the sustainability of the cost reduction process

The Sustainability of Cost Reduction Processes

Overhead Cost Reduction Processes are Important to European Companies

www.expensereduction.comwww.ebs.edu/ime

Imprint

Publisher:Expense Reduction AnalystsSuite 24, 40 Churchill Square Kings Hill, West Malling Kent, ME19 4YU U.K.

Strascheg Institute for Innovation and Entrepreneurship (SIIE) – EBS Business SchoolBurgstraße 565375 Oestrich-WinkelGermany

Editors: Christoph Schneider Arnd GörnerProf. Dr. Ronald Gleich

Summary

The importance of overhead costs reduction processes is highlighted by the majority of firms. More than 83% of all companies that filled out the survey confirmed to have undertaken an overhead costs reduction process throughout the last three years.

Energy most important cost category. Regard-ing the different types of overhead costs, energy is by far the most important type. 43% of all partici-pants name energy as one of the three most impor-tant types of costs. Other frequently mentioned cost categories are marketing, logistics, freight and travel management.

Savings are used to increase profit margins – less than half of the companies reinvest the savings. In that perspective the studies shows that sustainable companies more often tend to reinvest the money in the development of new markets and already exist-ing markets than others.

Cost reduction processes start as result of not reaching financial goals. Mostly companies started a cost reduction process in their overhead spending as they failed to reach their desired profit margins, made losses or were not competitive enough com-pared to their competitors. However, sustainable companies have a more active treatment of their overhead costs and start programmes proactively not because of external pushes.

Most companies still use standard cost control-ling methods for their overhead costs manage-ment. Less than half of the companies acknowledge the application of methods for comparison. An active comparison of costs via the use of purchasing price analysis or the application of benchmarking with competitors is only done by 43.5 % and 42.5%.

Furthermore, employees seem to be of high importance when initiating and implementing a cost reduction process. Companies should be aware of the risk they take when not actively involv-ing their staff in such a process. Especially the most sustainable companies involve and keep their em-ployees well informed throughout the process.

Table of Contents

Introduction� 5

Results of Expert Interviews 6

Sustainability and Innovativeness of Participants 7Sustainability 7Innovativeness 8 Planning of Overhead Costs 9Companies Prove to be Cost-Sensitive 9The Most Important Types of Overhead Costs 10Processes 14Process Success 18Usage of Savings 24

Annex 26Literature 26Table of figures 27

Preface

Printing, logistics, travel management, or freight are commonly known examples of cost categories often denoted as overhead costs or indirect ex-penses. However, many companies do not focus on actively managing these costs since they consider achievable margins to be small and view many cat-egories as indispensable. So far, not much research has been conducted to explore the hidden potential of these cost categories and to analyse how and if overhead costs can be managed and reduced.

Hence, EBS Business School and Expense Reduction Analysts initiated this survey in order to investigate the importance of overhead costs, the success and success factors of overhead costs reduction processes, and the processes’ sustainability. 301 managers from seven European countries responded to the questions, there-by making it a valuable source of information for both managers and academics interested in the subject.

Opposed to the general perception, the study finds that companies do take their overhead expenses seriously. According to the firm representatives ques-tioned, more than 83% confirm to have carried out an overhead costs reduction process in the last three years in their respective enterprises.

However, such processes are rarely the result of careful planning or aim at obtaining a sustainable cost situation. In many cases, they are rather initiated as a reaction to immediate financial threats.

Employees appear to play a prominent role for the success of overhead costs reduction processes. Com-municating the need for such action to staff and actively integrating employees into the process can have a positive impact on the reduction processes. Managing overhead costs should not be considered a burden to management but a chance to make busi-nesses more efficient and sustainable.

Sincerely,

Prof. Dr. Ronald Gleich

Preface

Long-term-studies have shown that the period over which companies stay competitive in a market is shortening constantly. Only the well positioned com-panies are fit enough to survive in times of increasing global competition, complex supply chains and short-ened cycles of global financial instability. Well positioned means, companies that are able to adapt to changes in their environment quickly. Key aspects worth mentioning here are innovation and economic sustainability. In particular, economic sus-tainability, the efficient use of accessible sources, is often rated with a lower priority within companies – at least as long as sales and turnover are performing well. In an economic down turn – as we have seen during the last financial crisis – sales revenues de-cline rapidly and companies need to cut costs but the challenge is not jeopardising their productivity. Economically sustainable companies have one thing in common: they do not react to external threats with harsh knee jerk cost cutting programmes. These companies utilise professional cost management techniques on a regular basis and continue to use these tools even in times of prosperity. Furthermore, they use the achieved savings in the business as part of their current business strategy; be that investing in R&D, developing new and existing markets or building up reserves for other strategic initiatives. A cost conscious culture provides for a healthy balance sheet and a more valuable business. In order to find out how well positioned European companies are in terms of sustainability, the EBS Business School and Expense Reduction Analysts created this survey and analysed the answers of 301 companies from 7 European countries. The results clearly show in which areas sustainable companies are better positioned than others.

Fred MarfleetChairman, Expense Reduction Analysts

5

Introduction

Non-core costs, commonly called overhead costs, often

provide considerable potential for savings. Causing only

minor disruptions for the companies’ business opera-

tions, savings can be obtained without consuming much

time and efforts. Especially small and mid-sized compa-

nies often seem to neglect the potential for savings in

their company.

In contrast to strategic cost areas such as research & de-

velopment or investments, overhead costs have been

subject to investigation by only a few scientific studies,

partially even dating back to the 1980s and 1990s.

EBS Business School and Expense Reduction Analysts

therefore decided to undertake a study on cost-reduction

processes in the area of overheads and their sustaina-

bility. It is the study’s aim to investigate how European

companies deal with the issue of overhead costs and res-

pective reduction processes. In detail, the study examines

the types of overhead costs, the companies’ awareness

towards reduction processes and the processes’ success.

A further step is to analyse differences between more and

less sustainable companies regarding their treatment of

overhead costs.

In a last step, the study seeks to identify potential success

factors for a future-oriented management of overheads.

A thorough multi-stage research process was applied. In

a first step, relevant literature was analysed in order to

build a framework for the course of investigation. Base

on this, a semi-structured interview guideline was deve-

loped and discussed with practitioners. In a second step,

11 interviews with industry experts from a variety of in-

dustries were undertaken in which current topics concer-

ning overhead costs and respective reduction processes

were identified and discussed.

Taking these findings, a structured survey was developed

and made available to managers from European compa-

nies via the internet. Between March 2011 and May 2011,

301 managers completed the survey.

1 Vgl. z.B. Foster & Gupta 1990; Cooper 1990; Cooper & Kaplan 1988.

• Analysis of importance of overhead costs in several European markets

• Investigation of the relationship between cost-reduction processes in the area of overheads and the companies‘ sustainability and innovative behaviour

• Deduction of the importance of cost categories across industries and countries

• Comparison of more and less sustainable companies with regard to the execution of cost-reduction processes

• Investigation of the companies’ view on external knowledge

Defining Overhead Costs

Overhead costs, often labelled as non-strategic or indirect costs, are costs not directly assignable to a certain unit. Instead, they are mostly assigned to a group of products or to the production process in general. Overhead costs include (e.g.):

. Office Supplies

. Printing

. Energy

. Waste Management

. Freight

. Logistics

. Marketing

. Travel Management

. Telecommunications

. Packaging

. Insurance

. Etc.

6

Results of Expert Interviews

The interviews with experts from a variety of industries

show a high relevance on the topic of overhead costs for

today’s companies.

The majority of participants highlighted the importance of a

cost-sensitive culture for their companies

The participants’ perception of their companies’ degree of

sustainability and innovativeness showed a lot variety.

The term sustainability itself was interpreted differently by

the participants. Therefore, a thoroughly developed multi-

dimensional construct will be used in the second stage of

the study.

The managers interviewed highlighted the maintenance of

their working processes’ and products’ quality as a major

concern regarding the execution of cost-reduction proces-

ses in the area of overheads. Upholding the quality is ex-

pressed to be of utmost importance

Sample 11 companies

Data Collection Tool Open interviews, guided along a semi-structured interview guideline

Data Collection Method Personal interview

Survey Period 10th of December 2010 until 31th of January 2011

Companies by Respondents’ Position | N = 11 Companies by Number of Employeesr | N = 11

Percentage of Overhead Importance of Overheads

Managing

Director

Business Unit

Manager /

Department Head

Other

6 4

1

< 100 > 500100 – 500

2 6 3

No estimation

40%

ca. 20%very important

Fig. 1 | © Expense Reduction Analysts

important

20–30%

3

3

41

6 5

7

Sustainability and Innovativeness of

Participants

One of the core issues is to analyse cost-reduction pro-

cesses in the light of the executing companies’ success

regarding sustainability and innovativeness. As a first step

of the large-scale European survey, the necessary const-

ructs for measuring innovativeness and sustainability are

defined and explained.

Sustainability

Sustainability is operationalised using the three dimen-

sions ecology, economy and society with the indicators

long-term orientation of goals, subjective assessment of

the top management’s view and personal assessment.

1. In the left half of the diagram shown below, the cumu-

lative percentages of the respective mentions are listed

2. The respective indicators values are averaged and

converted into an „index of sustainability“, ranging from

0 to 100.

3. Based on the index values, three groups of companies

were identified (right part of the diagram). The three

groups constitute the “most sustainable companies”

(29.1%), the „sustainable companies“ (43.8%) and the

„least sustainable companies“ (27.1%).

The companies that proved to be sustainable from an eco-

nomic perspective, nearly 84% confirm this statement.

Another 64% report the observation of ecological im-

pacts while 61% acknowledge to take social impacts into

account. Nearly three quarters of all top managers are

considered to perceive their companies as sustainable.

indi

cate

d

… observing economic impacts

… long-term goals

… observing ecological impacts

… observing social impacts

From our top management teams‘ perspective, we are a sustainable company

I would personally regard our company as sustainable

In our company we place value on …

4 84

8 80

19 54

16 51

7 74

10 65

Disagree Agree Index of Sustainability

100

0

>80

61–79

0–60

29,1 %: Most Sustainable Companies; Ø Index Value 89,8

43,8 %: Sustainable Companies; Ø Index Value: 71,3

27,1 %: Least Sustainable Companies; Ø Index Value: 48,2

Ø Index: 70,4

N = 301; in %; scale points 1&2 and 4&5 are summed up, point 3 not considered


8

Innovativeness

Similar to the index of sustainability described before,

an index of innovation has been constructed. It com-

prises the participants’ assessment of their companies’

degree of innovativeness and of their belief regarding

their company’s top management’s view on this issue.

Additionally, the index includes the employees’ openness

towards new ideas or issues.

Less than half of the participants consider their company’s

employees to be open towards new things. Interestingly,

more than half of them do, nevertheless, consider their

company as innovative.

indi

cate

d

In our management board‘s perception we are an innovative company

I would personally describe our company as innovative

Our employees are always willing to learn new things

Our employees are open-min-ded towards new things

15 61

18 53

18 45

4121

Disagree Agree Index of Innovation

100

0

>80

41–80

0–40

16,6%: Highly Innovative Companies; Ø Index value: 88,8

58,1%: Innovative Companies; Ø Index Value: 63,6

25,2%: Least Innovative Companies; Ø Index Value: 33,6

Ø Index: 60,2



9

Planning of Overhead Costs

Companies Prove to be Cost-Sensitive

Increasing competition in global markets and shortening

product life cycles are examples for current trends that

highlight the importance of an effective cost management

for European companies. Monitoring overhead costs and

identifying potential for reduction enables companies to

proactively enhance their efficiency.

Nearly Three out of Four Companies Acknowledge to Control Their Costs in Precisely Defined Periods

As a prerequisite for applying an effective management

of overhead costs, firms have to be cost-sensitive in order

to build the necessary awareness. 72% of the interviewed

companies acknowledge to periodically controlling their

costs. 62 % are confident to immediately react to a deteri-

oration of their cost situation.

We control costs in precisely defines periodical cycles

Our company reacts immediately to a deterioration in the cost situation

We give increase in tumover proority over cost reduction

The following statements essentially deal with the handling of costs. To which degree do they apply to your company?

11 72

8 65

31 34


Disagree Agree


10

The Most Important Types of Overhead Costs

Regarding the different types of overhead costs, energy

proves to be the most important one to European compa-

nies. 43.2 % of all participants name energy as one of the

three most important types of costs to their respective

company. (Fig. 5)

Costs, associated to marketing and logistics take the places

two and three. Further cost categories that were menti-

oned by more than 20 % of all participants are freight

and travel management. It is interesting to note, that four

out of these five categories appear to be energy-intensive

(energy, logistics, freight and travel management).

Differentiating the cost categories by countries allows for

interesting insights into differences across regions. While

energy proves to be an important cost category in all re-

gions, marketing expenses play a central role in Finnish,

German and Italian firms, but are much less relevant in

France and Belgium. (Fig. 4)

Logistic costs take second place in Belgium and Italy but

fall far behind in the Netherlands.

Freight turns out to be the most important cost category

to the responding French firms and are equally important

as energy to their counterparts in Spain but are nearly dis-

regarded by Italian respondents.

Travel management is most often named in Italy while

Belgian and German firms seem to place more empha-

sis on other areas of overhead expenses, Dutch firms do

hardly name this category at all.

Facility management is what the Finnish respondents do

care about, but plays only a minor role to their colleagues

in France and Spain.

Telecommunication costs are often named by Belgi-

an and Dutch firms, maintenance costs are a burden for

French respondents.

Energy

Marketing

Logistics

Freight

Travel Management

Facility Mangement

Telecommunications

Maintenance

Insurance

Fleet Management

Packaging

Printing

Office Supplies

Taxes

Factory Consumables

Waste Management

Cleaning

Other

Couriers

Security

Industrial Gases

Uniforms

Merchant Card Fees

43,2

28,2

27,2

25,2

20,6

19,9

18,6

16,9

15,6

14,6

9,3

9,0

8,3

8,3

8,0

5,6

5,3

4,7

3,0

2,7

1,0

1,0

0,3


Up to three choices possible


Germany France Italy Spain Netherlands Belgium Finland

Energy

Marketing

Travel Management

Facility Management

Logistics

Freight

Telecommunication

Maintenance

Insurance

Fleet Management

Up to three choices possible

60

50

40

30

20

10

0

11

Only 18.3 % of all responding companies realise overhead-

related purchases through decentralised departments,

while 37.9 % confirm to have centralised purchasing de-

partments. (Fig. 7)

Centralised purchasing provides the purchasing party

with greater buying power and, therefore, a more

powerful position in negotiations. Decentralised pur-

chasing may have the advantage to enable the company

to profit from specialised knowledge of specific categories

and local supplier advantages.

Nearly 44 % of all companies combine both ways of pur-

chasing in order to profit from the respective advantages.

Especially the highly sustainable companies seem to ap-

ply both forms of purchasing. As it can be seen in Fig. 8,

more than 56 % of the highly sustainable companies use

this combination in contrast to only 34.6 % in case of the

least sustainable companies.

Companies still stick to „classic“ instruments and methods for managing their overhead costs

A variety of tools and methods exist, that companies may

apply to their cost management. Most companies in the

sample (62.8 %) still use only standard cost controlling

methods for their overhead costs management. More

than 60 % of the firms engage in negotiations. (Fig. 9)

Less than half of the companies acknowledge the appli-

cation of methods for comparison. An active comparison

of costs via the use of purchasing price analyses or the

application of a benchmarking with competitors is only

done by 43.5 % and 42.5 %.

A special tool designed for the management of over-

head costs is the overhead-value analysis. Despite its

special design only a minority of companies confirm the

use of an overhead-value analysis as a tool for managing

overheads.

Multiple entries possible

Cost Controlling

Negotiations

Purchasing Price Analyses

Benchmarking

Acquisition Price Comparison

Contract Management

Cost Allocation Sheet

Internal Cost Allocation

Supplier Ratings

Ratio Systems

Overhead-Value Analysis

Checklists

Other

62,8

60,1

43,5

42,5

32,2

30,2

29,6

28,6

26,9

23,3

12,0

11,3

0,3


Both

Decentralised bodies

Central purchasing

43,9 37,9

18,3


Sustainability

Low Average High

Central 40,7 38,2 34,0purchasing

Both 34,6 44,2 56,6

Decentralised 24,7 17,6 9,4bodies

N = 301; in %


12

Across Europe, the various instruments’ use is quite

diverse. While traditional cost controlling is named by

nearly three quarters of all firms in Germany and Finland,

only 35% of Spanish firms report to use cost control-

ling. Negotiations are the most important instrument for

Belgian French and Dutch respondents. Purchase price

analyses are applied by half of the Spanish and Dutch

firms while only every fifth French firm in the sample con-

firms their use.

An equally diverse picture can be obtained by looking

at benchmarking: 64% of the Dutch firms claim to use

benchmarking, in contrast to only 20% of the Italian com-

panies. Acquisition price comparison plays a major role to

the Dutch, Belgian and French respondents, but is hardly

mentioned by firms from Finland or Spain. Internal cost

allocation is named by 42% of Finnish and 40% of Ita-

lian firms. Great differences can also be identified regar-

ding overhead-value analysis. While 44% of the French

respondents use it as a tool, only 4% of the German and

3% of the Finnish firms confirm to do so.

44% of the French companies use the specially de-signed tool overhead-value analysis - but only 4% of the companies in Germany and 3% of companies in Finland

74

64

45

43

24

27

36

34

30

40

4

14

61

70

22

35

65

52

26

22

35

30

44

9

50

45

30

20

30

25

35

40

5

5

10

15

35

52

52

52

9

17

22

0

39

9

22

9

41

73

50

64

73

23

9

9

27

0

14

5

50

77

36

32

68

41

23

32

27

5

18

14

71

52

48

48

13

32

23

42

3

0

3

7




Cost controlling

Negotiations

Purchase price analyses

Benchmarking

Acquisition price comparison

Contract Management

Cost allocation sheet

Internal cost allocation

Supplier ratings

Ratio systems

Overhead-value analysis

Checklists

13

Companies that do report to use an overhead-value analysis show greater process satisfaction

In a next step, the frequency of the respective methods’

application is compared to the level of satisfaction that

companies show regarding the overall cost reduction

processes. Firms that acknowledge applying the over-

head-value analysis to their company’s overhead costs

management show a high level of satisfaction regarding

the overall cost-reduction process. As it can be seen in the

table below, companies applying overhead-value analy-

sis, purchase price analyses and checklists reach higher

scores regarding process satisfaction than the companies

applying other methods or instruments.

1 Cost controlling

2 Negotiations

3 Purchase price analyses

4 Benchmarking

5 Acquisition price comparison

6 Contract Management

7 Cost allocation sheet

8 Internal cost allocation

9 Supplier ratings

10 Ratio systems

11 Overhead-value analysis

12 Checklists

While it can not be deducted that the level of satisfaction

is only dependent on the tool or method chosen for over-

head-costs management, results can still act as an indica-

tor and trigger firms to critically assess their management

accounting tools and methods applied.

N = 301

Frequency of Mention

4

21

57

968

10

3

Process Satisfaction


1211

14

Processes

Companies actively drive overhead-costs reduction processes

Asking the companies whether they have carried out an

overhead-costs reduction process during the last three

years, more than four out of five companies confirm to

have done so. Only 16 % negate this statement. Out of

the companies that did not carry out such a process, more

than half report to concretely plan or at least consider it.

This reduces the total percentage of firms that are averse

to a reduction process to 6 % of the total sample. (Fig. 12)

Regarding the companies that report to have undertaken

a reduction process, more than a third acknowledge to

have undertaken the reductions with support by a specia-

lised consultancy.

Across Europe, the picture drawn is fairly stable. Spanish

and French companies in the sample appear to use exter-

nal support by consultancies more often than their Finnish

and German counterparts. In sum, less Italian firms have

carried out reduction processes in the past three years,

but those that have not show a great tendency to consi-

der doing so. The percentage of companies that has not

carried out such a process and reports to neither plan nor

consider it is quite similar across all countries. (Fig. 13)

Have you carried out processes to reduce overhead costs in the

past three years in your company?

Yes

Yes, without support by specialised consultancy

43,9

Yes, with support by specialised consultancy

39,5

No

Considered 7,0

Neither considered nor planned

6,0

Concretely planned 3,7


N = 301; Answers in %

Yes, without support by consultancy

GermanyFinlandNetherlandsBelgium

FranceSpainItaly

Have you carried out processes to reduce overhead costs in the past three years in your company?

Planned Consider Nothing at allYes, with support by consultancy


60

50

40

30

20

10

0

15

If such a process is neither considered nor planned: what are the

reasons for this?

At the moment we have other priorities

We already work efficiently in the area of overhead costs

Such a cost-reduction process cannot be communicated to our staff at

the moment

N = 18; in %; scale points 1&2 and 4&5 are summed up,

point 3 not considered

Disagree Agree


780

4112

2544

In a further step, the 6 % of companies negating to even

consider a reduction process were questioned with regard

to their reasons for not doing so. The majority of these

companies answered to have other current priorities. In-

terestingly, 7 firms named the belief to already work cost-

efficiently in the area of overheads as a reason for not

planning or carrying out a reduction process. Referring to

the total number of firms, this part of the companies that

answered the survey is quite small, accounting for only

2.3 % of the whole sample. (Fig. 18)

Other priorities reason for not carrying out cost reduction processes

Cost reduction processes as a mere reaction of not reaching financial goals

Regarding the reasons for undertaking reduction pro-

cesses, the view is twofold. The analysis indicates, that

overhead-cost reduction processes are often a direct re-

sult of an assessment of the short-term performance or

as a reaction to current threats. Companies in the sample

mostly initiate reduction processes as reaction of not re-

aching predetermined financial goals. Half of all respon-

ding companies acknowledge to have failed on reaching

the desired profit margin as a reason. A further 23 % con-

firmed that the reduction processes were initiated as a re-

action to losses. Another 29 % assessed its own company

as not profitable enough but came to this conclusion by

actively comparing the company to other competitors in

the field. (Fig. 15)

In contrast to these results, a positive view can be taken

upon the involvement of employees. 70 % of the com-

panies acknowledge using suggestions of employees in

order to identify potential improvements in the area of

overheads.

Potential for improvements in the area of overheads were identified in

our company using internal sources

The company did not reach the desired profit margin

Potential for improvements in the area of overheads were pointed out

to our company through external sources

Our company was not profitable enough in

comparison with our competitors

The company made losses



Disagree Agree

5129

7013

2845

2949

2361


16

Sustainable companies have a more proactive treat-ment of overhead spendings

In a further step, these results are compared to the com-

panies’ level of sustainability. The analysis indicates that

more sustainable companies tend to have a more active

treatment of overheads instead of purely reacting.

Reducing overhead costs as a reaction to not having met

the desired profit margin is most often named by those

companies that can be considered as less sustainable.

Saving potentials identified by internal sources seem to

be used much less as a justification for introducing reduc-

tion processes in the area of overheads.

In turn, the most sustainable companies acknowledge

that internal sources are a major driver of overhead-costs

reduction processes. More sustainable companies do not

tend to introduce reduction processes as a mere result of

losses or missed profit margins. These results can be con-

sidered as one indication for a more forward-looking way

of cost management.

Potential for improvements in the area of overheads were identified in

our company using internal sources

Potential for improvements in the area of overheads were pointed out

to our company through external sources

Our company was not profitable enough in comparison with

our competitors

The company did not reach the desired profit margin

The company made losses

N = 301; mean

1

1 = Disagree

high

middle

low

5 = Agree

2 3 4 5


Reasons for Introducing Cost-Reduction Processes (by Sustainability)

17

Looking at the groups involved in the reduction processes,

one observes a major role of internal positions that are in-

corporated. The management board is the most important

group, with their incorporation being confirmed by 94 %.

Accounting and purchasing staff is also a major contribu-

tor to reduction processes. 89 % report the incorporation

of accounting staff and 85 % do the same for purchasing

professionals. Production staff is still being named by

nearly 65 % of respondents.

Management board deals with reducing overhead spendings

41.5 % report to integrate specialised consultants as a

source of external knowledge into the reduction process.

Every third firm acknowledges having individual experts

on board. Management consultants are incorporated into

the process by only 26 % of the firms.

Which of the following groups are incorporated in an overhead reduction process?

Management board

Accounting staff

Purchasing staff

Staff from other departments

Production staff

Specialised consultants

Individual experts

Management consultants

Other

N = 301; in %

94,4

89,3

85,0

74,8

64,6

41,5

34,1

26,1

15,2


18

Process Success

Results show a general satisfaction with overhead reduc-

tion processes carried out in the various companies in the

sample. More than two thirds of all respondents express a

general satisfaction. Only 7.2% are disappointed with the

results. Interestingly, companies that report the highest

satisfaction level concerning the overhead-costs reduc-

tion processes, on average achieve the highest ranking

on the sustainability index. (Fig. 18) While the least satis-

fied companies reach a score of 67.6 %, the most satisfied

companies reach a score of 79.5 , 17.6 % more. (Fig. 19)

Sustainable companies more satisfied with achieved savings

Process Satisfaction


79,5

73,1

67,6

High

Average

Low

Sustainability Index

-11,9

1 Not satisfied at all

N = 301; in %

2

1,3 5,9 10,0

3 4 5very satisfied

∑ = 7,2

∑ =68,2Mean: 3,70


24,7 58,2

19

During the expert interviews participants highlighted the

importance of maintaining the quality of their products

or services despite the cost reduction process. Results of

the survey show that the products’ or services’ quality

is not influenced negatively by the reduction processes.

78 % confirm that the quality of their services or products

remained the same after the reduction process.

Quality of products and services is not negatively in-fluenced by cost reduction processes

Furthermore, 68 % of all firms confirmed that their emplo-

yees had learned to pay more attention to overhead costs

in the course of the reduction process. No clear effect can

be determined regarding the reduction processes’ influ-

ence on the atmosphere in the respective companies. 31 %

confirm a positive influence while 25 % report a negative

influence. Therefore, it can be assumed that a reduction

process’ influence on the working atmosphere depends

on the individual firm culture and special circumstances

that can be found in the firm.

The quality of our products / services remains

the same even after the cost reduction proces

7 78

In the course of reducing overhead costs our staff

have learned to pay more attention to those costs

12 65

The atmosphere in the company was positively

influenced by the cost reduction process

25 31



Disagree Agree


20

The most sustainable firms in the sample are able to obtain

the best results in reduction processes. These companies

are able to deliver the best results of all three sustainabi-

lity types in all three dimensions discussed. Sustainability

therefore, seems to contribute to the successful imple-

mentation of these processes. (Fig. 21)

For successfully carrying out reduction processes a num-

ber of factors show clear support from respondents. Im-

plementing the recommended measures is of crucial

importance for the success. Furthermore, informing the

staff about the changes and making sure that employees

understand the need for the measures is also of utmost

importance for success. Leaving staff out of the process,

therefore, appears to endanger its success. (Fig. 22)

In addition to staff involvement, a majority of 58 % of re-

spondents confirm an important role of suppliers. In their

opinion, suppliers need to be involved in order to be suc-

cessful. 15 % do negate this statement.

Respondents do not give a clear idea of whether manage-

ment should react to objections from staff referring to the

measures of the reduction process. While 39 % of respon-

dents answer accordingly, 31 % do not agree.

It proved/proves important for the success of overhead cost

reduction processes that …

… recommended measures are also implemented and

do not simply remain on paper

… the staff are informed about

the need for the measures

… the staff understand the

need for the measures

… the staff are actively involved in the

formation of the processes

… the suppliers are included

… the company management make the final

decision without staff involvement



Disagree Agree

3931


812

853

873

757

15 58

The quality of our products / services remains the same even after the

cost reduction process

In the course of reducing overhead costs our staff have learned to pay

more attention to those costs

The atmosphere in the company was positively influenced by the cost

reduction process

N = 301; mean

1

1 = does not apply at all

high middle low

5 = Fully Applies

2 3 4 5

Fig. 21 | © Expense Reduction Analysts Resistance or Barriers (by Sustainability)

21

Analysing these statements with respect to sustainabili-

ty, answers show a clear tendency: The most sustainable

companies vote for an active involvement of staff. Less

sustainable companies are more reluctant to do so. With

regard to management’s commitment to objections from

staff regarding the process, the more sustainable compa-

nies seem to reject the idea to decide without involve-

ment of staff while the other groups of firms show no

clear picture.

Sustainable companies involve staff more often

It proved/proves important for the success of overhead cost

reduction processes that …

… recommended measures are actively implemented

and do not simply remain on paper

… the staff are informed about the need for the measures

… the staff understand the need for the measures

… the staff are actively involved in the formation of the processes

… the suppliers are included in the process

… the company management make the final decision

without staff involvement

N = 301; mean

Success Factors by Sustainability

1


high

middle

low

5 = Fully Applies

2 3 4 5


22

When carrying out overhead costs reduction processes,

various resistances or barriers may exist. Respondents to

the survey do not draw a clear picture regarding the poten-

tial types of barriers. However, the largest consent can be

identified regarding staff that fears changes and, therefore,

acts dismissively. 42 % of respondents acknowledge this

as a major problem in their company. In contrast to this,

difficulties in switching suppliers are confirmed by only

every fifth respondent to be an important barrier. (Fig. 24)

Results are therefore twofold. On the one hand, they in-

dicate that a multitude of potential barriers or resistances

may prevent reduction processes from being carried out

successfully. Each company should consider which fac-

tors might be of particular importance to it. On the other

hand, employees seem to be of great importance, even

across company borders.

More sustainable companies seem to encounter less pro-

blems arising from staff fearing changes and acting dis-

missively. One potential reason for that could be that a

company’s commitment to sustainability in general increa-

ses employees’ trust and loyalty which prevents them from

initially reacting dismissively in case of changes. (Fig. 25)


In the following we present you a number of statements regar-

ding resistance or barriers which can emerge when implementing

the cost reduction measures. How do/did the statements regar-

ding resistance or barriers apply to your company?

Staff feared changes and acted dismissively

Due to organizational reasons the

implementation was difficult

During the processes implementation

the business environment changed

Difficulties in switching suppliers

Staff feel their work is put into question



Disagree Agree

31 42

40 30

44 27

42 21

39 32


Staff feared changes and acted dismissively

Due to organizational reasons the implementation was difficult

Difficulties in switching suppliers

During the process implementation the business

environment changed

Staff feel their work is put into question

N = 301; mean

1


high

middle

low

5 = Fully Applies

2 3 4 5

Resistance and Barriers by Sustainability

In the following we present you a number of statements regarding resistance or barriers which

can emerge when implementing cost reduction measures. How do/did the statements regarding

resistance or barriers apply to your company?

23

Implementing measures and controlling their success are important parts of a successful reduc-tion process

Cost reduction processes can be split up into the following four groups:

a) Status Quo Analysis

b) Compilation of a List of Measures

c) Implementation of Measures

d) Control of Success

For each of these phases, respondents were asked to rate

the phases’ respective importance for the process’ suc-

cess. The same was done for two additional steps that

were deducted from the expert interviews and further

discussion.

All four measures received great support from basically all

respondents regarding their importance, only the compi-

lation of measures was confirmed by „only“ 89 %. The in-

vitation to tender for the necessary service also received

support by 59 % of respondents. Using external bench-

marks is considered to be important by a relative majority

of 46%.

How important are the following steps for the success

of overhead cost reduction processes?

Controlling of activities‘ success

Implementing recommended measures

Carrying out a status quo analysis

Compiling measures

Invitation to tender for the necessary services

Use of external benchmarks



Not important Important

95

94

3

2

91

2 89

11 59

20 46

d

a

c

b


24

What did you do or are you intending to do with the

achieved savings?

1 Increasing profit

2 Increasing efficiency

3 Investment in existing

business

4 IInvestment in new

areas of business

5 Research & Development

6 Investment in new markets

7 Advertisement

8 Pay rises

9 Other purpose:

Multiple entries possible N = 251

Frequency of Responses

12

3

789

Increasing Sustainability

Usage of Savings

The study wanted to shed light on the question for which

purpose the companies use savings that were achieved in

the course of overhead reduction processes.

The simple increase of profit and efficiency is the major

goal for the firms in the sample. Investment in existing

business is claimed by 36.7 %. Although being of minor

importance, this still means that every third company

uses the money saved from over head reduction proces-

ses for a long-term goal such as investment in business.

In addition to that, a quarter of the companies report to

invest the money saved in new areas of business. 17.9 %

report to direct the money to research and development

and 17.6 % confirm to invest it in completely new markets.

(Fig. 27)

72,9

66,9

36,7

24,7

17,9

17,5

8,0

4,4

2,8

Saving money from overheads can therefore be a way to

substantially increase the competitiveness of a company

by identifying funds that are invested in order to improve

the company’s competitive position and long-term success.

(Fig. 28)

Most companies use the achieved savings for increasing profit margins – not for reinvestments



5

4

6

25

Results across countries are quite similar regarding the

savings’ purpose of use. Belgian firms are the ones which

most often mention the increase of profits as a purpose.

Investment in existing business is acknowledged by more

than half of all French respondents and 45% of German

firms. While entries for investments in new markets are

generally scarce, more than a quarter of German firms

confirm this purpose. Every third Italian firm does the

same for research and development. (Fig. 29)

In the following graph, companies are grouped with res-

pect to their geographical origin and then compared re-

garding their degree of innovativeness and sustainability.

In addition the symbol’s form and colour indicates the

group’s relative cost sensitivity and satisfaction with the

reduction process. (Fig. 30)

Increasing profit

Increasing efficiency

Investment in existing business

Investment in new areas of business

Research & Development

Investment in new markets

Advertisement

Pay rises

Other purpose

75

50

25

33

33

8

8

0

0

76

71

19

5

14

5

10

0

5




69

68

45

28

22

26

7

4

2

79

53

53

37

21

21

16

5

5

72

72

11

0

0

0

0

0

6

85

75

25

25

10

15

20

5

0

77

69

31

19

8

0

4

4

8

Innovativeness

Sustainability


GermanyFrance

Spain

Netherlands

Italy

Finland

Belgium

High Cost Sensitivity

Average Cost Sensitivity

Low Cost Sensitivity

High Process Satisfaction

Average Process Satisfaction

Low Process Satisfaction

26

Literature

Banker, Rajiv D. / Potter, Gordon / Schroeder, Roger G. (1995): An empirical analysis of manufacturing overhead

cost drivers, in: Journal of Accounting and Economics 19,

S. 115–137

Foster, George / Gupta, Mahendra (1990): Manufactu-

ring Overhead Cost Driver Analysis, in: Journal of Accoun-

ting and Economics 12, S. 309–337

Heimbrock, Jürgen Klaus / Deil, Thomas (2004): Erfolgs-

potentiale im strategischen Einkauf, in: Horst, Bruno /Söhn-

chen, Wolfgang (Eds.): Wertschöpfung und Supply Chain

– Festschrift für Prof. Dr. Heinz Tempel. Shaker Verlag

Held, Stephan / Kijak-Koselnik, Olha / Uhlenbroch, Rene (2009): Strategisches kostenmanagement. Anwendungs-

stand bei den 500 umsatzstärksten deutschen Unterneh-

men. In: Beiträge zur Umweltwirtschaft und zum Control-

ling Nr. 35, Universität Duisburg-Essen

Monden, Yasuhiro (1999): Wege zur Kostensenkung.

Verlag Vahlen,

O.N. (2005): Wertsteigerung im Einkauf – Studie zur

Erschließung von Potentialen in nicht-traditionellen Be-

schaffungsfeldern. Studie von Deloitte, Universität der

Bundeswehr München und dem Bundesverband Material-

wirtschaft, Einkauf und Logistik e.V.

Rosenstein, Roman A. (2008): Den Gemeinkosten auf

der Spur, in: Swiss Engineering STZ Oktober 2008, S. 36–37

Schwarz, Walter (1983): Die Gemeinkostenwertana-

lyse nach McKinsey & Company, Inc. Eine Methode des

Gemeinkosten-Managements.

Versteeg, Andre (1999): Revolution im Einkauf. Campus

Verlag

27

Table of figures

Fig. 1: Results of Expert Interviews

Fig. 2: Index Sustainability

Fig. 3: Index Innovativeness

Fig. 4: Planning of Overhead Costs

Fig. 5: Most Important Types of Overhead Costs

Fig. 6: Most Important Types of Overhead Costs

by Countries

Fig. 7: Organisation Procurement

Fig. 8: Organisation Procurement by Sustainability

of Companies

Fig. 9: Use of Procurement-Tools

Fig. 10: Use of Procurement-Tools by Countries

Fig. 11: Satisfaction with Results by Use of

Various Procurement-Tools

Fig. 12: Implementation of Cost Reduction Process

Fig. 13: Implementation of Cost Reduction Process

by Country

Fig. 14: No Cost Reduction Process Planned

Fig. 15: Reason for Introducing Cost Reduction Process

Fig. 16: Reason for Introducing Cost Reduction Process

by Sustainability

Fig. 17: Groups Involved in the Cost Reduction Process

Fig. 18: Success of Process

Fig. 19: Success of Process by Sustainability

Fig. 20: Effect of Quality and Service-Level

Fig. 21: Effect of Quality and Service-Level

by Sustainability

Fig. 22: Importance of Employers

Fig. 23: Importance of Employers by Sustainability

Fig. 24: Barriers Introducing a Cost Reduction Process

Fig. 25: Barriers Introducing a Cost Reduction Process

by Sustainability

Fig. 26: Important Steps for Successful Cost

Reduction Process

Fig. 27: Usage of Achieved Savings

Fig. 28: Usage of Achieved Savings by Sustainability

Fig. 29: Usage of Achieved Savings by Country

Fig. 30: Process Satisfaction by Country and

Sustainability and Innovativeness

www.expensereduction.com

the sustainability of the cost reduction process

Economy & Finance