business partnerships.

The survey revealed some equally striking sector-specific results. For the question on whether the sectors regard cost reduction as a means to securing economic survival, 46% of insurance; 45% of telecommunications and oil and gas; 44% of real estate; 42% of power and utility and banking responded “yes”. By contrast, 34% of pharmaceuticals and consumer products and 33% of media and entertainment responded “no”. 

Interestingly, the consumer products and telecommunications sectors both achieved higher scores than other industries in terms of cost savings relating to goods sold. For consumer products, 31% of companies reached 11-20% savings costs; for telecommunications 32% of companies reached 11-20% savings cost.

The report also draws attention to the opportunities offered by innovative business models such as virtual worlds and the scope for environmental measures such as renewable energy to play a role in cost reduction. Both can improve a company’s reputation and its relationship with stakeholders.

Companies that neglect these two issues may be storing up trouble for the future and missing significant cost reduction possibilities.

Berty concludes, “Cost reduction has to be considered as a fundamental business commitment. Companies’ focus now needs to move to beneficial cost optimization. If companies treat it as a temporary and inconvenient phase, they risk losing out to more agile rivals. By recognizing the competitive nature of the new commercial landscape, management can ensure their businesses survive and prosper.” 
The full report is available on request or at www.ey.com 

About the survey

The Ernst & Young Save to Prosper: from cost reduction to cost optimization survey is based on the interviews of 561 decision-makers from small to large companies in 11 countries. The 11 countries are as follows: China, France, Germany, India, Netherlands, Russia, South Africa, Spain, Switzerland, UK and USA. The 11 industries included in the report are as follows: automotive, banking/capital markets/asset management, consumer products, insurance, media and entertainment, oil and gas, biotechnology/pharmaceuticals, power and utility, real estate, technology, telecommunications. The breakdown of those interviewed is as follows:
55% head of finance and accounting or CFO, 30% head of controlling or financial controller, 11% managing director or CEO, 4% board member.

About Ernst & Young 

Ernst & Young is a global leader in assurance, tax and legal, transaction and advisory services. Worldwide, our 144,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.

Ernst & Young expands its services and resources in accordance with clients’ needs throughout the CIS. 3,400 professionals work at 16 offices throughout the CIS in Moscow, St. Petersburg, Novosibirsk, Ekaterinburg, Togliatti, Yuzhno-Sakhalinsk, Almaty, Astana, Atyrau, Baku, Kyiv, Donetsk, Tashkent, Tbilisi, Yerevan and Minsk.

For more information, please refer to www.ey.com.