Recession of 2009 Will Spur Companies to Drive Profitable Growth
Driving profitable growth will remain a top priority for financial executives over the next twelve months, but due to current economic turbulence the playbook for achieving profitable growth will change. The “investing for revenue” approach of the past will be balanced with an aggressive reassessment of all OpEx spend with an eye toward dramatic productivity improvements that also return unprecedented year-over-year reductions in operating expense.
Those are the key findings from a recent Market Strategy Group survey conducted with senior financial executives from Fortune 1000 companies representing nearly $180 billion in combined annual revenues.The companies are market leaders in industries including consumer goods, business services, financial services, healthcare, manufacturing, publishing, telecom, and technology.
Study results indicate that almost 90% of companies consider profitable growth a top priority over the next 12 months. For over 70% of the firms polled the path to growth involves renewed focus on worker productivity. Almost two-thirds seek cost reductions that exceed last year’s cuts.
High-Impact Opportunities
Discussions with respondents and other executives show trends that reveal a focus on two key areas of savings:
- Sales and Marketing Spend: Accounting for roughly two-thirds of SG&A costs and as much as 15% of revenue, sales and marketing expenses are a natural target of cost reduction efforts in trying economic times. Many organizations attack this lucrative pool of savings by cutting across the board in media spend, promotions, product development, headcount, or all of the above. Unfortunately, this approach usually reduces revenue along with expenses. Better results arise from more targeted cuts that keep revenue stable, or that can be prudently re-invested to gain a 5-10% revenue lift. Winners recognize that not all cuts are created equal when it comes to sales and marketing, and that aggressive yet careful restructuring and re-allocating leads to superior results.
- Indirect Operating Spend: While only a third of respondents see indirect spend as a priority source of savings, those who do focus on this area report significant savings. This often neglected cost category is about much more than paper clips. Executives report literally millions in potential savings on such categories as services, travel, computers, and other below-the-line items. Careful sourcing, aggressive re-negotiation and other steps – often beyond what internal staff is comfortable seeking – can pay off in spades.
Impediments to Success
Executives in the survey do see significant obstacles ahead in pursuing the cost reductions central to profitable growth. Fully 68% cite “organizational inertia” as an obstacle while 61% cite “limited bandwidth.” In effect, while more than nine out of ten respondents project significant savings from cost reduction efforts, roughly two-thirds say they lack the internal capability to achieve those reductions.
While significant, the challenges are not insurmountable. Companies seeking high performance will devise workarounds to break through the inertia.
How to Succeed
Whether the focus is on indirect spend or sales and marketing OpEx redirection, executives often find it easy to get incremental change but difficult to achieve breakthrough results. While there are no silver bullets, our clients and respondents do suggest several key principles that significantly increase the odds for dramatic cost reduction success:
- Be Autocratic: All managers have a vested stake in protecting their future spend and they are always enthusiastic about making cuts elsewhere in the organization. Human nature? Absolutely. Productive? Unfortunately not. It leads to the time-wasting deadlocks that today’s economic times cannot allow. While we all feel better when aspirational targets are set and met through a cordial consensus-based dialogue, in today’s climate it’s just not a realistic or workable approach. Action: Set the targets top down and make them doubly aggressive.
- Get Objective Outside Help: Hate consultants? You’re not alone. But on rapid high-stakes cost cutting that preserves revenue potential, your team doesn’t have all the ideas or answers. And they lack the objectivity to make it happen. Find a responsive outside firm. Use a fee contingency model if you prefer to tie fees to real cost savings, but don’t skimp on external help if you want to save big and move fast. Action: Target third-party external advisors who understand revenue attainment, not just cost cutting, to help you get it done.
- Figure Out Where to Stop Spending: One client with global markets asked us: “What if we really slowed market spend in (mature) western Europe for 18 months so we can spend more on developing eastern Europe AND keep OpEx in the entire European theater flat? How fast would we lose revenue in Western Europe?” Our analysis suggested that the reduction of market spend in mature markets could occur without adverse impact on revenues. But the client’s sales and marketing team was understandably reluctant to even consider it. They had an inbred belief that if sales and market spend in mature markets slowed, it would be fatal to revenue. Challenging the conventional wisdom – asking what will happen if we halt or slow this spend or that spend – is central to significant breakthrough. Action: Investigate all the sacred areas of spend that absolutely must continue “because they always have” and pick the ones that MUST abate for the time being.
About Market Strategy Group
Market Strategy Group helps clients succeed in markets by identifying the best opportunities for growth and the best avenues for establishing the most efficient underlying cost structures. For more information on our current assistance to clients seeking to drive optimal sales and marketing spend and indirect spend, please contact joel.krauss@mkt-strat.com. We will meet with you at our expense to help you size the potential savings you should be achieving.