survey: cost improvement - deloitte...reliance on tactical cost actions, rather than strategic ones,...

Thriving in UncertaintyDeloitte’s first biennial cost survey: Cost improvement practices and trends in Europe.April 2017

Executive summary 2

About the survey 4

Macroeconomic trends 7

Survey findings 9

Zero-based budgeting: breakthrough or passing fad? 19

Regional comparisons 22

Choosing the right cost management approach 26

Looking ahead 31

Appendix A – Germany: The most aggressive “save to grow” posture in Europe 32

Appendix B – UK: Playing defense in the face of uncertainty 39

Appendix C – France: Are the business outlook and cost approach consistent with market dynamics? 45

Appendix D – Italy: Focusing on cost reduction and a defensive posture 51

Appendix E – Spain: Leading the way on cost management in Europe 57

Contacts 64

Contents

1

Thriving in Uncertainty | Deloitte’s first biennial cost survey: Cost improvement practices and trends in Europe

Executive summary

Macroeconomic trends • Over the two-year period ending March 2016, overall growth across the region has been low (average of 1.6% annual growth for major markets), with the lowest growth rates in France (1.0%) and Italy (0.3%). Unemployment rates are high, particularly in Spain (21%), Italy (12%), and France (10%).4

• During that same two-year period, the pound and euro have weakened substantially against the dollar, with the pound declining 15% and the euro declining 20%. Immediately following the Brexit vote, the euro remained stable but the pound fell an additional 10%.5

Key findings from the study • Despite challenging economic conditions, most respondents (67%) reported positive revenue growth over the past 24 months, and even more (76%) expect growth to continue over the next 24 months.

• The top three strategic priorities are sales growth (30%), product profitability (28%), and cost reduction (28%), which add up to a cost management strategy that we call “save to grow”: using cost savings to fund growth activities.

• Balance sheet management – which is typically associated with times of distress – emerged as a top strategic priority this year. This defensive posture – combined with concerns about macroeconomics, exchange rate volatility, and political factors such as Brexit – suggests an environment of caution and uncertainty not seen since the financial crisis.

• Brexit is a major concern for UK companies, with 36% of UK respondents citing it as a top external risk versus 0% – 10% for respondents from other European markets.

• Despite Europe’s relatively low cost targets (52% of respondents cite targets of less than 10%), cost program failure rates are high, with 57% of respondents indicating their cost programs failed to meet targets. Implementation challenges are viewed as the main barriers to effective cost management, with four of the top five barriers directly related to implementation. These include not only the general issue of “challenges in implementing initiatives” (48%), but also more specific implementation-related issues:

1. EIU data

2. “Cost management and improvement trends in the Fortune 1000, Thriving in uncertainty: Deloitte’s fourth biennial cost survey,” Deloitte, April 2016

3. “Thriving in Uncertainty, Deloitte’s first biennial cost survey: cost improvement practices and trends in Latin America,” Deloitte, June 2016

4. EIU data

5. exchangerates.org.uk

Macroeconomic factors may be having a major impact on cost improvement priorities and actions throughout Europe. To learn what European companies are doing to manage costs, Deloitte recently surveyed 349 CXOs, executives, and senior management from large and mid-size companies in ten European markets -- the UK, France, Germany, Spain, Italy, Belgium, the Netherlands, Poland, and the Nordics – which together comprise 88% of the European Union (EU) economy based on gross domestic product (GDP).1 We also analyzed key macroeconomic factors in order to establish a broader context for the survey results.

This study is part of a global survey effort that includes Deloitte’s fourth biennial cost survey in the United States (published in April 2016),2 as well as our first biennial cost survey in Latin America (published in June 2016).3

erosion of savings (20%), weak business case (23%), and poor design and tracking (17%).

• European companies tend to rely more on tactical approaches to cost reduction, rather than strategic ones. The most frequently cited cost management approach is “streamlining business processes” (38%), which is a tactical approach. The least frequently cited approach is outsourcing/off-shoring (26%), which is a more strategic approach. Greater reliance on tactical cost actions, rather than strategic ones, could be a key factor contributing to Europe’s low cost targets and high cost program failure rates.

• Only 7% of respondents currently use zero-based budgeting (ZBB), and only 8% plan to do so in the future, suggesting that ZBB is not a mainstream cost reduction approach and adoption might be topping out.

Regional comparison highlights • Respondents from all three regions – US, Latin America, and Europe – view “macroeconomic concerns/recession” as the top external risk.

• In the EU, government regulation and taxes are a much greater concern (16%) than in Latin America (9%) and the US (12%). This is especially true for UK respondents, which makes the Brexit decision less surprising.

• In Latin America, respondents are much more concerned than companies in other regions about global exchange rate fluctuations (38% versus overall EU average of 11%) and commodity price fluctuations (31% versus overall EU average of 18%).

• In the US, concern about digital disruption is far higher (19%) than in the EU (6%) and Latin America (1%) – and the issue is quickly rising to the top of the strategic agenda. Other regions may soon face a similar impact from digital disruption.

• Although growth expectations remain positive globally, European companies – especially those from the UK – are the least optimistic. According to our survey, 76% of European respondents expect positive revenue growth over the next 24 months, versus 85% in the US and 87% in Latin America.

• While the vast majority of companies in all three regions expect to pursue cost reduction over the next 24 months (92%), European companies are somewhat less likely to do so (83%).

• Although European respondents cite less aggressive cost targets, failure rates are high across all three regions: Latin America (67%), US (58%), and Europe (57%).

• European companies cite lower utilization rates for all five typical cost management approaches in the survey, which implies they are less likely to use structured cost programs. This is consistent with the fact that their cost targets are less aggressive.

Choosing the right cost management approach • To improve their cost management performance and achieve more aggressive targets, many companies may need to adopt a more strategic and transformational approach to cost reduction. Companies that stick to tactical cost actions and the status quo will likely continue to face implementation problems and high cost program failure rates.

• Businesses in pursuit of strategic cost improvements have traditionally fallen into one of three categories: (1) distressed, (2) positioned for growth, or (3) growing steadily. However, today’s volatile and complex global business environment seems to be giving rise to a fourth category that we call “thriving in uncertainty” -- a scenario that straddles the line between “distressed” and “positioned for growth” and involves organizations simultaneously pursuing the seemingly conflicting goals of growth, cost improvement, and balance sheet management.

• It remains to be seen whether this fourth category is a new and permanent feature of the business landscape, or simply a stepping-stone to one of the traditional categories.

• For the UK, France and Italy, macroeconomic factors seem to be pushing them toward greater uncertainty, requiring a playbook with value creation levers that may need to be more defensive in nature. The other European markets surveyed seem to be moving toward a more positive outlook, possibly requiring a different playbook with value creation levers that may need to be more focused on growth.

3


About the survey

1F. Number of employees

1D. Annual revenue

Figure 1. Firmographics summary for all European respondents (349)

Life Sciences & Health Care

1B. Industry breakdown

21%

32%

13%

10%

13%

7%4%

Consumer & Industrial Products Financial Services

Technology, Media & Telecommunications Other Energy & Resources

Public Sector

21%

16%

20%

17%

23%

3%

€100M - €150M €150M - €300M €300M - €500M€500M - €1B €1B - €3B > €3B

1C. Revenue footprint

57%

14%

9%

7%

7%

6%

European Union North America Asia Pacific Rest of the worldMiddle East and Africa Latin America

1E. Management level

27%

34%

39%

C-suite/CXO Executive Management Senior Management

21%

16%

19%

17%

23%

4%

<1K 1K - 5K 30K - 50K5K - 15K 15K - 30K >50K

1A. Respondent profile

UK France Spain Italy

Belgium Netherlands Nordics Poland

Germany

31%

14%

12%

4%3% 2%

17%

13%

4%

Notes: Due to small sample sizes collected in the Netherlands (15), Belgium (15), the Nordics (Norway (7), Denmark (5), and Poland (7), non-statistically significant results have been flagged ( ) in charts when appropriate – this symbol indicates that data may represent outliers or simply non-statistically significant results due to small sample sizes.

The red bar in the bar charts represents the weighted average response rate from all survey participants in all markets (349 total respondents).

Polish data is not presented as a unique data series in charts due to small sample size (7); however, this data sub-set is part of the “weighted average” series.

4


Qualification criteria • C-suite level executive (CEO, CFO, COO, CIO, Board of Directors, etc.), executive management level (Division/Business Unit/Regional President, Controller, Treasurer, or other company officers), or senior management level (SVP/VP of a Business Group, or SVP/VP of an enabling function such as Finance, HR, or IT)

• Annual company revenue of at least €150 million (€100 million for companies based in Belgium and the Netherlands)

• Personal involvement in managing cost reduction initiatives within the company

Eighty-six percent of respondents are from the five largest economies in Europe (Germany, the UK, France, Italy, and Spain), which comprise 72% of the European Union by GDP. The nine markets included in the survey comprise 88% of the European Union by GDP. (Figure 1A)

Most respondents are from the consumer & industrial products industry (32%) or financial services (21%); 13% are from technology, media, and telecommunications; 13% are from energy and resources; 7% are from the public sector, and 4% are from life sciences & health care. (Figure 1B)

Fifty-eight percent of respondents’ revenues are generated within the EU, indicating that the surveyed organizations are heavily dependent on trading within the EU. Fifty-one percent of the UK’s revenue comes from the EU, making Brexit highly relevant to our survey and findings. Also, the UK is the top European trading partner for the US and North America. Spain derives much more revenue from Latin America (17%) than do other European countries. (Figure 1C)

Forty percent of respondents are from companies earning €1 billion in annual revenue or more; 60% of respondents are from companies earning €500 million in annual revenue or more; only 40% of respondents are from companies earning less than €500 million in annual revenue. (Figure 1D)

The distribution of responses across management levels is relatively even, with 61% of respondents at the CXO or executive management levels. (Figure 1E)

Sixty-four percent of respondents are from organizations with less than 15,000 employees; 36% of respondents are from organizations with 15,000 employees or more. (Figure 1F)

In May and July of 2016, Deloitte Consulting LLP conducted its first biennial survey of current and future cost reduction initiatives at large and mid-size companies in the UK, France, Germany, Spain, Italy, Belgium, the Netherlands, Poland, Norway, and Denmark -- Ten markets that comprise 88% of the European economy based on gross domestic product (GDP). We have been conducting similar studies of large companies in the US since 2007, and this year decided to expand the studies to include both Europe and Latin America in order to gain a more global perspective supported by detailed regional insights.

The survey included 349 responses, 90 of which were gathered after the UK voted to leave the European Union (EU). This enabled us to test the initial data set and ensure the outlooks and behaviors among cost management executives were consistent before and after the Brexit decision. The data collected post-Brexit proved to be consistent with the data collected pre-Brexit, which is what we expected given that questions about the future focused on a 24-month time horizon that included the possibility UK voters would elect to leave the EU.

Key objectives • Understand factors, approaches, actions, and targets related to cost initiatives

• Assess the effectiveness of cost initiatives, including lessons learned from previous efforts

• Understand the drivers and scope of future cost initiatives

5


Figure 2. Respondents’ revenue footprint

Weighted average UK France Spain Italy Belgium Netherlands NordicsGermany

58%51%

58%64%

48%56%

53%

50%

14%20%

15%13%

15%10%10%

3%4%

6%8%

5%7%

9%10%

5%7%

3%

6%6%

5%6%

17%7%

4%2%2%

9%10%

12%8%

8%6%

12%5%

7%

64%

7%6%

5%3%4%

8%22%

12%35%

1

2

4

3

Rest of the world

Asia Pacific

Latin America

Middle East andAfrica

NorthAmerica

EuropeanUnion

Demographic comparisons58% of respondents’ revenues are generated within the EU, inferring respondents’ organizations are heavily dependent on trading within the EU

The UK trades heavily with the EU (51% of revenues), making Brexit particularly relevant to our survey respondents across continental Europe

The UK trades more frequently with the USA / North America (20%) relative to other European economies (14%)

Spain trades much more frequently with Latin America (17%) relative to other European economies (6%)

1

2

3

4

Indicates data point may represent outliers or simply non-statistically significant results due to small sample sizes

6


Macroeconomic trends

The nine markets covered in our survey comprise 88% of the EU economy as measured by GDP. (Figure 3)

Germany

20.6%

14.9%

17.5%

11.2%

7.4%

6.3%

4.6%

2.9%

2.8%

11.8%

Figure 3. Survey sample coverage (% of EU economy by GDP)

Nordics Netherlands Poland Belgium

Rest of the EU (not covered by survey)

Source: EIU

France Italy SpainUK

Figure 4. Real GDP in past 24 months

Source: EIU

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Q1 2016Q4 2015Q3 2015Q2 2015Q1 2015Q4 2014Q3 2014Q2 2014

Netherlands BelgiumUK France Italy SpainGermany

Looking at the major European markets, we find that overall growth across the region has been low (average annual growth of 1.6% over the past two years). Annual growth has been particularly low in France (1.0%) and Italy (0.3%). (Figure 4)

7


Like other major global currencies, the pound and euro weakened relative to the dollar over the two year period ending March 2016 (Figure 6A). Immediately following the Brexit vote, the euro remained stable but the pound fell an additional 10%, and global equity prices have been volatile since that time. (Figure 6B)

Figure 5. Unemployment in past 24 months

Source: EIU

0%

5%

10%

15%

20%

25%

Q1 2016Q4 2015Q3 2015Q2 2015Q1 2015Q4 2014Q3 2014

UK France Italy Spain Belgium Netherlands USAGermany

Unemployment is generally high, especially in Spain, Italy, and France, which all have unemployment rates consistently at or above 10%. (Figure 5)

Figure 6A. Exchange rates in past 24 months ($ USD: Local Currency)

1.0

1.2

1.4

1.6

1.8

Mar16

Feb16

Q12016

Dec 15

Nov15

Q42015

Sep15

Aug15

Q32015

June 15

May 15

Q22015

Mar 15

Feb15

Q12015

Dec14

Nov14

Q42014

Sep14

Aug14

Q32014

Jun14

May14

Q22014

14.9%decline

19.6%decline

Dol

lars

per

Uni

t of L

ocal

Cur

renc

y

Figure 6B. Recent currency movements ($ USD: local currency)

Source: EIU

1.0

1.2

1.4

1.6

August 2016July 2016June 2016May 2016April 2016

USD per pound USD per Euro

10% decline

Dol

lars

per

Uni

t of L

ocal

Cur

renc

y

8


Our survey of 349 CXOs, executives, and senior management from across Europe provided deep insights into what large and mid-size companies throughout the region are doing to manage costs.

Macroeconomic factors are the top external risksMuch of Europe continues to face lackluster economic growth, weakening currencies, and continued high unemployment. Thus, it is not surprising that “macroeconomic concerns/recession” is the most frequently cited external risk (Figure 7). In the UK, the economy’s performance has been relatively strong, so much of the concern expressed by UK respondents is more likely related to uncertainty about the future, especially Brexit.

In this survey of European companies, digital disruption is at the bottom of the list of external risks. This is in sharp contrast to the US where digital disruption is rapidly being recognized as one of the most powerful forces shaping the business landscape – a trend that seems likely to reach Europe in the very near future. (See the “Regional Comparisons” section to learn more about the similarities and differences between the survey results for Europe, the US, and Latin America).

Survey findings

Figure 7. Top external risks


2

3

1

34%

42%20%

28%29%

21%20%

5%

26%

52%

2

4

15%23%

18%5%

40%20%

27%25%

50%

18%16%

18%26%

10%16%

0%20%

16%20%

12%8%

17%12%

20%13%

33%15%

10% 22%22%

29%12%

0%0%

0%0%0%

8%11%

8%7%

12%27%

9%13%

20%8%

11%17%

13%8%

10%7%

8%

8%

9%

9%

7%10%

10%

7%7%7%

5%

15%7%

7%7%

7%

7%7%

7%

0%

2%

2%

0%

0%

0%

0%

4%

4%

5%

5%

6%5%

5%

8%

8%

4%Digital disruption

Credit costs/risk/availability

Terror/war

Poor financial/stock markets

Global exchangerate fluctuations

Customerconfidence/demand

Political climate/politics

Governmentregulations/taxes

Commodityprice fluctuation

Competition

Macroeconomicconcerns/recession

Survey findingsMacroeconomic concerns/recession (including Brexit) represented the most frequently cited external risk (34%), particularly among respondents from the UK (52%)

Three of the top five most frequently cited external risks are related to government/politics (macroeconomic concerns/recession, government regulations/taxes and political climate/politics)

Two of the top five most frequently cited external risks are market related (competition and commodity price fluctuation)

Digital disruption represented the least frequently cited external risk at 6%

1

2

3

4


9


The cost/growth paradoxDespite a challenging economic environment, respondents in most of the surveyed countries have seen their revenues grow over the past 24 months – and an even larger number of respondents expect their revenues to grow over the next 24 months. In the UK, past growth performance was lower than the overall survey average (56% versus 67%), as was the expectation for future growth (64% versus 76%). However, even those lower-than-average numbers still reflect an optimistic outlook about growth. (Figure 8)

Annual revenue over past 24 months

Figure 8. Annual revenue trends


1

Annual revenue growth projections over next 24 months

2

67%56%

83%74%

73%77%

60%40%

50%

12%12%

10%10%

7%12%

27%33%

0%

20%32%

7%16%

20%12%

7%27%

50%

1%0%0%0%0%0%

7%0%0%

Don’t Know

Decreased

Remainedthe same

Increase

76%64%

77%90%

93%81%

47%60%

83%

13%12%

10%2%2%

9%27%

20%8%

9%10%

13%6%

2%9%

13%13%

8%

2%2%

0%2%2%

0%13%

7%0%

Don’t Know

Decrease

Remainthe Same

Increase

Demographic comparisons67% of the respondents reported revenue growth over the past 24 months, while 76% of respondents believe that revenues will continue growing for the next 24 months

In the UK, respondents cited lower revenue growth expectations with only 56% of UK respondents citing revenue growth over the past 24 months, and only 64% of UK respondents citing continued revenue growth for the next 24 months

1

2


10


At the same time, the vast majority of responding companies in all surveyed countries (83%) say it is “likely” they will pursue cost reduction over the next 24 months. (Figure 9)

The simultaneous pursuit of these two seemingly conflicting priorities -- growth and cost reduction – is a cost management strategy we call “save to grow,” in which companies use cost savings offensively to help fund their growth initiatives.

Figure 9. Likelihood of cost reduction in next 24 months


83%

78%

87%

76%

90%

84% 87

%

73%

92%

15%

16%

12%

24%

7%16

%

13%

27%

8%

2% 2% 2%

6%

0% 0% 0% 0% 0%

UnlikelyNeutralLikely

1

Cost reduction is nearly universalOf course, it is not just growing companies that expect to reduce costs; the vast majority of all survey respondents say they are likely to reduce costs over the next 24 months. This is true both for companies that expect their revenues to rise (85%), and for those that expect their revenues to remain flat or decline (74%). (Figure 10)

4%2%

1

2

Figure 10. Likelihood of cost reduction next 24 months*

Revenue decline/no change**Revenue increase**

85%

22%

74%

13%

Very likely to somewhat likely UnlikelyNeutral

* Includes responses from UK, Germany, France, Spain, Italy, Belgium, Netherlands, Nordics and Poland**Revenue changes refer to change in revenue over the next 24 months

Survey findings83% of the respondents indicated their organizations are likely to undertake cost reduction activities over the next 24 months

1

Survey findingsRespondents are highly likely to undertake cost reduction initiatives, regardless of whether or not revenues are increasing (85%) or decreasing (74%)

Respondents expecting future revenue increases are even more likely to undertake cost reduction initiatives, potentially indicating a more growth-oriented posture

2

1

11


Thriving in uncertaintyThe top three strategic priorities – “sales growth” (30%), “product profitability” (28%), and “cost reduction” (28%) – are all very consistent with a “save to grow” strategy. So is “organization and talent” (19%), which helps a company grow. And for most of the surveyed countries, growth appears to be a higher priority than cost reduction. In fact, Italy and the UK are the only countries where cost reduction scored higher than sales growth as a strategic priority. (Figure 11)

That being said, the “save to grow” approach that was prevalent in recent years now seems to be tempered by a renewed focus on balance sheet management, which has traditionally been associated with companies in distress and was a top priority during the financial crisis. We call this newly evolved approach “thriving in uncertainty” because it implies that while companies continue to focus on growth and cost savings, they are also playing defense in the face of an uncertain future by cautiously managing their balance sheets – including a focus on working capital, credit, treasury-related items, and in some cases perhaps even liquidity.

Figure 11. Strategic priority in next 24 months


1

3

30%23%

33%32%

0%0%0%

0%

13%

8%

28%10%19%

19%

32%

33%53%

37%

17%26%

42%

37%37%

40%40%

42%

28%29%

22%16%

32%44%

27%33%

14%

13%13%

8%

19%13%

13%

15%

33%

14%12%

24%16%

20%27%

10%

8%

4%4%

7%2%2%2%

0%0%0%

23%8%

29%26%

40%

0%

2

Other

Balance sheet Management

Organisation and Talent

Cost Reduction

ProductProfitability

Sales Growth

Survey findingsSales growth, product profitability and cost reduction represent the top strategic priorities for respondents, underscoring the “save to grow” theme

Italy and the UK are the only two markets reporting a higher focus on cost reduction than on sales growth, potentially indicating the need for a different cost management approach

Despite strong growth priorities, the focus on balance sheet management underscores a theme of “uncertainty” and a defensive posture not seen since 2008

11

2

3


12


Survey findingsThe top two drivers of cost reduction are offensive in nature, focusing on cost reduction as a mechanism to fuel growth – 46% of respondents cited gaining a competitive advantage as a key driver, and 36% of respondents cited required investment in growth areas as a key driver

Five of the top seven drivers of cost reduction are defensive in nature and suggest uncertainty about near-term business performance

11

2

Cost reduction drivers underscore the theme of ”thriving in uncertainty”Although the top two drivers of cost reduction are growth-oriented, five of the top seven drivers are defensive in nature and underscore the increasingly important secondary theme of uncertainty and caution. These defense-oriented cost reduction drivers include everything from decreased liquidity and tighter credit to reduced consumer demand, unfavorable cost positions, changing regulatory structures, and poor international portfolio performance. (Figure 12)

Figure 12. Drivers of cost reduction


1

2

46%

52%30%

49%42%

36%28%

57%36%

56%30%

26%

26%29%

22%20%

29%

50%

19%7%

17%

7% 33%

22%

21%

20%

0%

26%

7%0%

22%35%

22%

22%33%

26%37%

30%7%

0%8%

17%16%

17%17%18%

17%

13%0%

0%

0%

20%

23%

17%23%

7%7%

13%13%

17%

73%53%

75%

42%

Decrease in liquidityand tighter credit

Significant reductionin consumer demand

Performance of yourinternational portfoliooutside of the Europe

Unfavorable costposition relative

to peer group

Changed regulatorystructure

Required investmentin growth areas

To gain competitiveadvantage over

peer group


13


Low cost targets and high failure ratesThe majority of respondents (52%) are pursuing cost reduction targets of less than 10%, while only a small minority (13%) are pursuing targets of more than 20%. And while it might seem as if these low targets would be easy to achieve, the survey results show that most companies (57%) are failing to meet their targets, while only 11% are exceeding their targets. (Figure 13) This combination of low targets and high failure rates suggests that European cost programs may have significant room for improvement.

Annual cost reduction targets

Figure 13. Cost reduction targets and success of cost programs


1

3

Success in meeting cost targets

213%10%

18%16%17%

16%13%

0%8%

29%39%

39%

28%12%

35%13%13%

8%

52%48%

50%68%

44%47%47%

60%58%

6%3%3%4%

0%2%

27%27%

25%

No target

Less than 10%

10%-20%

More than 20%

57%54%

65%62%

41%51%

73%73%

42%

13%12%

10%2%

2%9%

27%20%

8%

11%12%

7%6%

17%5%7%

13%50%

Exceeded goals

Met goals

Did not meet goals

4

Survey findings52% of the respondents cite cost targets less than 10%

Only 13% of respondents cite cost targets greater than 20%, and the UK reports the lowest response rate (10%)

57% of respondents did not meet their cost reduction targets with only 11% exceeding goals

Respondents from Spain indicated the lowest failure rates (41%)

1

2

3

4


14


Survey findings48% of the respondents cite implementation challenges as the key barrier to effective cost management

Only “lack of understanding” is related to change management and represents the second most frequently cited barrier to effective cost management

Four of the top five barriers to effective cost management are related to implementation challenges

1

2

3

What factors are behind this disappointing cost management performance?

Implementation is the biggest challengeImplementation challenges are viewed by respondents as the main barriers to effective cost management, with four of the top five barriers directly related to implementation. These include not only the general issue of “challenges in implementing initiatives” (48%), but also more specific implementation-related issues: erosion of savings (20%), weak business case (23%), and poor design and tracking (17%). The only barrier in the top five not directly tied to implementation is “lack of understanding” (32%), which is primarily a change management issue. (Figure 14)

Figure 14. Barriers to effective cost management


2

1

3

48%

62%

40%

34%

37%

53%

20%

50%

32%

32%32%

34%

13%

20%42%

30%

30%

57%

23%

20%

21%

25%

25%

24%

22%

28%

13%

13%

17%

27%

24%

17%

17%

19%

18%

24%

7%

7%

17%

16%

12%

22%

9%

0%

27%

Poor design and tracking

Erosion of savings

Weak business case

Lack of understanding

Challenges in implementing

initiatives

15


Lessons learnedSince issues related to implementation and change management are seen as the biggest barriers to effective cost management, it makes sense that those same two areas are where respondents feel their companies have learned the most over the past 24 months. (Figure 15)

Figure 15. Lessons learned – past 24 months


48%46%

55%

51%42%

47%

38%

47%

75%

37%38%38%

46%33%

0%

42%

20%

42%

20%27%

13%

22%9%

20%

14%

0%

50%

15%24%

10%

10%9%

20%

12%

20%

17%

11%5%

20%

5%28%

0%

10%

13%

8%

11%9%

5%

10%9%

7%

14%

13%

25%

11%19%

7%

15%9%

0%

6%

7%

8%

Budgetmanagement

Poor design andtracking

Continuousimprovement

Communication

Goals andobjectives

Changemanagement

Implementationstrategy

1

Survey findingsImplementation strategy and change management are the most commonly cited categories of lessons learned

1


16


Companies are actively developing their cost management capabilitiesOver the past 24 months, surveyed companies have developed a variety of capabilities to support more effective cost management. The top three capability areas cited by respondents are: processes for forecasting, budgeting, and planning (47% of respondents); cost management policies and procedures (44%); and IT capabilities, including infrastructure, systems, and business intelligence platforms (42%). German companies led the way in developing IT capabilities. Spanish companies led the way in developing new policies and procedures (Figure 16). It should be noted that zero-based budgeting (ZBB) ranked very low, with only 3% of respondents having developed ZBB capabilities over the past 24 months. (See sidebar for a detailed discussion of ZBB).

Figure 16. Capabilities developed over past 24 months


47%

43%

57%

44%

49%

56%

40%

13%

42%

42%

36%

58%

40%

49%

40%

40%

27%

17%

44%

51%

47%

36%

63%

33%

13%

27%

33%

22%

22%

23%

10%

24%

37%

7%

20%

25%

3%

3%

2%

6%

7%

2%0%0%0%

Implementedzero-based budgeting

system or process

Created new excutiveposition to drive cost

management

Implement newpolicies andprocedures

Set-up ITinfrastructure,IT systems and

business intelligenceplatform

Improved processesfor forecasting,budgeting and

reporting

4

1

2

3

Survey findingsThe most frequently cited capabilities developed over the past 24 months were: Improved processes for forecasting, budgeting and reporting, set-up IT infrastructure, IT systems and business intelligence platform and implement new policies and procedures

Respondents from Germany cited a higher response rate (58%) for setting up IT infrastructure, IT systems and business intelligence platforms

Respondents from Spain cited a higher response rate (63%) for implementing new policies and procedures

ZBB represents the least likely capability to have been developed within the past 24 months with only 3% of respondents citing ZBB capability development

1

2

3

4

17


Tactical versus strategic cost reductionMany of the surveyed companies plan to rely primarily on tactical cost actions such as reducing external spend (32%), streamlining organization structures (36%), and streamlining business processes (38%). Overall, respondents ranked those tactical actions higher than strategic cost actions such as outsourcing/offshoring (26%), centralization (30%), and changing the business configuration (32%). Collectively, the various tactical actions on average were cited by 34% of respondents, compared to an average of only 29% for the various strategic actions (Figure 17). This emphasis on tactical actions may be due to the fact that cost reduction targets in Europe are relatively low, limiting the need for approaches that are more strategic.

However, if competitive pressure and other market forces – particularly digital disruption – create an imperative to reduce costs more aggressively, European companies will likely need to shift their focus to strategic cost reduction approaches, since tactical actions cannot be relied upon to deliver cost savings greater than 10%.

Figure 17. Cost actions viewed as most likely in next 24


32%26%

53%

37%28%

20%

26%

0%

33%

26%28%

37%

24%23%

0%

28%

7%

25%

30%32%

30%

32%33%

27%

28%

27%

17%

36%40%

38%

32%42%

7%

26%

27%

50%

28%23%

30%

37%33%

13%

44%

0%

17%

32%36%37%

39%19%

20%

28%

7%

50%

38%36%37%

54%23%

20%

26%

47%

34%

92%

Strategic

Tactical

29%

Streamlinebusiness

processes

Reduce externalspend

Improve policycompliance

Streamlineorganization

structure

Increasecentralization

Outsource/Off-shorebusiness

processes

Change businessconfiguration

2

1

3

1

Indicates average response rates within either the “strategic” or “tactical” categories

Survey findingsOn average, only 29% of respondents plan to undertake a strategic cost action vs. 34% that plan to undertake a tactical cost action

The most frequently cited cost actions likely over the next 24 months were streamlining business processes (38%) and streamlining organization structure (36%) – both of these actions are tactical in nature

The least frequently cited cost action likely over the next 24 months was outsourcing / off-shoring business processes (26%) – this action is strategic in nature

1

2

3


18


The traditional approach for developing a budget is to start with the previous period’s budget and make adjustments as needed. Zero-based budgeting (ZBB) is a fundamentally different approach that involves developing a new budget from scratch every time (i.e., starting from zero). The theory is that ZBB prompts decision-makers to constantly look at the business with fresh eyes, free from the limitations of past assumptions and targets. But how well does the theory translate into practice?

In our survey of European companies, ZBB was the lowest ranked approach to managing costs over the past 24 months (Figure 18).

Figure 18. Approaches to manage costs over the past 24 months


52%

45%

68%

42%

59%

42%

60%

67%

58%

47%

46%

43%

50%

66%

51%

27%

20%

33%

32%

28%

40%

26%

39%

37%

20%

7%

33%

31%

36%

37%

30%

34%

33%

0%

7%

0%

7%

8%

10%

6%

15%

5%0%0%0%

Conduct zero-basedbudgeting efforts

Drive all divisions,business units and

corporate functionsto reduce a fixed

percent of their costs

Conduct anenterprise-wideanalysis of cost

structure followedby the deployment

of a broad program torestructure and

manage the costbase across all

operating companies,holding companies,

shared functions, etc.

Intensify existingproductivity

improvementprograms

Targeted actionstaken to reduce costs

in a few divisions,business units,

functions, orgeographies

1

Zero-based budgeting: breakthrough or passing fad?

Survey findingsUtilization of ZBB over the past 24 months is the lowest among typical approaches to cost management (response rates range from 0% - 15% with a weighted average of 7%)

1

19


Although adoption of zero-based budgeting remains very low, companies in our survey that use ZBB report marginally higher success in meeting or exceeding their cost targets (48%) versus those that do not use it (43%). However, this small difference may have more to do with the fact that most companies in Europe – especially those with cost targets of less than 10% – do not follow a structured approach to cost management, which can limit their success. Among companies with cost targets of 10% or higher, 63% use ZBB compared to only 37% of companies with cost targets of less than 10% (Figure 19). As a structured approach to cost reduction, ZBB is better than nothing. However, our experience suggests that other structured approaches may be even more effective when properly applied.

1

2

Annual cost reduction targets*Figure 19. Cost Reduction Targets and Success

63%

41%

37%

53%

6%

0%

* Includes responses from UK, Germany, France, Spain, Italy, Belgium, Netherlands, Nordics and Poland

* Includes responses from UK, Germany, France, Spain, Italy, Belgium, Netherlands, Nordics and Poland

Conducted ZBB

Success in meeting cost targets*

52%

57%

33%

32%

11%

15%

Did not conduct ZBB

Conducted ZBB Did not conduct ZBB

0%-20% More than 20%

No target

Lessthan 10%

Morethan 10%

Exceededgoals

Met Goals

Did notmeet goals

Conducted ZBB Did not conduct ZBB

44%

48%

37%

31%

26%

23%

37%

16%

22%

20%

Erosion of savings

Poor designand tracking

Weak businesscase


Challenges in implementing

initiatives

Figure 20. Barriers to effective cost management*

1

3

Companies that have used ZBB over the past 24 months are likely to report more barriers to effective cost management – perhaps because they are pursuing higher cost targets (Figure 20).

Survey findingsA high percentage of respondents cited cost targets of less than 10%, likely indicating a less structured approach to cost management

The proportion of respondents citing cost targets of 10% or greater is higher for those conducting ZBB (63%) vs. those not conducting ZBB (41%)

Respondents conducting ZBB cited lower failure rates, but the difference was small (5%); the higher success rates reported by ZBB users may result from those respondents taking a more structured approach to cost management as the majority of European companies do not utilize structured programs, which can be more effective at achieving results

Survey findingsRespondents from organizations conducting ZBB over the past 24 months reported a higher frequency of barriers to effective cost management in four out of five categories

1

1

2

3

20


Survey findingsOverall planned utilization of ZBB over the next 24 months is low (8%) compared to other typical cost management approaches; the same number of respondents that have been conducting ZBB in the past expect to do so in the future with no meaningful change in expected ZBB utilization rates

1

Looking ahead, the survey data shows that adoption of ZBB over the next 24 months is expected to remain low at 8%, up only slightly from 7% over the past 24 months (Figure 21). This relatively flat adoption rate suggests the ZBB trend might already be topping out.

Figure 21. Planned cost improvement initiatives in next 24 months


1

55%

47%

72%

54%

66%

40%

53%

53%

75%

43%

41%

47%

32%

54%

60%

13%

13%

58%

39%

37%

53%

30%

39%

37%

47%

33%

17%

31%

42%

37%

32%

20%

28%

0%

0%

8%

8%

9%

10%

8%

12%

5%0%0%0%

Conduct zero-basedbudgeting efforts

Drive all divisions,business units and

corporate functionsto reduce a fixed

percent of their costs

Conduct anenterprise-wideanalysis of cost

structure followedby the deployment

of a broad program torestructure and

manage the costbase across all

operating companies,holding companies,

shared functions, etc.

Intensify existingproductivity

improvementprograms

Target actionstaken to reduce

costs in a few divisions,

business units, functions, or geographies

21


Regional comparisons

Comparing and contrasting the results from the three regional cost studies Deloitte conducted this year offers some revealing insights into how companies around the globe are managing costs. Looking across regions reveals a number of common themes, as well as some surprising and enlightening differences.

The economy tops the list of external risks in all regionsMacroeconomic concerns -- and the prospect of recession -- tops the list of external risks for all three regions: Latin America (39%), EU (34%), and US (23%). Companies in the UK are particularly concerned about macroeconomic risk and recession, especially Brexit.

In the EU, government regulation and taxes are a much greater concern (16%) than in Latin America (9%) and the US (12%). This is especially true for UK respondents, which makes the UK’s decision to leave the EU less surprising.

Latin America is more concerned about commodities and exchange rates In Latin America, respondents are much more concerned than companies in other regions about global exchange rate fluctuations (38% versus overall EU average of 11%) and commodity price fluctuations (31% versus overall EU average of 18%).

Digital disruption is only prevalent in the US In the US, concern about digital disruption is far higher (19%) than in the EU (6%) and Latin America (1%) (Figure 22). In fact, among many of the leading companies we work with, digital disruption is quickly rising to the top of the strategic agenda. Companies in other regions may soon face a similar impact from digital disruption, and should consider getting themselves into fighting shape.

EU Survey Respondents* UK Latin America**USA

1

3

2

4

Figure 22. Top external risks in next 24 months (Regional)

*Includes responses from UK, Germany, France, Spain, Italy, Belgium, Netherlands, Poland and the Nordics**Includes responses from Brazil and Mexico

34%52%

23%39%

20%15%

11%16%

16%20%

12%9%

15%10%12%

17%

11%8%

10%18%

11%20%

6%38%

8%9%

4%9%

9%15%

7%5%

4%5%4%

2%

6%5%

19%1%

18%16%17%

31%

Digitaldisruption

Credit costsrisk availability

Terror war

Poor financialstock markets

Globalexchange rate

fluctuations

Customerconfidence demand

Politicalclimate politics

Governmentregulations

taxes


Competition

Macroeconomicconcernsrecession

Survey findingsConsistent with respondents from the USA and Latin America, respondents from the EU (and from the UK in particular) cite macroeconomic concerns / recession as the top external risk

Respondents from the EU (and from the UK in particular) cite government regulations / taxes as a top external risk more frequently relative to other regions

Respondents from Latin America cite commodity price / global exchange rate fluctuations as top external risks more frequently relative to other regions

Respondents from the USA cite digital disruption as a top external risk nearly four times more frequently relative to other regions

1

2

3

4

22


Survey findingsWhile all respondents in all regions surveyed are highly likely to undertake cost reduction over the next 24 months, European respondents (respondents from the UK in particular) are somewhat less likely to do so (83% in Europe vs. an average of 92% in other regions) – this effect may translate into the lower cost targets cited by European respondents

1

Growth is the norm in all regionsGrowth remains the dominant trend in all surveyed regions. However, companies in the EU are the least likely to have grown over the past 24 months (67%, versus 81% in the US and 73% in Latin America). Also, they have the least optimistic growth expectations over the next 24 months. This is especially true in the UK, where the numbers for past growth performance (56%) and future growth expectations (64%) are significantly lower than the averages for each of the three regions surveyed (Figure 23).

Annual revenue over past 25 months

Figure 23. Revenue trends (Regional)

Annual revenue growth projections over next 24 months

12%12%

7%

3%

21%

32%

12%25%

67%

56%

81%

73%

1

76%

64%

85%

87%

13%24%

6%4%

9%

9%

9%

2%

2%

0%

0%

10%

Decreased

Remainedthe same

Increased

Don’t know

Decrease

Remainthe same

Increase

1

Figure 24. Likelihood of cost reduction in next 24 months (Regional)


78%83%

96%88%

16%15%

4%11%

6%2% 1%1%




1


Survey findingsRespondents from Europe (in particular the UK) cited lower revenue growth over the past 24 months

1

1

Cost reduction is a strong global trendCost reduction is more likely to take place in Latin America (96%) and the US (88%) than in the EU (83%) – especially the UK (78%). However, in all surveyed regions the vast majority of companies expect to pursue cost reduction over the next 24 months (Figure 24). The lower likelihood of cost reduction activity in the EU may be related to the fact that cost reduction targets tend to be lower there, giving companies less incentive to take action.

23


Europe seems to be less aggressive about reducing costsAs noted above, European companies generally have lower cost reduction targets than do companies in other regions. Specifically, only 13% of EU respondents cited annual cost targets of greater than 20%, compared to 33% of respondents in the US and 32% in Latin America. Similarly, 52% of EU respondents cited cost targets of less than 10%, compared to 41% of respondents in the US and 31% in Latin America (Figure 25). Europe’s relatively low cost reduction targets may reflect a wide range of factors, from social values and government policies to the prevalence of labor unions. It may also reflect the fact that structured approaches to cost reduction are less common in Europe, thus limiting the cost savings that companies can expect to achieve.

Despite lower cost reduction targets in the EU, cost programs there had a similar failure rate (57%) to those in the US (58%). The rate of failure was highest in Latin America, where 67% of surveyed companies did not meet their cost goals.

1

2


Figure 25. Cost Reduction Targets and Success (Regional)


6%3% 1% 3%

13%10%

33% 32%29%

39%

26%

35%

52%48%

41%

31%

3

57% 54%58%

67%

32% 34%28%

18%11% 12% 14% 17%


No targetLess

than 10%10% - 20%More

than 20%

Exceededgoals

Met GoalsDid notmeet goals


Survey findingsAn average of 32% of respondents from regions outside Europe cited annual cost reduction targets of 20% or more, but only 13% of European respondents cited the same

52% of respondents from Europe (and 48% of respondents from the UK) cited cost reduction targets of less than 10%, suggesting European respondents may execute cost reduction via less structured approaches relative to other regions

Although targets cited by respondents in the UK and Europe are lower, program failure rates are generally the same as in the USA

1

2

3

24


Implementation is the biggest barrier for all regionsRespondents in all regions rate “challenges in implementing initiatives” as the top barrier to effective cost management, followed by “lack of understanding” (Figure 26). It is interesting that these two barriers are consistently at the top of the list in all regions, despite significant regional variations in cost reduction approaches and targets. Clearly these are important challenges that need to be addressed head-on.

Figure 26. Barriers to effective cost management

1

Figure 27. Approaches to manage costs over the past 24 months

2

1

3

2

48%

57%

55%

48%

32%

32%

36%

41%

23%

25%

26%

25%

17%

19%

26%

26%

20%

21%

23%

26%

Erosion of savings

Poor design and tracking

Weak business case


Challenges in implementing initiatives

*Includes responses from UK, Germany, France, Spain, Italy, Belgium, Netherlands,Poland and the Nordics**Includes responses from Brazil and Mexico




Conduct zero-based budgeting efforts

Drive all divisions, business units and

corporate functions to reduce a fixed percent of

their costs

Intensify existing productivity improvement programs

Conduct an enterprise-wide analysis of cost structure followed by the deployment of

a broad program to restructure and manage the cost base across all operating companies, holding

companies, shared functions, etc.

Target actions taken to reduce costs in a few

divisions, business units, functions, or geographies

52%

45%62%

50%

32%

28%

49%

51%

47%

46%

52%

51%

31%

36%45%

43%

7%

8%16%

15%

Cost management programs are less common in EuropeAccording to the survey results, cost reduction in Europe is more likely to be pursued ad hoc, rather than through standard cost management approaches that are more common in other regions. Enterprise-wide cost analysis and broad restructuring was much less common over the past 24 months in the EU (32%) than in the US (62%) and Latin America (50%). But that is just the most dramatic example. EU respondents cited lower utilization rates than other regions for nearly all cost management approaches, except for the one category of highly focused “targeted actions” where the EU was behind the US (52% versus 62%) but slightly ahead of Latin America (50%) (Figure 27).

Survey findingsRespondents from Europe cited lower utilization rates for conducting an enterprise-wide analysis of cost structure over the past 24 months

In general, European respondents cite low utilization rates for all approaches to cost management, perhaps indicating that European respondents are less likely to pursue structured cost programs

Respondents from Europe are least likely to have conducted ZBB over the past 24 months

Survey findingsImplementation challenges rank highest among barriers to effective cost management

European respondents generally cite lower rates of barriers to effective cost management relative to other regions, although this might be expected given the prevalence of less structured cost programs in Europe

1

1

2

2

3

25


Choosing the right cost management approach

In Europe, the “save to grow” mentality that emerged as the global economy was bouncing back from the financial crisis is now being tempered by a renewed focus on balance sheet management. Although companies throughout the region continue to place a strong emphasis on growth and cost reduction -- using cost savings to fund growth activities -- many are also adopting a more defensive posture by tightening up their balance sheets. This mix of strategic priorities -- what we call “thriving in uncertainty” -- seems to reflect an environment of cautious optimism combined with uncertainty about the future.

Low targets and high failure rates imply that European cost programs are not as effective as they could be, creating an opportunity for companies to significantly improve how they manage costs. Some improvements might be tactical in nature,

such as focusing on new cost areas and simultaneously pursuing multiple cost levers. But even with such improvements, a tactical approach to cost reduction is unlikely to deliver cost targets beyond the single digits.

Achieving cost targets greater than 10% generally requires a cost management approach that is more strategic and transformational in nature (Figure 28). However, the right strategic approach varies from one company to the next, depending on its unique situation and challenges. Companies pursuing strategic-level cost reductions may soon reach a fork in the road where they must choose between a more offense-oriented cost strategy (typically associated with businesses that are growing rapidly), or a more defense-oriented cost strategy (typically associated with businesses in distress).

• 52% of European respondents cited cost targets of less than 10%

• 57% of European respondents did not meet cost reduction goals

• 34% of European respondents plan to undertake tactical cost actions with the most frequently cited action being to streamline business processes (38%)

• 29% of European respondents cited cost targets between 10% and 20%

• 13% of European respondents cited cost targets greater than 20%

• Only 29% of European respondents plan to undertake strategic cost actions

Tactical/Continuous Improvement Approach

Strategic/Transformational Approach

Scope/Cost Areas Narrow/selective e.g., streamline organization structure, improve policy compliance, reduce external spend, streamline business processes

Broad e.g., change business configuration, outsource/offshore, increase centralization

Cost Target Range <6% (Continuous Improvement)/

6%–10% (Tactical)

>10%

Sustainability/Scalability Lower Higher

Change Management Needs Lower Higher

Currently, these are the types of approaches

European respondents are pursuing…

…but the environment suggests many European companies should pursue

these approaches

<10% Cost Target >10%

Figure 28. The cost management continuum

Source: Deloitte

26


Improve policy compliance

Reduce external spend

Streamline organization structure

Streamline business processes

EU Survey Respondents

Figure 29. Most common tactical cost actions

38%

32%

36%

28%

As noted earlier, European companies tend to use tactical cost actions more than strategic cost actions. Looking at the entire pool of EU respondents, the most common tactical cost actions are to: streamline business processes (38%), streamline organization structure (36%), reduce external spend (32%), and improve policy compliance (28%) (Figure 29).

Our experience working with companies around the world suggests the last two may have a greater cost impact than the first two, even though the survey results show they are less utilized. Also, companies often can improve their results and achieve higher cost reduction targets by focusing on a broader number of tactical cost reduction levers.

That being said, many companies will not be able to achieve their required cost improvements through tactical actions alone. Instead, they will need to adopt a cost management approach that is more strategic and transformational.

Traditionally, companies in pursuit of strategic cost improvements could be categorized as: (1) distressed, (2) positioned for growth, or (3) growing steadily (Figure 30).

Survey insights• Higher targets and better results can be obtained by focusing

on multiple tactical levers

• The tactical levers with the most cost impact may be reducing external spend and improving policy compliance, but they are the least likely to be utilized

Costs

1. Distressed 2. Positioned for Growth 3. Growing Steadily

• Losing market share

• Structural operating flaws

• Liquidity concerns

• No clear growth options

• Recovering from recession

• Adjusting to demand levels

• Growth concerns

• Conditional options for growth

• Healthy balance sheet

• Excess cash flow/reserves

• High growth potential

• Unconstrained options

• Conserve cash

• Renegotiate costs

• Restructure debt

• Downscale business model

• Transform operating model

• Optimize business processes

• Right-size FTE structure

• Fuel growth through savings (capital efficiency)

• Focus on investment and M&A

• Optimize and align customer and product portfolios

• Focus on efficient execution and delivery

Liquidity

Liquidity LiquidityTalent Talent

TalentCosts Costs

Growth

Growth Growth

Low FocusHigh Focus

Competitive situation

Priority balance

Primary objectives

Figure 30. Traditional cost management scenarios

Source: Deloitte 27


1. Distressed 2. Positioned for Growth 3. Growing SteadilyThriving in

Uncertainty

New

UK

FRITBESP

NONE

? ? ?

•

• The UK faces a more uncertain business environment as a result of Brexit – 36% of UK respondents cite Brexit as a top external risk

• UK survey respondents cite both past (56%) and future (64%) revenue growth less frequently than other European respondents

• Cost reduction is the most frequently cited strategic priority in the UK (29%) and Italy (44%), indicating a more defensive posture

• GDP growth is low in France (1.3%) and Italy (1.0%)

UK/France/Italy Competitive Situation Other European Economies’ Competitive Situation

•

• Germany, Spain, Belgium, Netherlands and the Nordics all cite sales growth as a higher priority than cost reduction, indicating a more offensive posture

• High unemployment rates in Spain (20.5%) have dropped significantly over the past two years, and GDP growth is picking up (3.4%)

• Macroeconomic factors like GDP growth and unemployment in Germany, Netherlands, Belgium and the Nordics are stable and improving

A “distressed” business typically focuses on short-term survival and balance sheet improvement -- looking for any cost and liquidity improvements that can help stabilize the business. A business that is “positioned for growth” typically starts by focusing on structural improvements, such as choosing the right operating model; it can then look for additional cost reduction opportunities to help fund its growth initiatives. A company that is “growing steadily” typically focuses on achieving profitable and sustainable growth through structural cost efficiencies and improvements – such as smart investments, M&A, and management of customer and product portfolios – actions that can strengthen its performance and competitive position.

Until recently, most companies fell into one of these three traditional categories; however, today’s volatile and complex global business environment seems to be giving rise to a fourth category that we call “thriving in uncertainty” -- a scenario that straddles the line between “distressed” and “positioned for growth” and involves organizations simultaneously pursuing the seemingly conflicting goals of growth, cost improvement, and balance sheet management. It remains to be seen whether this fourth category is a new and permanent feature of the business landscape, or simply a stepping-stone to one of the traditional categories (Figure 31).

GE

Source: Deloitte

Figure 31. A new cost management scenario has emerged

UK FRIT BESP NONE GE

28



Uncertainty

New

Value creation levers on which to focus

Less Focus

LiquidityTalent

CostsGrowth More Focus

Pricing Realisation

Direct Cost Optimisation

Working Capital Optimisation

Governance & Change

Mergers and Acquisitions

Marketing & Sales Effectiveness

SG&A Cost Management

Inventory Optimisation

Optimisation & Talent

Business Portfolio Optimisation

Customer Experience and Channel Mix

Supply Chain and Manufacturing Effectiveness

Capital Investment and Divestment

Business Preformance Management

Partnership & Collaboration

Product Portfolio Innovation &

Rationalisation

Service Delivery Execution

Debt Restructuring

Risk, Compliance and Regulatory

Tax Strategy

Revenue

Margin

Assets

Execution

Strategy

Indicates levers that Deloitte identified as potential focus areas

For the UK, France, and Italy, macroeconomic factors seem to be pushing companies toward greater uncertainty, requiring a playbook with value creation levers that may be more defensive in nature (Figure 32).

Figure 32. Defense-oriented Playbook

UK

FRIT

Source: Deloitte

29


Value creation levers on which to focus

Less Focus

Liquidity Talent

CostsGrowth More Focus


Uncertainty

New

Pricing Realisation

Direct Cost Optimisation

Working Capital Optimisation

Governance & Change

Mergers and Acquisitions

Marketing & Sales Effectiveness

SG&A Cost Management

Inventory Optimisation

Optimisation & Talent

Business Portfolio Optimisation

Customer Experience and Channel Mix

Supply Chain and Manufacturing Effectiveness

Capital Investment and Divestment

Business Preformance Management

Partnership & Collaboration

Product Portfolio Innovation &

Rationalisation

Service Delivery Execution

Debt Restructuring

Risk, Compliance and Regulatory

Tax Strategy

Revenue

Margin

Assets

Execution

Strategy

In contrast, the other European markets surveyed seem to be moving toward a more positive outlook, requiring a different playbook with value creation levers that tend to emphasize growth (Figure 33).

Figure 33. Growth-oriented Playbook

BESP

NONE

GE

Indicates levers that Deloitte identified as potential focus areas

Source: Deloitte

30


Looking ahead

Companies across Europe face a number of challenges, including slow GDP growth, high unemployment, and uncertainty associated with Brexit. Also, the tidal wave of change driven by digital disruption will likely spread quickly beyond the US, potentially reshaping the competitive landscape in all regions.

To tackle these complex and varied challenges, many European companies may need to pursue cost reduction more aggressively. Tactical cost actions alone will likely not be able to deliver the required level of cost savings. Instead, companies in the EU may need to adopt new approaches to cost management, shifting to actions that are more strategic and structural, such as increasing centralization, reconfiguring the business, and outsourcing/offshoring business processes.

One question to ponder is whether there are hidden social, political, and economic barriers in Europe that make it difficult for companies to pursue and achieve aggressive cost reduction. And if so, have executives in the EU subconsciously accepted the barriers and scaled back their cost reduction targets accordingly – even if a more aggressive approach to cost management could help their businesses thrive?

During periods of uncertainty, companies that take bold action can recover more quickly and gain sustainable competitive advantages that boost performance both in good times and bad. Companies that are able and willing to make bold cost moves could find the current economic environment is a prime opportunity to position themselves for long-term success.

31


Appendix A – Germany: The most aggressive “save to grow” posture in Europe

German companies are very focused on growth, perhaps because expectations about future growth are lower than past growth performance. And while there tends to be less emphasis on cost reduction in Germany than elsewhere, German respondents cite growth factors as the top drivers behind their cost reduction efforts. One attribute that sets German companies apart from virtually all others is a greater focus on strategic cost actions than on tactical cost actions.

32


Key survey findings for Germany

Digitaldisruption

Credit costs/risk/availability

Terror/warPoor financial/stock markets

Global exchange rate

fluctuations


Politicalclimate/politics


/taxes


CompetitionMacroeconomicconcerns/recession

Other European respondents Germany

1

% o

f Tot

al R

espo

nden

ts

Top external risks

German respondents cite political climate / politics as a top external risk more frequently (23%) relative to other European respondents (16%)

Survey findings

1

34%

28%

20%23%

18% 18%16%

12%

16%

23%

11%

7%

11%13%

8% 7%9%

7%4%

6%7% 8%

Greater concern about politics. German companies cite “political climate/politics” as a top external risk much more frequently than the EU average (23% versus 16%) (Figure A1).

Declining growth expectations. Fewer German companies expect revenue growth over the next 24 months (77%) than reported revenue growth over the past 24 months (83%) (Figure A2).

Figure A1. German respondents cite political climate / politics as a top external risk more frequently relative to other European respondents

Figure A2. German respondents are slightly less optimistic about revenue growth over the next 24 months

DecreasedRemained the same

Increased Don’t' KnowDecreaseRemain the SameIncreased


1

2

% o

f Tot

al R

espo

nden

ts

Annual revenue growthover past 24 months

83% of German respondents reported revenue growth over the past 24 months, but only 67% of other European respondents cited the same

While 83% of German respondents reported revenue growth over the past 24 months, only 77% cited projected revenue growth over the next 24 months

Survey findings

1

2

67%

83%76% 77%

13% 10% 9% 13%

2% 0%

12% 10%

21%

7%

71%

Annual revenue growth projectionsover next 24 months

33


Figure A4. German respondents cite a higher focus on growth priorities and a lower focus on cost reduction relative to other European respondents

Other heet ManagementOrganization and TalentCost ReductionProduct ProfitabilitySales Growth


2 3

1

% o

f Tot

al R

espo

nden

ts

Strategic priority in next 24 months

The top three strategic priorities cited by German respondents are growth-oriented, and response rates for all three priorities were higher compared to other European respondents

German respondents cite cost reduction as a strategic priority less frequently (22%) relative to other European respondents (28%)

Unlike other European respondents, German respondents cite organization and talent within their top three strategic priorities

Survey findings

1

2

3

30%33%

28%

32%

28%

19%22% 23%

15%12%

4%7%

Figure A3. German respondents are more likely to undertake cost reduction initiatives if revenue is projected to increase over the next 24 months, possibly indicating a more growth-oriented posture

Revenuedecline/no change*

RevenueIncrease*


RevenueIncrease*



1

2

% o

f Tot

al R

espo

nden

ts

Likelihood of cost reduction next 24 months

86% of German respondents indicated their organizations are likely to undertake cost reduction activities over the next 24 months vs. 83% respondents from other European countries citing the same

German respondents are more likely to undertake cost reduction initiatives if revenue is projected to increase over the next 24 months (91% vs. 71%)

Survey findings

1

2

83% 86%

2% 4%

15% 12%2% 2%

85% 74%

13%22%

2% 0%

91%

71%

7%29%

*Revenue changes refer to projected change in revenue over the next 24 months

Unlikely Neutral

Very likely to somewhat likely

Unlikely Neutral


GermanyOther European

respondents

Saving to grow. German companies view “required investment in growth areas” as their top driver of cost reduction, citing it far more frequently than the EU average (57% versus 36%) (Figure A3). German companies that expect revenues to increase over the next 24 months are much more likely to undertake cost reduction initiatives (91%) than those expecting revenues to decrease (71%) (Figure A3).

Saving to grow. Also, the top three strategic priorities in Germany are all growth–oriented: sales growth (33%), product profitability (32%), and organization & talent (23%) (Figure A5).

34


Figure A6a. Although German respondents cite comparable cost targets, cost program failure rates are higher

Figure A5. German respondents cite investment in growth areas more frequently, but growth plans are tempered by a higher focus on business performance outside of EMEA



Performance of yourinternational portfolio

outside of EMEA

Unfavorable cost positionrelative to peer group



To gain competitiveadvantage over peer group


2

1

% o

f Tot

al R

espo

nden

ts

Drivers of Cost Reduction

German respondents cite required investment in growth areas as a driver of cost reduction more frequently (57%) relative to other European respondents (36%)

German respondents cite performance of the international portfolio of businesses outside EMEA as a driver of cost reduction more frequently (35%) relative to other European respondents (22%)

Survey findings

1

2

46%52%

36%

57%

26%

33%

26%22% 22%

35%

17% 17% 17% 18%

Defensive DriversGrowth Drivers

Exceeded goalsMet goalsDid not meet goalsNo targetLess than 10%10%-20%More than 20%


12

% o

f Tot

al R

espo

nden

ts

Annual Cost Reduction Targets

In line with other European respondents, 50% of German respondents cite targets of less than 10%

65% of German respondents did not meet their cost reduction targets (vs. 57% for other European respondents) with only 7% exceeding goals (vs. 11% for other European respondents)

Survey findings

12

13%18%

57%

32%28%

65%

11%7%

29% 28%

52% 50%

6%3%

Success in Meeting Cost Target

Higher cost program failure rates. Although German companies cite comparable cost targets, cost program failure rates are higher than the EU average (65% versus 57%) (Figure A6a).

35


Figure A6b. German respondents cite challenges in implementing initiatives as a barrier to effective cost management more frequently

Figure A7. German respondents were generally more active in developing cost management capabilities over the past 24 months

Poor design and trackingErosion of savingsWeak business caseLack of understandingChallenges in implementing initiatives


2

1

% o

f Tot

al R

espo

nden

ts

Barriers to Effective Cost Management

German respondents cite challenges in implementing initiatives as a barrier to effective cost management more frequently (62%) relative to other European respondents (48%)

German respondents cite erosion of savings as a barrier to effective cost management more frequently (27%) relative to other European respondents (20%)

Survey findings

1

2

48%

62%

32% 32%23% 25%

20%27%

17% 18%


32

% o

f Tot

al R

espo

nden

ts

Capabilities Developed Over Past 24 Months

German respondents were more active in developing capabilities in four out of the five categories surveyed

German respondents cite improved processes for forecasting, budgeting and reporting as a capability developed over the past 24 months more frequently (57%) relative to other European respondents (47%)

German respondents cite setting up IT infrastructure, IT systems and business intelligence platforms as a capability developed over the past 24 months more frequently (58%) relative to other European respondents (42%)

Survey findings

1

2

3

47%

57%

1

44%47%

42%

58%

22% 23%

3% 2%

Implemented zero-basedbudgeting system or process

Created new executive position to drive cost management

Set-up IT infrastructure, IT systemsand business intelligence platform

Implement new policies\and procedures

Improved processes for forecasting, budgeting and reporting

Implementation is a bigger issue. “Challenges in implementing initiatives” is cited more frequently as a barrier to effective cost management by German companies than by others (62% versus an EU average of 48%). German respondents also more frequently cite “erosion of savings” as a barrier (27% versus an EU average of 20%) (Figure A6b).

More active in developing new and improved capabilities. Over the past 24 months, German companies were more active than the EU average in developing cost management capabilities in four of the five areas specified in the survey (Figure A7).

36


Figure A8. Unlike all other European respondents, German respondents are more focused on strategic cost actions relative to tactical cost actions

Streamline businessprocesses



Streamline organizationstructure

Increasecentralization

Outsource/Off-shorebusiness processes


Other European respondents


Strategic Tactical

Germany

2

% o

f Tot

al R

espo

nden

ts

Cost Actions Viewed as Most Likely in Next 24 Months

32%

53%

26%

37%

30% 30%36% 38%

28%

30% 32% 37% 38% 37%

Survey findings

1

2

Unlike all other European respondents, German respondents are more focused on strategic cost actions (40%) relative to tactical cost actions (36%)

German respondents cite changed business configuration (53%) and outsourcing/off-shoring (37%) more frequently relative to other European respondents, potentially indicating a more strategic approach to cost management

40%

1

36%

1

More strategic at managing costs. Unlike companies in most other countries, German companies are more focused on strategic cost actions (40%) than tactical cost actions (36%). The top ranked strategic actions are “change business configuration” (53%), and “outsource/offshore business processes” (37%).

Greater focus beyond EMEA. German companies cite performance of their “international portfolio outside of EMEA” as a key cost reduction driver much more frequently than the EU average (35% versus 22%) (Figure A9).

Figure A9. German companies cite performance of their international portfolio outside of EMEA as a key cost reduction driver more frequently than the EU average

Decrease in liquidity andtighter credit

Significant reduction inconsumer demand

Performance of your internationalportfolio outside of EMEA


Changed regulatory structure


1

% o

f Tot

al R

espo

nden

ts


German respondents cite performance of the international portfolio of businesses outside EMEA as a driver of cost reduction more frequently (35%) relative to otherEuropean respondents (22%)

Survey findings

1

26%

33%

26%

22% 22%

35%

17% 17% 17%18%

37


7%

31%

23%

12%

2%

18%

7%

Industry Breakdown

27%

26%

12%

25%

10%

Annual Revenue

23%

52%

38%

25%

Management Level

27%

17%

7%

8% 3%

Number of Employees


Technology, Media & Telecommunications Other

Energy & Resources Public SectorLife Sciences & Health Care

€150M - €300M €300M - €500M €500M - €1B

€1B - €3B > €3B

58%

15%

5%

12%

5%

5%

Revenue Footprint

European Union North America Asia Pacific

Rest of the world Middle East and Africa

Latin America

C-suite/CXO Executive Management

Senior Management

<1K 1K - 5K

30K - 50K

5K - 15K 15K - 30K

>50K

Figure A10. Firmographics summary for Germany (60 responses)

A10a.

A10c.

A10b.

A10d. A10e.

38


Appendix B – UK: Playing defense in the face of uncertainty

Cost reduction is the top strategic priority for UK companies, and past growth performance and future expectations are both lower than the EU average. This defensive posture is likely tied to significant uncertainty about the impact of Brexit.

39


0

5

10

15

20

25

30

35

Digital disruptionCredit costs/risk/availability






/taxes



Other European respondents UK

Portion of responsesciting Brexit explicitly

1

% o

f Tot

al R

espo

nden

ts

Top external risks

UK respondents cite macroeconomic concerns / recession as a top external risk more frequently (52%) relative to other European respondents (34%), primarily due to Brexit concerns

Survey findings

1

34%

52%

20%

15%18%

16% 16%

20%

16%

10% 11%8%

11%

17%

8% 9% 9%

15%

4%6%5% 5%

Figure B1. UK respondents cite macroeconomic concerns / recession as the top external risk, primarily due to Brexit concerns

Figure B2. UK respondents cite past and future revenue growth at lower rates compared to other European respondents

DecreasedRemained the sameIncrease Don’t' KnowDecreaseRemain the SameIncrease


13

2

% o

f Tot

al R

espo

nden

ts


56% of UK respondents reported revenue growth over the past 24 months, but 67% of other European respondents cited the same

While only 56% of UK respondents reported revenue growth over the past 24 months, 64% cited projected revenue growth over the next 24 months

64% of UK respondents reported revenue growth over the next 24 months, but 76% of other European respondents cited the same

Survey findings

1

2

3

67%

56%

76%

64%

13% 12% 9% 10%2% 2%

12% 12%

21%

32% 71%


Concern about the economy and Brexit. UK companies cite “macroeconomic concerns/recession” as a top external risk much more frequently than the EU average (52% versus 34%), primarily due to Brexit concerns (Figure B1).

Lower than average growth. Compared to other EU countries, fewer companies from the UK reported revenue growth over the past 24 months (56% versus the EU average of 67%) or expect revenue growth over the next 24 months (64% versus the EU average of 76%) (Figure B2).

Key survey findings for the UK

40


Revenue decline/no change*

Revenue Increase*


RevenueIncrease*



1

2

% o

f Tot

al R

espo

nden

ts


78% of UK respondents indicated their organizations are likely to undertake cost reduction activities over the next 24 months – slightly lower than the rate for the rest of Europe (83%)

UK respondents are more likely to undertake cost reduction initiatives if revenue is projected to increase over the next 24 months (84% vs. 68%)

Survey findings

12

83%78%

2% 4%

15% 16%

2%6%

85% 74%

13%22%

4% 8%

84%68%

12%24%


Unlikely Neutral


Unlikely Neutral


UKOther European respondents

Figure B3. UK respondents are more likely to undertake cost reduction initiatives if revenue is projected to increase over the next 24 months

Figure B4. UK respondents are more focused on cost reduction than on any other strategic priority

OtherBalance Sheet ManagementOrganization and TalentCost ReductionProduct ProfitabilitySales Growth


2

1

% o

f Tot

al R

espo

nden

ts


Unlike the growth-oriented priorities of other European respondents, cost reduction represents the most frequently cited strategic priority among UK respondents (29%)

UK respondents cite organization and talent as a strategic priority less frequently (13%) relative to other European respondents (19%)

Survey findings

1

2

30%

23%

28%

19%

28%

19%

29%

13%15% 14%

4% 4%

Saving to grow. UK companies are more likely to undertake cost reduction initiatives if they expect revenue to increase over the next 24 months (84%) than if they expect revenue to decrease (68%) (Figure B3).

Cost reduction is the top priority. UK companies are more focused on cost reduction than on any other strategic priority, reflecting a defensive posture (Figure B4).

41


Figure B5. UK respondents cite growth-oriented drivers of cost reduction less frequently relative to other European respondents




outside of EMEA




To gain competitiveadvantage over peer group


2

3

1

% o

f Tot

al R

espo

nden

ts


UK respondents cite growth-oriented drivers of cost reduction less frequently relative to other European respondents, possibly indicating a more defensive posture

UK respondents cite unfavorable cost position relative to peer group as a driver of cost reduction more frequently (29%) relative to other European respondents (26%)

UK respondents cite significant reduction in consumer demand as a driver of cost reduction more frequently (21%) relative to other European respondents (17%)

Survey findings

1

2

3

46%42%

36%

28% 26% 26%29%

22% 22% 22%17%

21%17% 17%


Figure B6. Although UK respondents cite more aggressive targets, failure rates are consistent with those cited by other European respondents



12

% o

f Tot

al R

espo

nden

ts

Annual Cost Reduction Targets

UK respondents cite cost targets of 10% – 20% more frequently relative to other European respondents, indicating their targets are slightly more aggressive

Although UK respondents cite slightly more aggressive targets, failure rates (54%) are consistent with those cited by other European respondents (57%)

Survey findings

12

13%10%

57%

32% 34%

54%

11% 12%

29%

39%

52%48%

6%3%


Cost efforts less driven by growth. Overall, UK companies cite growth-oriented drivers of cost reduction less frequently than other EU companies, possibly indicating a more defensive posture (Figure B5).

Higher targets. Similar failure rates. Although UK companies cite more aggressive cost reduction targets, reported failure rates (54%) are similar to those cited by all European respondents (57%) (Figure B6).

42





Streamlineorganization structure

Increase centralization





Strategic Tactical

UK

2

% o

f Tot

al R

espo

nden

ts

Cost Actions Viewed as Most Likely in Next 24 Months

32%26% 26%

28% 30% 32%36%

40%

28%30%

32% 36% 38% 36%

Survey findings

1

2

UK respondents cite tactical cost actions (34%) as more likely to be utilized in the next 24 months relative to strategic cost actions (28%)

The top three most frequently cited cost actions are tactical in nature: Streamline organization structure (40%), reduce external spend (36%) and streamline business processes (36%)

28%

1

34%

1

Figure B7. UK respondents cite tactical cost actions as more likely to be utilized in the next 24 months

Tactical actions favored over strategic. Over the next 24 months, UK companies are more likely to use tactical cost actions (34%) than strategic cost actions (28%). The top-ranked tactical actions are: streamlining organization structure (40%), reducing external spend (36%) and streamlining business processes (36%) (Figure B7).

43


25%

31%

10%

10%

12%

10%2%

Industry Breakdown

16%

22%

21%

31%

10%

Annual Revenue

30%

15%

30%

55%

Management Level

17%

10%

9%

24%

10%

Number of Employees


Technology, Media & Telecommunications


€150M - €300M €300M - €500M €500M - €1B

€1B - €3B > €3B

51%

20%

8%

10%

5%

6%

Revenue Footprint



Latin America


Senior Management

<1K 1K - 5K

30K - 50K

5K - 15K 15K - 30K

>50K

Other

Figure B8. Firmographics Summary for UK (106 Responses)

44


Appendix C – France: Are the business outlook and cost approach consistent with market dynamics?

The French economy is experiencing a relatively low growth rate and high unemployment levels, yet French companies show relatively little interest in cost reduction. Cost targets in France are relatively low, yet cost program failure rates are higher than for the EU as a whole. The biggest concerns are commodity price fluctuations and politics.

45





Customerconfidence/

demand



/taxes



Other European respondents France

1 2

% o

f Tot

al R

espo

nden

ts

Top external risks

French respondents cite commodity price fluctuation as a top external risk more frequently (26%) relative to other European respondents (18%)

French respondents cite political climate / politics as a top external risk more frequently (24%) relative to other European respondents (16%)

Survey findings

1

2

34%

22%20%

18% 18%

26%

16%

8%

16%

24%

11% 12% 11%8%8%

10% 9% 10%

4%6%

4% 4%

Figure C1. French respondents cite commodity price fluctuation and politics as top external risks

Figure C2. French respondents cite past and future revenue growth at higher rates relative to other European respondents



13

2

% o

f Tot

al R

espo

nden

ts


74% of French respondents reported revenue growth over the past 24 months, but only 67% of other European respondents cited the same

While only 74% of French respondents reported revenue growth over the past 24 months, 90% cited projected revenue growth over the next 24 months

90% of French respondents reported revenue growth over the next 24 months, but 76% of other European respondents cited the same

Survey findings

1

2

3

67%74% 76%

90%

13%

2%9% 6%

2% 2%12% 10%

21% 16%

71%


Key survey findings for France

Concern about volatile commodity prices and politics. French companies cite commodity price fluctuation (26%) and politics (24%) as the top external risks (Figure C1).

Higher than average growth. French companies report a relatively high level of past revenue growth (74%) and expected future revenue growth (90%) compared to the EU-wide averages (Figure C2).

46



Revenue Increase*


RevenueIncrease*



1

2

% o

f Tot

al R

espo

nden

ts


76% of French respondents indicated their organizations are likely to undertake cost reduction activities over the next 24 months – lower than the rate for the rest of Europe (83%)French respondents are more likely to undertake cost reduction initiatives if revenue is projected to increase over the next 24 months (78% vs. 60%)

Survey findings

12

83%76%

2% 4%

15%24%

2% 0%

85% 74%

13%22%

78%60%

22%

40%


Unlikely Neutral


Unlikely Neutral


FranceOther European respondents

Figure C3. French respondents are more likely to undertake cost reduction initiatives if revenues are projected to increase, possibly indicating a more offensive posture

Figure C4. French respondents cite cost reduction as a strategic priority much less frequently in favor of more growth-oriented priorities

OtherBalance sheet ManagementOrganization and TalentCost ReductionProduct ProfitabilitySales Growth


2 31

% o

f Tot

al R

espo

nden

ts


Sales growth and product profitability represent the top strategic priorities for French respondents, consistent with response rates from other European respondents

French respondents cite cost reduction as a strategic priority much less frequently (16%) relative to other European respondents (28%), potentially indicating that the “save to grow” theme does not apply as strongly to the French market relative to other European markets

French respondents cite organization and talent (8%) and balance sheet management (10%) as strategic priorities less frequently relative to other European respondents

Survey findings

1

2

3

30%32%

28%26%

28%

19%16%

8%

15%

10%

4%2%

Saving to grow. French companies are more likely than most to undertake cost reduction initiatives if revenue is projected to increase over the next 24 months (78% versus the EU average of 60%), possibly indicating a more offensive posture (Figure C3).

Low emphasis on cost reduction. French companies cite cost reduction as a strategic priority much less frequently (16%) than the EU average (28%) (Figure C4).

47


Figure C6. Lower relative response rates for creating a new executive position to drive cost management may provide additional support that cost reduction is a lower priority in France

Figure C5. Although French respondents cited lower cost targets, cost program failure rates were higher



1

2

% o

f Tot

al R

espo

nden

ts


French respondents cite comparatively low cost targets with 68% of French respondents citing targets of less than 10% compared to 52% for other European respondentsAlthough French respondents cited lower cost targets, cost program failure rates were higher (62%) relative to other European respondents (57%), and the proportion of French respondents that “exceeded goals” is lower (6%) relative to other European respondents (11%)

Survey findings

12

13%10%

57%

32% 32%

62%

11%6%

29%

39%

52%

68%

6% 4%



21

% o

f Tot

al R

espo

nden

ts

Capabilities developed over past 24 months

French respondents cite implementing new policies and procedures as a capability developed over the past 24 months less frequently (36%) relative to other European respondents (44%)

French respondents cite creating a new executive position to drive cost management as a capability developed over the past 24 months less frequently (10%) relative to other European respondents (22%)

Survey findings

1

2

47%44% 44%

36%

42% 40%

22%

10%

3%6%




Implement new policies\and procedures


High cost program failure rates. Although French companies had relatively low cost targets, their cost program failure rates were higher (62%) than the EU average (57%). The proportion of French companies that “exceeded goals” is also lower (6%) than the EU average (11%) (Figure C5).

Minimal effort to create a cost executive position. The percentage of French companies that are creating a new executive position to drive cost management is much lower than average (10% versus 22% for all European respondents). This may be additional evidence that cost reduction is a relatively low priority in France (Figure C6).

48




Strategic Tactical

France

23

% o

f Tot

al R

espo

nden

ts

Cost actions viewed as most likely in next 24 months

32% 26% 26% 28% 30% 28% 36%

26%

28% 28%

44%

32%38%

26%

Survey findings

1

2

3

French respondents cite tactical cost actions (31%) as more likely to be utilized in the next 24 months relative to strategic cost actions (27%)

French respondents cite improved policy compliance (44%) more frequently relative to other European respondents (28%)

French respondents are less likely to conduct five out of the top seven cost actions relative to other European respondents

27%

1

31%

1








Figure C7. French respondents are less likely to conduct five out of the top seven cost actions relative to other European respondents

Tactical actions favored over strategic. Over the next 24 months, French companies are more likely to use tactical cost actions (31%) than strategic cost actions (27%). The top-ranked tactical action is “improving policy compliance” (44%) (Figure C7).

49


10%

34%

26%

4%

8%

12%

6%

Industry Breakdown

14%

20%

22%

26%18%

Annual Revenue

44%

36%

20%

20%

Management Level

18%

6%

14%

24%18%

Number of Employees




€150M - €300M €300M - €500M €500M - €1B

€1B - €3B > €3B

64%

13%

7%

8%

5%

3%

Revenue Footprint



Latin America


Senior Management

<1K 1K - 5K

30K - 50K

5K - 15K 15K - 30K

>50K

Figure C9. Firmographics summary for France (50 responses)

50


Appendix D – Italy: Focusing on cost reduction and a defensive posture

Cost reduction is the top strategic priority for companies in Italy, which is not surprising given the country’s economic indicators. Italy is well above average in creating a new executive position to drive cost management. And while past and expected future growth is high, Italian companies are generally more focused than their EU peers on four of the five defense-oriented cost drivers. Also, competition is viewed as the top external risk. These are all signs of a defensive posture where cost reduction may not be not strongly linked to growth, or that Italian firms have internalized a challenging environment.

51





Customerconfidence/

demand



/taxes



Other European respondents Italy

1

2

% o

f Tot

al R

espo

nden

ts

Top external risk

With the exception of “competition,” Italian respondents are generally less concerned about external risks; Italian response rates were lower for 9 out of the 11 top external risk categories

Italian respondents cite competition as a top external risk more frequently (40%) relative to other European respondents (20%)

Survey findings

1

2

34%

22% 20%

40%

18%16% 16%

12% 12%

16%

11%9%

11%8%7%

5% 5% 5%

9%7%

4%6%

Figure D1. Italian respondents are generally less concerned about typical external risks compared to other European respondents

Figure D2. Italian respondents cite past and future revenue growth at higher rates relative to other European respondents



1

2

% o

f Tot

al R

espo

nden

ts


77% of Italian respondents reported revenue growth over the past 24 months, but only 67% of other European respondents cited the sameWhile 77% of Italian respondents reported revenue growth over the past 24 months, 82% cited projected revenue growth over the next 24 months

Survey findings

12

67%77% 76%

82%

13% 9% 9% 9%2% 0%

12% 12%21%

11%

71%


Competition is the main concern. Companies in Italy show a relatively low concern for external risks, with tallies below the EU average in nine of the eleven risk categories, or an acceptance of the complex competitive situation. The noteworthy exception is “competition,” which Italian companies cite twice as much as the EU average (40% versus 20%) (Figure D1).

Higher than average growth. Italian companies cite past (77%) and expected future (82%) revenue growth at higher rates than the EU average. (Figure D2).

Key survey findings for Italy

52



Revenue Increase*


RevenueIncrease*



1

% o

f Tot

al R

espo

nden

ts


Unlike other European respondents, Italian respondents are more likely to undertake cost reduction initiatives if revenue is projected to decline over the next 24 months (87%) vs. if revenue is projected to increase (83%)

Survey findings

1

83% 84%

2% 4%

15% 16%

2% 0%

85% 74%

13%22%

83% 87%

17% 13%


Unlikely Neutral


Unlikely Neutral


ItalyOther European respondents

Figure D3. Italian respondents are more likely to undertake cost reduction initiatives if revenue is projected to decline over the next 24 months, possibly indicating a more defensive posture

Figure D4. Cost reduction is by far the most frequently cited strategic priority among Italian respondents



2

1

% o

f Tot

al R

espo

nden

ts


Unlike the priorities of other European respondents, cost reduction represents the most frequently cited strategic priority among Italian respondents,potentially indicating the “save to grow” theme still applies in Italy

UK respondents cite organization and talent as a strategic priority less frequently (13%) relative to other European respondents (19%)

Survey findings

1

2

30%

37%

28%

19%

28%

19%

44%

26%

15% 16%

4%2%

Cost reduction is the top priority. Cost reduction is by far the most frequently cited strategic priority (44%) for companies in Italy – much higher than for the EU as a whole (28%). (Figure D4).

53


Figure D5. In general, Italian respondents cited growth-related drivers of cost reduction less frequently and defensive-related drivers more frequently relative to other European respondents

Decrease inliquidityand tighter credit



outside of EMEA

Unfavorable costposition relativeto peer group



To gaincompetitive advantage

over peer group


2

1

% o

f Tot

al R

espo

nden

ts

Drivers of cost reduction

In general, Italian respondents cited growth-related drivers of cost reduction less frequently relative to other European respondents

In general, Italian respondents cited defensive-related drivers of cost reduction more frequently relative to other European respondents

Survey findings

1

2

3

46%42%

36%

30%26% 26%

19%

30%

22%26%

17%

23%

17%

23%


Figure D6. Although Italian respondents cite slightly more aggressive targets, failure rates are consistent with those of other European respondents



1

2

% o

f Tot

al R

espo

nden

ts


Italian respondents cite cost targets of 10% – 20% more frequently relative to other European respondents, indicating their targets are slightly more aggressiveAlthough Italian respondents cite slightly more aggressive targets, failure rates (51%) are consistent with those of other European respondents (57%)

Survey findings

12

13%16%

57%

32%

44%51%

11%5%

29%

52%

35%

47%

6%2%

Success in meeting cost target

Cost targets and failure rates close to average. Although Italian companies report cost targets that are slightly higher than average, cost program failure rates (51%) are close to the EU average (57%). (Figure D6).

Playing defense. Italian companies came in above the EU average on four of five defensive cost drivers, and below average on the two growth-oriented cost drivers. (Figure D5).

54


Figure D7. Italian respondents created a new executive position to drive cost management much more frequently, potentially indicating a higher focus on cost


21

% o

f Tot

al R

espo

nden

ts

Capabilities developed over past 24 months

Italian respondents cite implementing new policies and procedures as a capability developed over the past 24 months less frequently (33%) relative to other European respondents (44%)

Italian respondents cite creating a new executive position to drive cost management as a capability developed over the past 24 months more frequently (37%) relative to other European respondents (22%)

Survey findings

1

2

47%

56%

44%

33%

42% 40%

22%

37%

3% 2%




Implement new policiesand procedures


Figure D8. Italian respondents are more likely to adopt tactical cost actions such as streamlining organization structure



Strategic Tactical

Italy

1 2

% o

f Tot

al R

espo

nden

ts

Cost actions viewed as most likely in next 24 months

32% 28% 26%

23%

30% 33% 36%42%

28%

19%

33% 32%38%

23%

Survey findings

1

2

Italian respondents cite tactical cost actions like streamlining organization structure (42%) and improving policy compliance (33%) more frequently relative to other European respondents

Italian respondents cite tactical cost actions like reducing external spend (19%) and streamlining business processes (23%) less frequently relative to other European respondents

28% 29%








Cost targets and failure rates close to average. Leading the way on cost executives. Italian companies created a new executive position to drive cost management much more frequently (37%) than the EU average (22%). This is consistent with a greater focus on cost. (Figure D7).

55


23%

26%

21%

9%

5%

16%

Industry Breakdown

28%

14%

16%

23%19%

Annual Revenue

42%

46%

32%

12%

Management Level

21%

12%

14%

14%7%

Number of Employees

Consumer & Industrial Products Financial ServicesEnergy & Resources Public SectorLife Sciences & Health Care

€150M - €300M €300M - €500M €500M - €1B

€1B - €3B > €3B

56%

10%

10%

8%

8%

8%

Revenue Footprint



Latin America


Senior Management

<1K 1K - 5K

30K - 50K

5K - 15K 15K - 30K

>50K

Technology, Media & Telecommunications

Figure D9. Firmographics summary for Italy (43 responses)

56


Appendix E – Spain: Leading the way on cost management in Europe

Nearly all Spanish companies are focusing on cost reduction, regardless of their revenue outlook. Cost targets are higher than the EU average, as is the rate of success – perhaps because they encounter fewer implementation challenges. Also, companies in Spain have nearly universal growth expectations, with 93% expecting revenue to grow. Cost drivers tend to be somewhat growth-oriented; however, Spanish respondents demonstrate an unusual balance of priorities across all four of the typical strategic levers (growth, cost, talent, and liquidity). This may reflect Spanish executives’ experience in addressing their country’s challenging economic environment over the past few years.

57





Customerconfidence/

demand


Governmentregulations/

taxes



Other European respondents Spain

2 31

% o

f Tot

al R

espo

nden

ts

Figure E1. Top external risks

Spanish respondents cite competition as a top external risk less frequently (5%) relative to other European respondents (20%)

Spanish respondents cite political climate / politics as a top external risk more frequently (29%) relative to other European respondents (16%)

Spanish respondents cite customer confidence / demand as a top external risk more frequently (27%) relative to other European respondents (11%)

Survey findings

1

2

3

34%

20%20%

5%

18%

10%

16% 17%

29%

16%

11%

27%

11%8%

10%7%

2%0%

9%

2%4%

6%

Spanish respondents cite politics and customer confidence / demand as top external risks. (Figure E1).

Spanish respondents are more optimistic about future revenue growth. (Figure E2).



1 3

2

% o

f Tot

al R

espo

nden

ts

Figure E2. Annual revenue growthover past 24 months

73% of Spanish respondents reported revenue growth over the past 24 months, but only 67% of other European respondents cited the sameWhile 73% of Spanish respondents reported revenue growth over the past 24 months, 93% cited projected revenue growth over the next 24 months93% of Spanish respondents reported revenue growth over the past 24 months, but only 76% of other European respondents cited the same

Survey findings

123

67%73% 76%

93%

13%

3%9%

2% 2% 2%12%

7%

21% 20%

71%


58



RevenueIncrease*


RevenueIncrease*



2

% o

f Tot

al R

espo

nden

ts

Figure E3. Likelihood of cost reduction next 24 months

90% of Spanish respondents indicated their organizations are likely to undertake cost reduction activities over the next 24 months – slightly higher than the rate for the rest of Europe (83%)Unlike other European respondents, Spanish respondents are more likely to undertake cost reduction initiatives if revenue is projected to decline over the next 24 months (100%) vs. if revenue is projected to increase (89%)

Survey findings

1

2

83%90%

2% 4%

15%6% 2% 2%

85% 74%

13%22%

89%100%

8%

3%


Unlikely Neutral


Unlikely Neutral


Spain

1Other European respondents

Unlike other European respondents, Spanish respondents are more likely to undertake cost reduction initiatives if revenue is projected to decline over the next 24 months. (Figure E3).

Unlike other European respondents, Spanish respondents cite higher priorities for and greater balance across all four typical strategic levers (growth, cost, talent, liquidity) (Figure E4).



2

1

% o

f Tot

al R

espo

nden

ts

Figure E4. Strategic priority in next 24 months

Sales growth, product profitability and cost reduction represent the top strategic priorities for Spanish respondents, consistent with response rates from other European respondents

Spanish respondents cite organization and talent (29%) and balance sheet management (24%) more frequently relative to other European respondents

Survey findings

1

2

30%

37% 37%

28% 28%

19%

32%29%

15%

24%

4%2%

59


Spanish respondents cite a higher focus on growth drivers relative to defensive drivers. (Figure E5).

Although Spanish respondents cite more aggressive cost targets, success rates in meeting or exceeding those targets are higher. (Figure E6).


2

1

% o

f Tot

al R

espo

nden

ts

Figure E5. Drivers of Cost Reduction

Spanish respondents cite required investment in growth areas as a driver of cost reduction more frequently (56%) relative to other European respondents (36%)

Spanish respondents cite changed regulatory structure as a driver of cost reduction more frequently (37%) relative to other European respondents (26%)

Survey findings

1

2

46%49%

36%

56%

26% 26%29%

37%

22% 20%17% 17% 17% 17%


Decrease inliquidityand tighter credit



outside of EMEA

Unfavorable costposition relativeto peer group



To gaincompetitive advantage

over peer group

Met goals/Exceeded goals

Did not meet goalsNo targetLess than 10%10%-20%More than 20%


1

2

% o

f Tot

al R

espo

nden

ts

Figure E6. Annual Cost Reduction Targets

Spanish respondents generally cite more aggressive cost targets relative to other European respondents – 56% of respondents cite targets of 10% or higherAlthough Spanish respondents cite more aggressive cost targets, success rates in meeting or exceeding those targets (58%) are higher relative to other European respondents (43%)

Survey findings

12

13%17%

57%

42% 43%

58%

29%

52%

39%44%

6%0%


Exceeded Exceeded

60


Spanish respondents cite challenges in implementing initiatives less frequently relative to other European respondents, which may lead to higher cost program success rates. (Figure E7).

Spanish respondents cite implementing new policies and procedures more frequently. (Figure E8).

Poor designand tracking

Erosion of savingsWeak business case


Challenges inimplementing

initiatives


1 2

% o

f Tot

al R

espo

nden

ts

Figure E7. Barriers to effective cost management

Spanish respondents cite challenges in implementing initiatives as a barrier to effective cost management less frequently (34%) relative to other European respondents (48%)

Spanish respondents cite poor design and tracking more frequently (24%) relative to other European respondents (17%)

Survey findings

1

2

48%

34% 32% 34%

23%20%

22% 22%17%

24%


1

% o

f Tot

al R

espo

nden

ts

Figure E8. Capabilities Developed Over Past 24 Months

Spanish respondents cite implementing new policies and procedures as a capability developed over the past 24 months more frequently (63%) relative to other European respondents (44%)

Survey findings

1

47% 49%44%

63%

42%

49%

22% 24%

3%7%




Implement new policiesand procedures


61


Spanish respondents are more likely to adopt tactical cost actions over the next 24 months. (Figure E9).



Strategic Tactical

Spain

1

1

2

% o

f Tot

al R

espo

nden

ts

Figure E9. Cost Actions Viewed as Most Likely in Next 24 Months

32%37%

26% 24% 30%32%

36%

32%28%

39%37%

32%

38%

54%

Survey findings

1

2

Spanish respondents cite tactical cost actions (41%) as more likely to be utilized in the next 24 months relative to strategic cost actions (31%)

Spanish respondents cite three of the top four tactical cost actions viewed as most likely in the next 24 months more frequently relative to other European respondents

31%

41%








62


22%

29%

17%

7%

10%

15%

Industry Breakdown

22%

27%

22%

12%17%

Annual Revenue

15%

56%

37%

29%

Management Level

24%

12%

10%

7% 10%

Number of Employees



Energy & Resources Public Sector

€150M - €300M €300M - €500M €500M - €1B

€1B - €3B > €3B

48%

15%

9%

7%

17%

4%

Revenue Footprint



Latin America


Senior Management

<1K 1K - 5K

30K - 50K

5K - 15K 15K - 30K

>50K

Figure E10. Firmographics summary for Spain (41 responses)

63


Global Omar Aguilar Principal Deloitte Consulting LLP+1 267 226 [email protected]

EuropeNatalie Parent (Belgium)PartnerDeloitte Belgium+ 32 473 30 27 [email protected]

Ulrik Bro Muller (Denmark)PartnerDeloitte Denmark+45 30 93 40 [email protected]

Anne Gronberg (Finland)DirectorDeloitte Finland+35 [email protected]

Laurent Touboul (France)PartnerDeloitte France+33 1 58 37 96 [email protected]

Harald Proff (Germany)PartnerDeloitte Consulting GmbH+49 [email protected]

Umberto Mazzucco (Italy)Equity PartnerDeloitte Consulting SRL+39 [email protected]

Willem Christiaan van Manen (Netherlands)DirectorDeloitte Consulting B.V.+31 [email protected]

Joachim Gullaksen (Norway)DirectorDeloitte AS+47 905 34 [email protected]

Dariusz Kraszewski (Poland)PartnerDeloitte+48 (22) [email protected]

Irina Biryukova (Russia)PartnerDeloitte Russia+74 [email protected]

Gorka Briones (Spain) PartnerDeloitte Consulting, S.L.+34 [email protected]

Jonas Malmlund (Sweden)PartnerDeloitte Sweden+46 75 246 33 [email protected]

Simon Brew (UK) PartnerUK1W+44 20 7007 [email protected]

AmericasUlisses de Viveiros (Brazil)PartnerDeloitte Consultores+55 11 5186 [email protected]

Chris Lynch (Canada)PartnerDeloitte Canada+1 416 [email protected]

Federico Chavarria (Latin American Country Organization)PartnerDeloitte Consulting+506 [email protected]

Froylan Campos (Mexico)PartnerDeloitte Consulting Mexico+52 55 [email protected]

Omar Aguilar (US)Principal Deloitte Consulting LLP+1 215 870 [email protected]

Faisal Shaikh (US)PrincipalDeloitte Consulting LLP+1 214 840 [email protected]

For more information, please contact:

64

Thriving in Uncertainty | Thriving in Uncertainty | Deloitte’s first biennial cost survey: Cost improvement practices and trends in Europe

Middle East and AfricaDaryl Elliott (South Africa)Associate Director Deloitte South Africa+277 [email protected]

Mat James (UAE) PartnerDeloitte & Touche (M.E.)+971 2 408 [email protected]

Asia PacificJeremy Drumm (Australia)PartnerDeloitte Touche Tohmatsu+61 7 3308 [email protected]

Jez Heath (Hong Kong)PartnerDeloitte Advisory (Hong Kong) Limited+852 [email protected]

Gaurav Gupta (India)Senior DirectorDeloitte Touche Tohmatsu India LLP+91 124 679 [email protected]

Yusuke Kamiyama (Japan)PartnerDeloitte Tohmatsu Consulting [email protected]

Eugene Ho (Singapore)Executive Director Deloitte Consulting Pte Ltd+65 6232 [email protected] Ozgur Yalta (Turkey)Consultancy Partner Deloitte Danismanlik A.S.+90 212 366 60 [email protected]

65


Notes

66


Notes

67


Notes

68


Notes

69


Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.

Deloitte provides audit, consulting, financial advisory, risk management, tax, and related services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries and territories, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte’s more than 244,000 professionals are committed to making an impact that matters.

This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively, the “Deloitte Network”) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this communication.

© 2017 Deloitte Consulting, S.L.U.

survey: cost improvement - deloitte...reliance on tactical cost actions, rather than strategic ones,...

Documents