Cost cutting – surely we should be done with it by now?

Cost cutting – surely we should be done with it by now?

Chief financial officers don't generally ignore savings or leave waste on the table in budget meetings. But based on some of the cost-cutting programmes announced this year, you could be forgiven for thinking that's precisely what they've been doing.

Take Philips. In September it announced €800 million (£688 million) of cuts by 2013 – even though it had already set a target of €500 million. Guy Strafford, chief client officer at procurement consultancy BuyingTeam, reckons it's not the only company stepping up the pain.

"Back in 2008 when things slowed down markedly, a lot of organisations did the classic little squeeze on costs," Strafford says. "Then they started to take the brakes off in 2009. That was partly sentiment – most managers want to grow the top line and let the rest of the business catch up. And running a really tight business is hard work."

But persistently weak demand and higher input prices are forcing businesses to cut to the bone. And that's one reason why cost cutting is now the second highest risk factor for global businesses, according to Ernst & Young's Risk and Opportunity report.

In fact, only one sector's respondents collectively rated cost cutting risk as "very high impact" in the EY study – "public administration". (That of course may change if the current economic uncertainty deepens.) Government austerity programmes are not only severe in many cases, the sheer scale of them also means they have unpredictable results.

"Government cuts are a risk factor for other businesses too," says Jim Weight, founder of PE firm Weight Partners and former CFO at Westminster Healthcare and HIT Entertainment.

"Tax take is, approximately, 40 percent of GDP and that all gets spent," he explains. "If that spend goes down, you're losing a big chunk of the economy one way or another. Lots of sectors are going to feel it."

What's more surprising in the EY study is that the banking sector rated the risk as merely "medium impact".

"Most sectors have already been cost cutting, so we're actually seeing the perceptions of risk falling," says Gerard Gallagher, markets leader in EY's UK&I advisory arm.

"But the banks were under pressure not to cut headcount at the height of the crisis, especially after being bailed out."

In other words, the risk wasn't crystallised. But the banking respondents to the EY survey were also the only ones who rated cost-cutting as a rising risk factor over the next two years. And the reason for that is simple: there's about to be a bloodbath. According to announcements made by the end of August, HSBC is looking for between $2.5 billion and $3 billion in cost-savings over three years (includes around 30,000 job cuts). UBS wants to save $1.9 billion to $2.5 billion (that's even before it took its rogue-trader hit). Barclays wants to shed $1.6 billion in annual costs. And banks such as Credit Suisse, Goldman Sachs and Morgan Stanley are all engaged in $1 billion-plus cost-cutting programmes (albeit over different time-frames).

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Tags outsourcingriskcost cuttingopportunity cost

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