Cost management and improvement trends in the Fortune 1000

The cost/growth paradox

According to the 210 senior executives of US-based Fortune 1000 companies who participated in this year’s cost management survey, annual revenues are growing and the trend is expected to continue for at least the next 24 months.

Sales growth is the top strategic priority, cited by 51 percent of respondents–up from 36 percent in our previous survey. Organization transformation and talent is also a top strategic priority, consistent with a growth mindset since having qualified workers and deploying them effectively is a key to successful growth.

Despite these strong growth signals, balance sheet management is also viewed as an increasingly high priority, more than tripling from seven percent in our previous survey to 25 percent this year. This is somewhat surprising, since a focus on balance sheet management issues—such as working capital, treasury, credit, and cash flow—tends to be associated with business distress, not aggressive growth.

Similarly, the vast majority of surveyed companies (88 percent) expect to pursue cost improvement over the next 24 months regardless of whether their revenues are increasing or decreasing.

Meanwhile, cost improvement targets continue to rise, with most companies (59 percent) now pursuing targets of 10 percent or more—and 33 percent of companies pursuing targets of more than 20 percent. However, the percentage of cost management programs that failed to meet their targets also rose significantly, from 48 percent in our prior survey to 58 percent this year.

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Global economic factors are a key driver

Macroeconomic concerns/recession is viewed as the top external risk over the next 24 months. Other top external risks that fuel uncertainty are commodity price fluctuations and digital disruption.

The save to grow strategy that emerged in our previous survey (i.e., using cost improvement to fund growth initiatives) remains prominent; however, it might now be viewed as table stakes for “thriving in uncertainty,” which takes the idea of simultaneous growth and cost improvement to a whole new level.

The top cost improvement drivers are competitive advantage and required investment in growth areas, which are both growth-oriented business factors. However, the next highest drivers are “international portfolio performance” and “reduction in consumer demand,” which are more defensive in nature.

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Zero-based budgeting: breakthrough or passing fad?

Zero-based budgeting (ZBB) has been a hot topic of conversation in the field of cost management; however, only 16 percent of the companies we surveyed used ZBB in the past 24 months. Cost reduction program failure rates are higher for companies that conducted ZBB (65%) as compared to companies that did not conduct ZBB (57%). Digging deeper, companies surveyed that used ZBB reported encountering significantly more barriers to effective cost management as compared to companies that did not use ZBB.

Looking ahead, the number of companies surveyed that plan to conduct ZBB efforts in the next 24 months is less than half the number that reported using it in the past 24 months, down from 16 percent to only seven percent. These numbers suggest that ZBB might be a passing fad whose time has already come and gone.

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Could “thriving in uncertainty” be a permanent business requirement?

When pursuing cost management and cost improvement, companies have traditionally fallen into one of three categories:

1. Distressed
2. Positioned for growth
3. Growing steadily

However, today’s cost/growth paradox seems to be giving rise to a fourth category that we call “thriving in uncertainty.” Tackling this new cost management scenario requires a new approach.

Does the strategy of “thriving in uncertainty” reflect a new and permanent state of cautious optimism? Or is it simply a by-product of today’s global macroeconomics–and ultimately just a temporary stepping-stone to one of the three traditional cost management categories? Only time will tell.

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