Global Economic Watch


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  • Stategic Cost Cutting as a Means, Not an End

    Karl Stark and Bill Stewart Co-founders, Avondale Strategic Partners , seem skeptical about any strategy that is touted as increasing profits while cutting revenues. And so they are wary of cost-cutting as a path toward growth. At Inc. , they share three questions that executives should ask when embarking on a cost-cutting plan: 1. What costs and investments are required to maintain the existing or projected revenue base? 2. Which costs or investments will impact revenues in future years – positively or negatively? and 3. Will your cost cutting necessitate further cuts in the future, creating a snowball effect? When cost reductions cut to the bone and beyond, the inevitable result is a snowballing sequence of profit declines. The lack of critical sales, marketing, R&D, and other investments will likely reduce revenues, which leads to additional cuts. As the pace of revenue declines increase, profits will eventually evaporate and the business will not have the ability to recover. In short, Stark and Stewart recognize the need to cut costs. But if cost-cutting is the goal rather than growth, then, as many newspaper executives have found out over the last decade, the need for cost cutting may never end. Read You Can't Cut Your Way to Growth here .
  • McKinsey: Strategies for Lasting Cost Cutting Measures

    The recovery may be underway, but that does not mean that companies that instituted cost-cutting measures over the last 2 years are ready to look the other way and just let their expenditures return to pre-recession levels. They have their work cut out for them, according to McKinsey 's Ankur Agrawal, Olivia Nottebohm and Andy West , who argue in the McKinsey Quarterly that most cost-cutting measures have limited lasting power. They write: Many executives expect some proportion of the costs cut during the recent recession to return within 12 to 18 months —and prior research found that only 10 percent of cost reduction programs show sustained results three years later. On either schedule, any programs initiated in the early months of the downturn are already beginning to fail—just as savings would be most useful to finance growth. Sales, general, and administrative (SG&A) costs prove to be particularly intransigent. While manufacturing efficiencies have enabled an average S&P 500 company to reduce the cost of goods sold (COGS) by about 250 basis points over the past decade, SG&A costs have remained at about the same level (Exhibit 1--below). So to fight the erosion of cost-cutting gains, the authors argue that leading executives need to be involved, but since the most effective cost cutting measures take place at "very small, very practical" levels, companies need to utilize clear benchmarks. And most important, efforts to reduce costs must be tied to larger strategic initiatives. Read Five ways CFOs can make cost cuts stick here .
  • Booz & Company's Mainardi on Cutting Costs Strategically and Quickly

    Cost cutting has been a dominant theme in board rooms for at least the last year. But Cesare Mainardi --managing director of Booz & Company and co-author of Cut Costs + Grow Stronger --says a lot of companies do not know how to cut costs strategically. If done right, Mainardi says, companies can implement aggressive cost cutting rapidly. He describes appropriate cost cutting strategy, and details his notion of the right process, in this interview with Harvard Publishing (the publisher of his book):
  • Goldman Sachs Employees' New Accommodations

    If you are visiting Lower Manhattan, you could stay at the Ritz Carlton Battery Park, where you will have fabulous views of the Statue of Liberty, 400 thread-count linens, and a telescope in your room. Or you could stay at the nearby Embassy Suites, where your view will be of Jersey City, your cotton-poly blend sheets will have a thread-count of 250, you will get free Budweiser at happy hour, and your nightly cost will about half the rate of the Ritz. If you are an employee of Goldman Sachs , you'll now be staying at the Embassy Suites, according to an article in today's Wall Street Journal . Goldman Sachs also owns the Embassy Suites hotel, so it has some extra incentive to put up its employees there. But the cheaper hotel rooms are just part of an overall cutback in spending: Goldman people working late can only put in for $20 in dinner costs; the old limit was $25. If Goldman employees want to take a hired car home, they have to wait until 10 p.m., an hour later than before. The firm recently slashed the number of computer printers at its New York headquarters, frustrating employees who now have farther to walk in order to retrieve pitchbooks. "These firms don't want to do anything that harms their ability to produce revenue, but in this environment they have to be incredibly mindful of protecting shareholder value," said Glenn Schorr, an analyst at UBS AG. "If that means buying a hotel like the Embassy Suites and having employees stay there, so be it." Goldman, which accepted $10 billion in federal bank-rescue funds last year, has also taken great pains to not appear profligate, with all the intense government scrutiny over banks' spending on luxuries. It called off its big Miami hedge-fund conference scheduled for the first week in March and moved a three-day technology conference in late February from the Mandalay Bay casino-resort in Las Vegas to the San Francisco Marriott. You can read the full article here .