Cost cutting: under a new light?
While the coronavirus rages the need to cut costs has become a real means of survival for business, writes Pippa Stephens.
Hundreds of thousands infected; tens of thousands dead. Headlines about the coronavirus are not hard to come by.
Measures to contain it - primarily social distancing - are pushing the world’s economy into recession.
UK regional airline Flybe has folded; Carluccio’s faces collapse; M&S, Next and Primark warn of serious consequences.
But these household names are not the only ones facing difficult times.
Along with the virus, the global economy has been further hit by Saudi Arabia and Russia’s price war over oil. Already clobbered by low interest rates, the financial services sector has been forced into making tough decisions.
As investors predict ‘corporate Darwinism on steroids’, for many the only way to survive is to cut costs.
The pressure on bank liquidity due to the coronavirus has forced the hands of regulators, including the ECB and PRA, to suspend dividends and buybacks on ordinary shares until the end of 2020.
This includes not paying cash bonuses to senior staff, which in turn will drive other cost-cutting across the banking sector.
In ICAEW guidance to financial services on the moves, Philippa Kelly, Head of the Financial Services Faculty at ICAEW, said “The regulator has made it abundantly clear that banks and insurers should put households and businesses first to make sure the economy remains as resilient as possible in the coming months.”
Considering regulatory pressures, cost-cutting measures are “especially important” at the moment according to Germany’s Commerzbank, when it has not only the pandemic and low interest rates to contend with, but stiff competition, too.The bank recently announced the job cuts of 4,300 personnel, and the closure of 200 of its 1,000-odd branches. It is also set to merge with its subsidiary, the online bank Comdirect.
“Commerzbank’s cost management strategy builds on focusing on the core business with our clients, while at the same time improving efficiency in the back office by means of digitalization and near shoring,” a spokesperson for the bank told the ICAEW.
As part of the strategy, 6,000 of the bank’s 40,400 full-time employees were organised into new, “agile teams”, where business and IT staff work more closely together to develop new products.
The move is part of the bank’s drive to become a mobile-first technology company, after identifying financial technology as a significant competitor.
The merger with Comdirect aims to help it move in this direction, too.
Alongside the banking sector, the energy industry is also facing hard times at the moment.
Hit by a plunge in oil prices and with demand crippled by coronavirus, American oil giant Chevron has announced plans to cut its capital spending by 20 per cent, or $4bn [£3.2bn].
In an email to the ICAEW, Chevron spokesman Sean Comey said the company would also be terminating its share repurchase program. Along with the capital spending reduction, such measures were a “sacrifice in the short term in response to the market”, he said.
It is no stranger to cost-cutting measures; in the middle of an oil slump the company laid off 1,500 employees, or two per cent of its workforce, in 2015. When deciding how to cut costs today, Mr Comey said, the price of oil marked a “signal for less investment”. “Markets respond to those signals also, but we can't predict how long that will take. So we control the things we can control.
“We've seen situations like this before. We know what to do and we're doing it. Our financial priorities are unchanged,” he added.
The measures would not impact Chevron’s drive for equal pay between men and women, he said.
From multi-billion dollar companies in America to local clothes shops, the pandemic is disrupting everyone.
The manager for Germany of an international clothing brand shared how he and his finance team are cutting costs in response to the coronavirus, on condition of anonymity.
All of Germany’s five stores are closed, he said, as they are around the world - in locations from Australia, to Canada, the US and Asia.
Employees, taxes and rents are its main sources of expenditure, the manager - also a founder - said.
The majority of the brand’s staff in Germany have to stay at home, due to store closures. The company is adding up to 20 per cent to the German government’s safety net of a maximum of 67 per cent of pay for those employees who have their hours cut.
This safety net is Germany’s long-standing Kurzarbeit scheme, which replaces some of the lost income of workers whose employers are hit by a downturn.
It is in negotiations with the landlords of its various stores to defer its rent payments - some 80,000 euros per month in total - to the end of the year.
And the founders are taking 50 per cent pay cuts, he said. There are no pre-determined bonuses, but senior management would “see at the end of the year”.And with factories in China and Italy, what will happen with supply is “still something we have to figure out,” he added.
But lessons from a big drive to cut costs at the fashion retailer in 2016 will come in handy now.
When a lull followed rapid growth, the chain found it had employed too many people, and had to make “very heavy” personnel cuts - up to 20 per cent.
Those in need, identified by area managers, were given extra financial support during the cuts, he said, and founders took pay cuts too.
The source said: “The most important thing is to communicate. Sometimes you have to cut costs and let people go. It is a terrible situation. “We really encouraged people - if you’re not happy, then speak about it.”
With the right communication, he said - in person, rather than email - staff came to understand the need for the cuts. Such lessons are likely to be helpful in the months to come.
Today’s climate presents an indubitably extreme environment for businesses to try and survive in.
But there are lots of other reasons businesses have to cut down on costs.
Rick Payne, ICAEW Business and Management Faculty Technical Manager, outlines the following scenarios:
- A shrinking market;
- Undercutting by competitors;
- New technologies enabling automation and new business models;
- Business becoming bloated during successful times;
- Reorganising due to Brexit.
Pension deficits and debt can also force businesses to slash their expenditure; as was the case with BT.
The company was valued at £8bn in 2008, and saved £5.5bn in the years leading up to 2016, when it recorded a valuation of £40bn.
BT achieved such a turnaround by reducing its cost base through a range of targeted measures including streamlining and staff reallocation, CFO at the time Arthur Yu told the ICAEW’s Business and Management Faculty.
Mr Payne advised that in “normal times” if businesses are interested in costs but also growth, they can:
- Carefully examine their strategic priorities;
- Analyse cost drivers;
- Set up a structured cost reduction program
- Train people in cost reduction;
- Work through their priorities;
- Look to automate;
- Invest to save;
- Redirect resources to growth areas.
If the cuts are urgent, said Mr Payne, blanket measures such as a headcount freeze can be very effective.
“These are often criticised as they can damage the business, reduce morale and stop potentially great ideas in their tracks. “However, people are very adaptable and when confronted with constraints they can be very innovative and prioritise,” he said.
Clear direction and communication from executive management are important here, added Mr Payne.
Another important aspect is the budget, he said. “It can say a lot about costs and strategy.
“In theory the budget should reflect strategy, but often if you take the budget and work out what it says about strategy you get a very different answer.”
Close eye on costs
Zero based budgeting [ZBB] - where organisations look at every activity anew - became popular a few years ago, when mobile phone company 3G used it after acquiring businesses and taking out costs, said Mr Payne.
But before the crisis ZBB was beginning to come under scrutiny for potentially leading to dysfunctional behaviours, a lack of innovation and insufficient marketing, restricting growth, he said.
Regardless of the strategy, it is important to be ready for conflict, he said.
“Cost cutting will get emotional. It impacts people’s livelihoods, their power, status, the nature of their job and whether they can follow their ideas,” said Mr Payne.
Sobering thoughts, then, at a sobering time. But the store franchise’s success in its 2016 cuts shows that with decent communication, even the most unwelcome messages can be understood, and even supported.
And hopefully, strategic cost-cutting can mean those in the financial services sector will pull through this time, and come out of the other side.
About the author
Pippa Stephens is a freelance journalist in Berlin with over a decade of experience at FT business magazine Pensions Week, BBC News, BBC Business and the World Service.