Companies’ cost-cutting strategies are missing the mark

Good news: Most companies no longer look at cost-cutting solely as a means to survive. It’s moreso a way to drive growth. Now here’s the bad news.

Turns out that many cost-cutting strategies are simply not working.

Last year, 48% of companies’ cost initiatives failed to achieve the companys’ goals, according to Deloitte’s recent report (PDF) on cost improvement practices and trends in the Fortune 1000. And that percentage just been getting progressively higher. In 2010, 37% of businesses reported failed cost initiatives, and only 14% did in 2008.

What’s the issue? Respondents of the survey saw two things mainly: 74% cited a lack of understanding about why the company needs to cut costs and 73% cited an “erosion of savings” due to cost-cutting initiatives that were not feasible or sustainable.

But that’s not all. A fundamental problem is that companies are focusing in on cutting costs in the same areas every year, and using the same methods to cut costs, including:

• administration costs (75% reported focusing on this area)
• operations costs (67%)
• process streamlining (54%)
• organizational streamlining (50%), and
• external spend reduction (41%).

Where to go from here

The next logical question is, of course, “What can we do?”

Respondents from the report said they plan to overcome the barriers by focusing on change management, clear definitions of specific goals and objectives and better communication.

For companies who are recovering from the recession and are now ready for growth, Deloitte suggests:

• Transforming the company’s operating model
• Optimizing business processes
• Fine-tune your staff structure, and
• Fuel growth through savings.

And here’s another good tip: Avoid a big investment for cost-reduction strategies. It may be simple advice but you’d be surprised how often a good idea turns bad when too much money is spent on the execution.

For example, let’s say your company has no designated purchaser and it wants to cut costs by centralizing purchasing (have one person receive requests from different departments and then contact vendors to get the best deals).

There may be an initial desire to go for an outside hire with loads of purchasing experience in order to speed up the effectiveness of this plan. But instead of going with an outside hire, try to fill the position internally first. If you can find an employee with purchasing experience or a sincere desire to learn how, you’ll save tons on recruiting and achieve the same result.