It’s not for lack of trying.
Faced with continued economic turmoil and uncertain revenue streams, companies everywhere are scrambling to cut costs as much as they can. But because of the speed and ferocity of this particular downturn relative to the free spending of the peak boom years, those efforts are still not reflected in their cost-to-revenue ratios.
“The economic downturn caught many companies flat-footed,” says Jon Scheumann, a director with business-process consulting firm Gunn Partners, which teamed with CFO to produce the ninth annual Cost Management Survey. “What we are seeing in the cost management index [CMI] is a byproduct of how hard it is to change your cost structure.”
In this year’s survey (using 2001 data), the median company CMI — calculated by adding cost of goods sold (COGS) to selling, general, and administrative (SG&A) expenses and dividing by operating revenues — was 87 percent, compared with 85.3 percent in 2000. And during a five-year span (1997-2001), median cost-to-revenue ratios increased (read: worsened) by 79 basis points.
“You are seeing companies really get focused on cost, beginning in the last half of 2001,” says Scheumann. But even firms that recognized the severity of the downturn didn’t take the first steps — layoffs, restructurings — until late in the year and into 2002, he says. Consequently, the benefits won’t begin to be seen until next year’s survey, and the payback in terms of real structural change won’t be evident “until late in 2003.” The reason? Companies often lack the flexibility to cut costs, especially SG&A costs, in concert with declining revenues, he explains. “Their efforts always lag the economic cycle.”
Still, within the 50 industries surveyed, several firms excelled at cost control. Not surprisingly, the leanest operators make it a priority at every point in the business cycle. Take Kinder Morgan Energy Partners, a pipeline limited partnership with a five-year CMI of 43.0 compared with a median in the oil and gas (pipelines) category of 79.4. Says C. Park Shaper, CFO of the Houston-based firm, “The bottom line is that we are very cheap.” Regardless of the economic environment, he notes, “no one flies first class, we don’t advertise, and we don’t have excessive executive pay.”
In fact, Shaper notes, the company’s CEO and vice chairman receive $1 each in annual salary and nothing in bonuses. Instead, as partners, they receive a share of all profits on a quarterly basis — a requirement that demands a stable cash flow. “The partnership structure provides a lot of discipline,” says Shaper. So does the budget process, which permits only costs “integral to the operation of our pipelines.” He is so confident of Kinder’s ability to keep those costs in check that he publishes the annual budget on the company’s Web site.
At Six Flags Inc., CFO James Dannhauser also points to the budget process as key. There, the five-month effort is focused on “comparing costs on a park-to-park basis,” looking for best practices that can be leveraged companywide. With 39 parks, he says, realizing economies of scale is a major priority for group purchases. “And it’s not just with, say, food,” he says, explaining that economies are also sought in “what’s typically seen as fixed costs, such as insurance.”