Much is being made of the facts that house prices here in the UK are growing at again at 5% and 
economy has returned to growth with GDP increasing 0.7% in the last year. Well with signals like these – that are similar to those of other countries in the west albeit a little later to show – consumer confidence will soon be back to where it was before 2008 and businesses everywhere should surely be unleashing their cash piles and investing like crazy ready for the massive uptake in consumer demand that will follow?
Well, perhaps not. First there’s the issue of those indices. Increases in house prices are taken from the House Price Index compiled by the UK Land Registry which compares the average price of all the houses sold in each month with corresponding average in the previous. There is no weighting to ensure the figures represent a figure that represent the average of the UK housing stock so if a particular month is skewed by lots of multi-million pound mansions in the wealthy London commuter belt being included in the figures, the reported average rise in house price can look particularly buoyant – and this can easily happen when relatively few houses are being bought and sold as at present. In reality I doubt if there is much for the majority of homeowners to celebrate. Likewise, low-growth GDP figures can be heavily biased by rapidly recovering sectors like banking, which is again heavily biased towards London.
So perhaps CFOs should be wary of such headline figures and keep on spoon-feeding their business colleagues the same cost-cutting medicine that they’ve prescribed these last five years. That’s the message that comes through clearly from Deloitte’s third biennial cost survey, Cost-Improvement Practices and Trends in the Fortune 1000. Entitled Save to Grow, it seems that businesses are just as committed to managing costs as they were during the recession and even those enjoying growing revenues are still keep a tight rein of expenses.
Last time around in 2010, some companies were still struggling to manage their funding with 20% of respondents reporting that they were focused on managing their balance sheet. By 2103, this figure has fallen to 7% suggesting that the majority of companies are comfortable with their balance sheets and are now turning to using cost reduction as a growth lever to improve the efficiency and effectiveness of their businesses, and to generate cost savings that can be reinvested in growth initiatives such as new product development, innovation, R&D, and expansion into new markets – literally taking away with one hand and giving back with the other, which is no bad thing.
According to the current findings, the top three drivers for cost management are “to gain competitive advantage” (65%), “required investment in growth areas” (54%), and to address “unfavorable cost position” (35%) showing that the emphasis has shifted towards using cost management as a way of improving competitiveness. At the same time, the top strategic priorities cited for the next 24 months were product profitability (43%) and sales growth (36%), perhaps reflecting the view that the easy-pickings of taking a broad brush approach to cost reduction are beginning to run out with many companies seeking less aggressive targets for cost reduction than in the past and more companies reporting having fallen short on achieving even these more modest targets. In fact, nearly half of the executives surveyed (48%) did not meet their cost reduction objectives – up sharply from 37% in 2010, and 14% in 2008.
With the low hanging fruit already harvested some time ago and product profitability in first place on the “to do” list, I guess that means developing a more scientific approach to costs and their causes and giving the commercial folk better information on which to base pricing and discounting decisions.