Companies cut fat … but, like all of us, the pounds reappear

Excerpted from BusinessWeek, “The Secret to Making Cost Savings Stick”, by the staff of the Corporate Executive Board, February 13, 2009

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Of the 90% of organizations that are cutting costs this year only a small fraction will likely retain those savings for three years or longer

As a result, getting managers to focus on the right types of cost savings is more critical than ever. Organizations must ensure that they are driving surgical, sustainable cost reductions rather than indiscriminate cuts that will creep back into the organization (or, even worse, cripple future growth). 

Companies under pressure to cut costs tend to focus on the large variable costs that have an immediate, significant impact (e.g., travel and entertainment, administrative staff). Unfortunately, as soon as external pressure dissipates, these costs often creep back into the cost base.

CEB’s Finance Practice examined 230 major corporate cost-cutting initiatives at S&P 500 companies from 1999–2004. In the first year, only 100 companies, or 43%, achieved cost reductions. After three years, that number fell to 24 companies, or just 11%.

Quite simply, these “Elite Cost Cutters” were successful because they were proficient in controlling the cost of goods sold, rather than just quickly (and sometimes indiscriminately) cutting SG&A or ‘overhead’ costs, such as IT spending and travel. In fact, these firms actually spend proportionally more on overhead than their peers as a way to effectively drive long-term operational efficiency across the business.

Edit by DAF

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Full article:
http://www.businessweek.com/managing/content/feb2009/ca20090213_224955.htm?chan=top+news_top+news+index+-+temp_managing 

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