As a number of sources cite, the recession came to an end in mid-2009. Most businesses today working to gain back lost profit from its inception in 2008 can still recall the impact it had to their bottom line. Jobs were lost, salaries were decreased and declines in gross domestic product (GDP) and consumer spending were more evident than ever, to say the least. And while business profit gain has risen steadily, some executives are finding it’s not enough and are working towards more growth.
According to a recent survey from procurement solutions provider Procurian Inc., King of Prussia, Pa., (formerly ICG Commerce) and Harris Interactive, more than half of Fortune 1000 executives (about 52 percent) are focused on cost reduction strategies to deliver earnings and fund growth in 2012.
“Turn the clock back to 2008 and 2009—nobody was thinking about growth,” said David Clary, Senior Vice President of Global Program Management for Procurian. “The name of the game back then was survival. Instead, we saw businesses that needed to clear out inventory, finished goods and raw material and streamline product portfolios. We’ve been working with parent operation suppliers for years and they saw their business almost stop because their customers stopped ordering ball bearings and electrical supplies because they needed to clear out their own inventories before ordering new supplies. That was the mandate from top management.”
“Now, if you look at the U.S. and European countries, growth is stagnant,” Clary continued. “And this year and even in 2013, companies are going to be pressured by their boards and shareholders to grow.”
Administered to more than 300 Fortune 1000 executives, the survey finds that in the coming year 60 percent of respondents will focus on non-people related cost reductions as the major source of funds for investments in innovation and growth.
“A lot of our clients have boards who want them to grow organically,” said Clary. “And the only way to grow organically is by identifying new products or services that the market needs. And to do that, one needs to initiate research and development. So the question becomes ‘how do I fund that?’” he said.
“We were pleased to see that half of the executives and Fortune 1000 companies are saying: ‘to fuel growth we’ve already closed plants, laid off people, combined operations and accelerated M&A consolidations—but we really need to look at what we are spending our money on in those areas we haven’t particularly focused on.’ And that is one of the big takeaways over half of these executives are going to be pursuing in indirect related cost reductions to fund growth—whether it’s through R&D, organic growth, product development or through acquisitions,” Clary said.
In addition, 60 percent of those surveyed said they will focus on non-people related cost reductions, as opposed to 30 percent that will turn to layoffs or downsizing.
“In a typical manufacturing or consumer product company, about 50 percent of the dollars they spend on external service providers is not for input cost,” explained Clary. Everyone talks about costs of goods sold but usually half is indirect cost.” And while that indirect cost can include a number of variables, most vary based on the environment. “In a pharma company, that might be more dominated by clinical trials and marketing expense,” he continued. “In a manufacturing company, that might be more dominated in facilities, waste removal and MRO—it just depends on the type of company.”
More than 70 percent of executives polled also said that their purchasing group does not play a highly strategic role, with global impact, in managing indirect and non-product expenses.