2004
Companies' plans to manage costs are not enough to meet challenging cost pressures - driving 'UK plc' into the red
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01 June 2004
This is the alarming conclusion of a cost management survey among financial directors of FTSE 350 companies by PA Consulting Group.
UK plc's profitability has declined over the last five years, with net profit as a percentage of turnover falling from 10% in 1999 to negative figures at the start of 2003. Against this backdrop, 77% of Financial Directors in PA's survey expect cost pressures to rise, with the most serious cost pressures (taxation, government regulation and employment costs) the most difficult to control - a situation unlikely to change as Peter Sirman, a Member of PA's Management Group and co-author of the report, says:
"Today's cost pressures are different to those experienced by companies in the past as they are caused by long-term structural and economic trends rather than short-term monetary and fiscal cycles."
While businesses have been actively looking for ways to reduce costs - over 87% or companies have completed a cost reduction initiative in the past two years - PA's survey reveals a worrying mismatch between the initiatives UK plc is planning to implement and the initiatives the survey identified to be most effective.
The overwhelming majority of businesses are continuing to rely on tried and tested methods to reduce costs, such as introducing new IT systems (72%), across the board budget cuts (56%) and restructuring (54%). However, PA's analysis revealed that while these traditional approaches can deliver large absolute savings, inherent difficulties built into such initiatives mean they often fall short of expectations and proved to be less successful in the survey at delivering forecast savings. In addition, these traditional initiatives are often non-repeatable, particularly if the organisation has already trimmed down its staff and activities. Conversely, more innovative solutions that fundamentally change the way the business operates were revealed to be the most successful at delivering the full benefits targeted. However, these innovative initiatives such as IT outsourcing, business process outsourcing and the introduction of shared services, are currently only being implemented by around a third of companies (36%, 34% and 32% respectively). As a result, the survey indicates that companies' cost management plans will be inadequate in the face of increasing cost pressures.
Peter Sirman says:
"It's a concern that businesses are planning initiatives better suited to meeting traditional short-lived cyclical cost pressures rather than a longer-term change. These will not be sufficient to preserve companies' profitability and competitiveness in the long-term."
Companies need to embrace these innovative solutions to preserve profitability in the long-term. As Sirman concludes:
"It is essential that senior executives understand that the business environment has fundamentally shifted and will continue to do so. While there is still a place for traditional methods of cost management, companies also need to adopt more radical solutions if they are to maintain, or even increase, profitability in the face of such competitive pressures. The alternative is to head into the red."
For more information, please contact:
Notes to editors
Press copies
For a full copy of the report - Heading into the red? - please contact Tom Barton, +44 20 7312 4636 tom.barton@paconsulting.com
About the survey
PA Consulting Group (PA), the leading international management, systems and technology consulting firm, surveyed 50 financial directors and CFOs from FTSE 350 companies understand the nature of the cost pressures they faced in the period 2001-2005, and their responses to them. The survey addressed four main questions:
- what are the major cost pressures both historically and predicted?
- what measures have companies implemented to reduce costs?
how effective have these initiatives been?
- how are companies planning to respond to cost pressures in the next few years?
PA: delivering value
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PA focuses on creating benefits for clients rather than merely proposing them. Our work is founded on powerful insights into our clients' issues, and in the private sector in particular, on the need to deliver superior shareholder returns. We help accelerate business growth by developing innovative products for our clients and by the application of emerging technology. We deliver major transformation programs, mobilize human resources, and manage complex IT and technically-challenging programs.
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