Scorched-earth cost-cutting has returned with a vengeance of late. The individual situation varies, of course, though in most cases the companies in question are struggling to meet short-term commitments to earnings targets or ensure their survival.
Some of these ﬁrms were knocked off course by sudden market changes, as those in mining or oil and gas have experienced. Others underestimated the severity of structural changes, such as media ﬁrms bleeding advertising and subscription revenues. Incumbent ﬁrms in several industries, like grocery, are contending with new competitors that have lower-cost business models. And all face the possibility of lower economic growth for some years to come.
Without question, continual cost and productivity improvements remain fundamental parts of any ﬁrm’s success. A low-cost position wins in nearly every industry, as it allows a company to outearn and out-invest its peers for growth. Bain & Company analysis shows that top performers in total shareholder return focus on cost, not just revenue growth, no matter which phase of the economic cycle.
Yet all too often, cost-cutting programs today rely on a blunt, rote approach that can severely limit a company’s chance for recovery and future growth. To start, cost target-setting often relies heavily on external benchmarks with little regard for their relevance to the company’s distinctive ways of creating value. Clumsily applied benchmarks can lead to all functions and activities being treated as roughly equal in importance to the cost program, even if some activities are more critical than others to the ﬁrm’s chosen strategy. As a result, these programs inevitably cut organizational muscle, not just fat. For example, slashing customer service could provoke more customer churn. And executives, in their haste, sometimes gloss over the chance for productivity gains—getting more out of existing equipment or processes by ﬁnding and clearing bottlenecks.
Top-down mandates to fill the savings hopper have an even more insidious effect: They undermine people’s motivation and accountability for both sustaining and growing the business. An exclusive focus on efﬁciency might work for, say, mining companies whose source of competitive advantage is scale. But it can severely damage companies in industries such as retailing and hospitality, where advantage stems from an excellent customer experience.
Companies in distress—and those trying to reposition themselves for future growth—need more than a straight cost program. They need an accelerated transformation—an urgent, cross-functional effort to deliver cash savings and topline growth. And they will want to sustain the gains. Why put a company through a major overhaul of its cost structure while missing the opportunity to install the sustaining mechanisms that turn cost management into a strategic advantage?
Transformation requires careful planning and orchestration, yet at a fast pace. In our experience, a few practical guidelines can help senior leaders balance the short- and long-term concerns in order to achieve a successful transformation.