Five keys to making intelligent, strategic and sustainable spending cuts.
A McKinsey survey questioned executives from a range of industries and regions, to find out “What worked in cost cutting – and what’s next” – here we distil key insights into five top tips.
Know the key factors for effective cost cutting
McKinsey’s survey found that “top-management support”, “clear targets” and a “clear, well-planned approach” are the three top factors for meeting cost cutting targets. Companies that failed to cut costs cited an “insufficient fact base to make decisions”. Fact-based research and clear planning and direction by top management are crucial elements of effective cost cutting; vague management requests to cut costs rarely suffice.
Take a targeted approach for sustainable cuts
Of McKinsey’s respondents, those who predict that cuts are sustainable over time “are more likely to say their companies chose a targeted approach”. Across-the-board cuts may be easier and ‘fairer’ – because they don’t single out specific business units – but such a sweeping approach could create quick fixes that aren’t sustainable in the long-term and could harm productivity. A planned approach with specific goals is more likely to result in sustainable cuts.
Think where and why
75 per cent of McKinsey’s respondents “whose companies have taken a targeted approach to cost cutting” made cuts in “Operations”, in contrast to 33 per cent in “Marketing and sales”, 32 per cent in “IT”, and 13 per cent in “R&D”. McKinsey comments: “Respondents who think cutbacks will be sustainable are more likely to say their companies focused cuts on operations and less likely to have targeted marketing, IT, and R&D. This perhaps reflects a view among executives that is also seen in other surveys: that functions such as R&D, marketing, and IT are critical drivers of growth.” (Cuts may be viable in these areas but their sustainability should be considered when planning.)
Be strategic about procurement
54 per cent of McKinsey’s respondents are planning cost savings through “strategic sourcing or procurement effectiveness initiatives”. ‘Strategic sourcing’ is a procurement process that pursues continual improvement of purchasing activities, incorporating steps such as assessment of current spend, review and identification of suitable suppliers, development of a sourcing strategy, supplier negotiation, implementation of new supply structure, results tracking, and the restarting of the entire process from step one. ‘Procurement effectiveness’ incorporates strategic sourcing, as well as factors such as process improvement, people and skills development, and technology development.
Focus on organisation and people
McKinsey notes that “executives who describe their companies’ past approach to cost cutting as both targeted and sustainable are even likelier to be focusing on organisational effectiveness than are other executives”; “57 per cent of all executives say their companies will focus on organisational effectiveness, including talent and capability building, as an operational priority in the coming months”. This suggests that the most intelligent and prudent firms proactively develop the relevant capabilities of their people.