You might think that after a decade or two as a staple corporate activity, cost-reduction efforts would have already squeezed out the vast majority of excess spending.
But quite the opposite appears to be true, given the priority companies are still putting on cost containment, primarily because of the growth imperative. In a survey of 700 corporate executives by Accenture, 82% said their companies are focused on cost reduction as a way to free up funds to invest in growth initiatives.
Trouble is, while companies may not reduce costs effectively — cutting back in the wrong areas to the detriment of growth — they may be even worse at figuring out how to best spend the savings. One common, core problem is misalignment on growth strategy among corporate executives, says Kris Timmermans, senior managing director of Accenture Strategy, operations.
That problem goes right up to the top. In many cases, CEOs and CFOs can’t even agree on whether priorities for reinvesting cost savings are in fact aligned to business strategy. While 51% of chief executives participating in the study said they believe such alignment exists, only 34% of finance chiefs said the same.
According to Timmermans, the blame for those disparate perceptions lies more on the CEO side. “There is a clear trend that messages to the CEO, when there’s an escalation or some other issue, are being filtered positively,” he says. “They see things as being better than CFOs do.”
CFOs, he notes, see bigger challenges in reinvesting cost savings because they see more detail suggesting what could go wrong. In fact, that tendency has wide application outside CFO-CEO misalignment. “Every time we assess functions, CFOs think more negatively about their function than the heads of all the other functions,” Timmermans says.
Chief executives and finance chiefs are even further apart when asked if their company uses formal reviews of investment success to assess the return on reinvested cost savings. Only 49% of CFOs said that’s the case at their companies, compared with 70% of CEOs.
“On these stats, I believe the CFOs much more,” says Timmerman. “They are much closer to the ROI measurements, and [in many cases] they know they’re lacking the analytics to get detailed insights on ROI.” With regard to deciding where to reinvest cost savings, “there is still a lot of ‘gut feel’ going on and a lot of local fragmentation.”
As to the latter point, he continues, “A number of companies keep cost savings in the budgets of local decision makers, who then decide how to reinvest the money. I have one client with 8,000 budget holders. There is little formality on investment decisions.”
Another problem when it comes to reinvesting cost saving is operating models that aren’t aligned to fuel strategic growth initiatives. Only 17% of CFOs and 31% of CEOs strongly agreed that their operating model is sufficient for this purpose.
“This gets my attention, because it’s a big deal,” Timmermans says. “People always want to invest cost-reduction savings into growth initiatives but then realize they’re not organized for it. They lack the talent, they can’t free up the talent they have, and they don’t have a process of budgeting and long-term planning that are agile and flexible enough to handle these initiatives. It’s a broken link.”
One client, he notes, recently created a new position, “chief disruption officer,” to focus solely on fast-moving growth initiatives without being hindered by traditional company processes.
What’s the key to mending the broken link? According to Timmermans, it’s not saving some money and then deciding how to invest it. Instead, he says, start by developing a growth strategy, understand where pools of profits are going to come from, and let that inform your cost-reduction initiatives so that you don’t unwisely cut from areas that will support the strategy.
Only 30% of surveyed executives said they prioritize the reinvestment of cost savings in alignment with business strategy, according to a separate Accenture report based on the same research.
Further, companies should favor funding two or three initiatives that will lead to game-changing paybacks, which generally won’t happen in the situation where individual budget holders are making their own, parochial reinvestment decisions.
In any case, it’s clear that many companies have trouble making decisions about where to invest. The full survey base, given a list of challenges in funneling cost savings to growth, most frequently selected “identifying the right areas to invest” as the top challenge (21% of respondents). Further, more participants (54%) picked that response as among their top three challenges than any other response. (See chart, below.)