• Strategy
  • CFO Magazine

Everything in Moderation: Our 10th Annual Cost Management Survey

According to our latest survey, companies have been diligently pruning overhead, leaving them primed to capitalize on an economic recovery.

In telecom, another industry known for lavish spending, the leanest operators have also focused on fixed costs to help exploit growth opportunities. Chicago-based U.S. Cellular Corp., for example, completed a nationwide billing system last year that was largely responsible for a $25 million savings in SG&A in the third quarter of 2003. That, despite an already low CMI in 2002 of 68 percent, compared with an overall industry average of 81. Meanwhile, however, U.S. Cellular is entering the final year of an approximate $400 million upgrade to its network. Says Meyers: “We have to balance out revenue-generating and our cost-related projects.”

That balance is also evident at American Axle & Manufacturing Inc., which recorded one of the automotive industry’s greatest improvements in five-year CMI, reducing it by 721 basis points. “If you don’t focus on taking costs out, you’ll get burned by other factors,” says executive vice president of finance and CFO Robin J. Adams, who is committed to holding all costs steady—except for an annual R&D increase of 10 percent. Still, says Adams, the key to AAM’s business “is the ability to replace the new product portfolio.” And that requires constant investment in new technology and the maintenance of quality equipment. “We are committed to never cutting our product technology,” he says.

Even for utilities, cuts in fixed costs go hand in hand with growth initiatives. Consider $6 billion Sempra Energy, a product of the merger between Pacific Enterprises and Enova Corp. in 1998. Granted, the company’s five-year CMI of 38 percent, compared with the industry median of 64 percent, reflects the basis for the merger, which projected cost savings totaling some $1.2 billion over 10 years. At the same time, says executive vice president and CFO Neal Schmale, Sempra, because of its two California utilities, is also beholden to the regulatory process, which “is very rigorous in terms of cost justification.”

Yet while Schmale says that cost control will remain a priority in 2004, it will also work to complete two LNG (liquefied natural gas) facilities to grow the unregulated side of its business. For Sempra, as for all companies, says Gunn’s Yee, the question is “how to prudently make investments in a way that is scalable and not a huge financial commitment.” But as this year’s Cost Management Survey shows, a growing number of companies besides Sempra now at least have the wherewithal to consider the question.

Lori Calabro is a deputy editor of CFO.

Industry Waistlines
How the CMI* compares in 40 industries, 1998-2002.
Industry 1998-2002
Cost Management
Median (in %)
Advertising, Media & Publishing 77.9
Aerospace & Defense 86.6
Airlines 74.7
Autos & Auto-parts Manufacturers 89.1
Airlines 74.7
Autos & Auto-parts Manufacturers 89.1
Beverages 85.6
Building Materials 86.5
Chemicals 84.8
Computer Software & Services 81.0
Computer Systems & Peripherals 90.2
Construction & Housing 90.2
Consumer Services 75.2
Cosmetics & Personal Care 85.3
Diversified Financial Services 85.2
Diversified Services 89.7
Drugs & Biotechnology 75.0
Electronics & Semiconductors 80.6
Electrical Equipment & Components 86.3
Factory Equipment & Heavy Machinery 87.8
Food & Food Products 90.7
Food Retailers 93.6
Forest Products 86.4
Health-care Providers 95.4
Home Furnishings 88.5
Insurance 89.4
Leisure, Entertainment & Restaurants 73.1
Medical Devices 78.1
Steels, Metals & Mining 88.7
Manufacturing 84.7
Oil & Gas 77.3
Real Estate 42.0
Retail Banking 58.9
Retailers 93.9
Retailers-Specialty 92.7
Retailers-Apparel 89.0
Shipping, Railroads & Air Transport 85.5
Telecommunication Services 81.3
Telecommunication Equipment 85.9
Textiles, Apprael & Footwear 89.2
Tobacco 91.9
Utilities 64.4
Median 82.5


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