Slash-and-burn habit difficult to shake off

By VICKI JAYNE

When managers face economic uncertainty, the knee-jerk reaction is to cut costs. Now it seems this slash-and-burn approach is not only damaging but futile.

Short-term solutions undermine staff morale but rarely tackle the problem - within a couple of years the pruned costs have grown back.

This is revealed in a survey of international companies undertaken this year by PricewaterhouseCoopers.

The first research to test global business sentiment towards today's more volatile business environment, it shows that the lessons of past downsizing splurges have not yet been learned.

Sure, the bulk of respondents (86 per cent) acknowledge that significant short-term cost reduction programmes can be strongly detrimental to staff morale and loyalty.

More than half of them (56 per cent) also agree that obvious cost-cutting is more about impressing analysts and shareholders than improving the business.

Furthermore, two-thirds of respondents believe that most of the costs (and the personnel) taken out of a business during an economic downturn are back within two to three years.

Despite all this, management apparently finds it hard to kick the cost-cutting habit. The report's key findings highlight an anomaly of the sort non-reformed smokers would recognise.

You know cigarettes are bad for you. But today's measurable buzz has more clout than future decades of healthy living.

Yes, respondents know the downsides of downsizing (or dumbsizing, as it has also been described).

"But," says the report, "this knowledge does not stop most companies from making the same short-term cuts they know to be damaging to the longer-term prospects of the business."

Companies get their priorities wrong, say 76 per cent of respondents, in that they are driven by what is easy to measure rather than by what is most effective.

They axe costly parts of the business instead of undertaking a more strategic analysis based on maximising longer-term value.

Faced with uncertainty, management generally opts for the quick-fix solution. Problem is, uncertainty is now a way of life.

Chaos theory, says the report, has become business reality.

"Volatility and unpredictability are facts of life for companies worldwide - illustrated by respondents' lack of agreement over the current economic climate ...

"Our research shows that across industries and geographics, there is no clear view of the market or set pattern to attitudes."

In fact there was a 50:50 split. Half of survey respondents thought they were operating in an economic downturn; the other half didn't.

What PricewaterhouseCoopers set out to test was whether management is meeting the challenge of knowing how to achieve sustainable growth in this unpredictable environment.

Its survey encompassed more than 590 businesses, with turnover ranging from US$500 million ($1075 million) to US$5 billion ($10.7 billion). Geographically, these took in Europe, Britain, the Americas, Africa and Australia.

Interviews were conducted with senior executives, typically at chief finance officer or equivalent level, across a range of industry sectors.

The survey results (outlined in a report entitled Strange Days - Are Businesses Equipped to Catch Opportunity in an Unpredictable World?) uncover the dissonance between theory and reality - a gap between words and deeds.

Good news is the large number of respondents who are conducting spend analyses, who declare businesses should be willing to invest in themselves even in uncertain times, and who see downturns as potential catalysts for positive change.

At the same time, almost 60 per cent of them are undertaking reactive job cutting while even more are implementing freezes on recruitment. They are also deferring what they know is worthwhile investment in IT and marketing.

Australians are particularly active in many cost-reduction areas and significantly above the global average in deferring or cancelling investment.

And New Zealand is no different, says PricewaterhouseCoopers' local auditing and business advisory services partner, Paul Clark.

"Everything in [the report] fits the New Zealand pattern, which is short-term reactive. We have a market that is very much short-term-earnings driven - it doesn't look far enough into the future."

That's not lack of imagination, says Clark. It's more the pressure on local results from overseas owners.

Some costs are not so much removed as displaced. Headcounts may be cut in line with global targets, leaving so few staff that work has to be contracted out, often to former employees, at a higher cost.

Another problem is that new management brooms can sweep through in quick succession and want to impress before moving on.

"You have to hope the market can see through that," says Clark. "Anybody can boost their results by stopping staff replacements or curtailing maintenance programmes."

One area where New Zealand is lagging behind many of the surveyed countries, says Clark, is in the uptake of e-business strategies providing genuine cost reduction.

The trick is to understand which costs add value to the business and which don't.

Effective cost-control programmes tackle good and bad costs in areas ranging from technology (analyse and manage the investment), and workforce (fix processes before firing people), to suppliers, strategy, customers and assets.

The report does not make encouraging reading, says Clark.

"It doesn't provide confidence about where we're going to be in three to five years' time - though perhaps having this sort of information around will prompt companies to look at long-term success stories.

"Instead of having values based on short-term earnings results, they could explain how they are investing in people and in systems that will lead to an increase in shareholder wealth over the longer term."

* vjayne@iconz.co.nz