Three out of Four Global 1000 Companies Cannot Drive Cost Reductions That Match Declines in Revenue, Profits

The world’s largest companies have for the most part failed in their efforts to reduce the cost of functions such as Finance, IT, HR, and Procurement over the past year, exacerbating the impact of dramatic declines in revenue, profits, and earnings, according to new research from The Hackett Group, Inc. (NASDAQ: HCKT).

Hackett’s analysis of the latest financial results of nearly 200 of the 1,000 largest public companies in the world that have reported Q2 2009 financial information showed that only one company in four was able to manage their Selling, General, & Administrative (SG&A) costs in line with revenue reductions over the past 12 months.

While these companies saw average revenue reductions of 23.7 percent, they were only able to cut SG&A costs by 6.7 percent. As a result, SG&A costs as a percentage of revenue for Global 1000 companies have risen significantly over the same period, going from 12.6 percent of revenue to 15.5 percent of revenue. Hackett’s research found that typical Global 1000 companies (with $26 billion in annual revenue) are losing out on up to $1 billion in annual cost savings as a result of this lack of agility.

Hackett’s research spotlights Caterpillar as one company that has maintained a long-term focus on agility, and is taking steps to reduce costs during the current economic downturn. In 2005, Caterpillar began preparing for plans to manage the company during a recession as part of its corporate strategy.  That foresight is paying off as Caterpillar’s SG&A expenses for its principal machinery and engines businesses are expected to decline about 25 percent in 2009. Those reductions exclude the impact of the recent addition of Caterpillar Japan Ltd.  

“Agility is a competitive weapon that has become a requirement in today’s marketplace, where hyper-global competition and economic uncertainty reign supreme. Companies should have been able to rapidly reduce their overall G&A costs to more closely match the revenue reductions they are seeing,” said Hackett Chief Research Officer Michel Janssen. “But despite lots of tough talk about freezing discretionary spending and making across the board cuts, most companies appear to have failed in their efforts to manage their G&A cost structures. This trend has been getting worse each quarter, with the ‘agility gap’ growing wider.”

According to Hackett President, Advisory Services and Research Sean Kracklauer, “Caterpillar is a great example of what companies can accomplish by focusing on agility. And it’s not too late. Most business leaders are now reconciling themselves to the fact that any market comeback may be protracted. Regardless of what they’ve done so far, companies need to begin rethinking their service delivery models for key support functions, so that they have the agility that they need to respond, both to the current downturn and to the eventual market improvements down the road.”

Hackett’s research identifies eight key areas where companies can take action to evaluate their G&A service delivery model and make structural and organizational changes to drive agility improvements. According to Hackett, companies should:

•        increase economies of skill and scale opportunities, including use of Global Business Services/Shared Service centers and centers of excellence;

•        reduce complexity through end-to-end process design and standardization;

•        reevaluate use of insourcing and outsourcing resources;

•        restructure their talent mix to broaden span of control and increase cross-training;

•        rationalize service levels, mapping customer requirements against new budget levels;

•        renegotiate and optimize third party contracts;

•        and centralize spend and compel usage of global agreements.