finance cost reduction

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With a relatively poor economy, many companies are now looking to enhance their bottom line through cost cutting. Often, the finance function is one part of G&A subject to this cost cutting exercise. This presentatio shares with you how companies are looking at finance and evaluating where and how much to cut.

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  • 1. Lean But Not Broken Achieving Sustainable Cost Reduction in FinanceOctober 2, 2013

2. Agenda Review Cost Management Survey Role of CFOs/Finance Approach Size of the Opportunity Challenges and Lessons Learned Q&A1 Deloittes Business Class Deloitte LLP and affiliated entities.. 3. 3rd biennial cost management survey Overview We conduct primary research on cost management trends and state of the market through annual cost survey and related conferences, to assess clients needs, priorities and challenges, and to understand keys to success in cost management programs Our 2012 survey is an in-depth follow-up to our breakthrough cost-improvement surveys conducted in 2010 and 2008 The 2012 report included 153 senior executives from publicly-traded or private companies with annual revenues in excess of $1.5 billion The Survey looks at the latest trends in cost improvement and offers practical and demonstrated insights to help companies achieve and sustain improved financial and business performance2 Deloittes Business Class Deloitte LLP and affiliated entities.. 4. Companies continue to operate in a New Normal: reducing costs while maintaining revenue growth expectations Survey responses 2010 vs. 2012 73%Macroeconomic Factors Political/Regulatory39% External Risks (% Reponses)24%58% 25%Commodity Prices19 19 21 22 90%59%Balance Sheet Mgmt.201020126Cost Reduction Product Profitability Revenue Growth23 20 36Strategic Priorities (Avg. 100 point allocation)Growth76%Likelihood of cost management actions in the next 24 months76%Growth expectations (% Reponses) 80%Cost Mgmt. Outlook (% Responses) Source: Deloitte 2012 Cost Survey Preliminary Results3 Deloittes Business Class Deloitte LLP and affiliated entities.. 5. Targets for cost reduction programs have tempered but failure rates of cost programs have increased Annual cost reduction targets Greater than 20%10% to less than 20%0% to less than 10%19%11%36%35%37%52%Cost savings realization Did not meet goalsMet goalsExceeded Goals4 Deloittes Business Class201220102010201248%36%35%33%29%19% Deloitte LLP and affiliated entities.. 6. Focus of cost programs has shifted to a current focus on save to grow compared to save to survive post-recession Drivers of cost management2010To gain competitive advantage over peer group 52% Significant reduction in consumer demand201265%1 42%24%2 Decrease in liquidity and tighter credit33%Required investment in growth areas33%Unfavorable cost position relative to peer group12%54%3 22%35%4 Changed regulatory structureOther17%35%3%5%Cost management insights on drivers to cost management programs: 1 Gaining competitive advantage over peer group remains a major driver reflecting a save to survive mentality 2 Reduction of programs from liquidity and consumer demand decrease focus by 20% on average 3 Re-investment in growth areas has seen a major jump of 21% over 2010 4 Complex regulatory environment is now a significant driver for cost management increasing by 18% over 20105 Deloittes Business Class Deloitte LLP and affiliated entities.. 7. But failure rates of cost programs have increased showing ineffective scope, approach and/or implementation challenges of cost programs Insights from Deloitte cost surveys over the last six years 15.0%% GDP Change% Unemployment10.0% 5.0% 0.0% 2012 Q22012 Q12011 Q42011 Q32011 Q22011 Q12010 Q42010 Q32010 Q22010 Q12009 Q42009 Q32009 Q22009 Q12008 Q42008 Q32008 Q22008 Q12007 Q42007 Q32007 Q22007 Q1-5.0% -10.0%20082010Pre-recession economic climate with a few signs of economic crisisFinancial crises resulted in tighter credit and a reduction in overall demand2012 Recovery has been slow and there is prolonged uncertainty in the business climateTypical cost action from survey resultsCompanies focused on continuous improvement programs before the downturnCompanies focused on cost programs aimed at low hanging fruit to recover from reduction in consumer demandCompanies still focused on tactical changes mostly by targeting processes and organization streamliningReported cost program failure rate17%34%47%Broad restructuring and liquidity improvementsStructural costs and business model changes to gain efficiencyStructural cost and business model changes to fuel growthActual response neededDeloitte Cost Management Survey6 Deloittes Business Class Deloitte LLP and affiliated entities.. 8. What is the CFOs/Finance role in cost reduction? Increasingly the CFO is expected to lead large scale cost reduction programmes to which finance must make a proportionate contribution whilst maintaining finance as a critical control function Leading the charge The CFO is increasingly at the heart of qualifying and measuring the results of Enterprise wide cost reduction programmes, providing financial leadership in determining strategic business direction vital to future performance (Strategist) Using finance acumen and discipline, the CFO can drive that same discipline across multiple business functions to promote the behaviours required to successfully execute against cost reduction objectives (Catalyst)Finance is no longer ring fenced from cost reduction targets. Despite the wave of regulation within the industry, Finance, like other functions is expected to do more for lessBy being a contributor to cost reduction efforts, finance leadership build credibility with stakeholders across the business, facilitating their role as strategist and catalystSetting A Good Example: Lean But Not Broken Scrutiny over Finances value for money has never been more intense with CFOs looking to deliver higher quality services through increasingly low cost business models that balance capability, cost and service to fulfill finances core responsibilities (Operator) Finance functions are taking on increasingly high percentile cost challenges, requiring a lean organisation, yet one that does not jeopardise the quality and integrity of statutory, regulatory and other stakeholder reporting (Steward)7 Deloittes Business Class Deloitte LLP and affiliated entities.. 9. How is successful, sustainable cost reduction delivered? To help meet the challenges of cost reduction in finance, there are four principal types of initiatives that span the ambition and level of sustainability of delivering finance cost reduction Operating Model & Organisation Alignment: Highest benefit and sustainability with corresponding complexity to implement Infrastructure Rationalisation: Great efficiency benefits derived from streamlining finances main and supporting systems Business Process Optimisation: Streamlining the cost base by doing what you do efficiently and effectively External Spend Reduction & Demand Management: Often one-off, low complexity to implement with limited sustainabilityInitiatives adopted by Finance to reduce cost Initiatives keyEstablish/extend use of shared service centresOperating Model & Organisation AlignmentExtend outsourcing/off-shoring arrangementsIncreasing benefit & sustainabilityInfrastructure Rationalisation Business Process Optimisation External Spend Reduction & Demand ManagementConsolidate functionsTransfer non-core Finance activities Review role & scope of Finance Standardise and automate finance processes Increase spans of controlImplement a common financial back-office Rationalise and cleanse source systems and dataRedesign processes to increase capacity/reduce cycle timeDe-layer organisationStreamline reporting infrastructure Eliminate waste and low value activitiesImplement ERP enhancements to eliminate manual workarounds Introduce/extend roll-out of self-service models Improve governance and control effectivenessReview finance project portfolio Improve utilisation and/or productivityIntroduce cross-charging for servicesReduce the number of temps/contractors Close all non-core vacancies and absorb workCreating a Low Cost Operating Model Streamlining the Cost BaseBudgetary Quick Wins ApproachesIncreasing implementation time & cost8 Deloittes Business Class Deloitte LLP and affiliated entities.. 10. How are finance cost reduction approaches applied? Cost reduction initiatives align well to various approaches, each of which spans the scale of sustainability and ease of implementation based on a number of key considerations Focus areaKey considerations Represents a relatively low cost, low complexity implementation Should be delivered through good business as usual budgetary disciplineBudgetary quick wins Sustainability of cost impacts is usually poor as costs tend to creep back in to the organisation (cancelled vacancies are re-opened in next forecasting year, contractors re-engaged) Inter-relationship of costs is often an issue for example, planning to reduce travel expense and telephony expense in the same period Suspending or cancelling change programmes as a result of reviewing the finance project portfolio often has the potential to put core finance requirements at risk (i.e. meeting statutory and regulatory requirements) Requires a focussed but moderate investment to deliver desired outcomesStreamlining the cost base Examines the cost base by business unit, function and processes Achieved primarily through levers such as structural consolidation (centralisation and rationalisation of similar functions across the organisation) and end-to-end reengineering (generation of savings through de-duplication and process improvement, removing waste and surplus headcount) Operating model changes offer the greatest and most sustainable cost reduction benefits Represents a significant investment in reducing the cost base and presents the greatest complexity to implementCreating a low cost operating model Requires management to develop a strategic top-down view of cost reduction opportunities based on organisational priorities Reducing the cost base through structural changes requires careful management of risk and resistance in order for the programme to suc