When Cost Cutting Gets Expensive

Bron: ww2.cfo.com

Restructuring charges are commonly 125% of the savings actually realized, which makes cost cutting a losing proposition.

During periods of slow economic growth, companies instinctively move to curtail their costs, often via strategies shaped by the CFO. Yet many cost cutting programs actually cost the company money.

Too often, these massive investments in cost cutting fail to deliver the intended result. Our analysis found that restructuring charges are commonly 125% of the savings actually realized, which makes cost cutting a losing proposition.

There are instances when the ratios are actually far worse. We know of one consumer products company that invested $125 million in a cost cutting program that delivered just $20 million in cost savings. Compounding the problem, costs that were successfully taken out via cost cutting programs tend to creep back in before long, making the entire effort an expensive exercise in futility.

The implications are staggering. In a persistently sluggish economy, companies that repeatedly but ineffectively cut costs can do serious harm to their bottom lines (146 of the Fortune 500 missed earnings estimates last year). Further, after diverting company resources to cost cutting, companies have less money and talent available to drive the top line. Our scan found that the Fortune 500 posted 0% cumulative revenue growth last year.

 

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