Technology firms too hesitant over cost cutting

As profits and revenues rise, costs start to spiral out of control, KPMG research claims

Technology, media and telecoms (TMT) firms are too hesitant when it comes to essential cost cutting measures, KPMG has claimed.

The market watcher questioned 79 senior executives from top TMT firms, and discovered that 60 per cent of those set cost reduction targets of less than three per cent per year. However only 11 per cent of respondents actually managed to reach or exceed those targets.

More than 50 per cent of respondents admitted that they had inadequate processes to drive cost reduction at a business unit level, and most admitted that as profits and revenues rise, costs start to spiral out of control.

In addition, 73 per cent predicted that in the next three years, the biggest rise in costs would be pay and benefits, and also the cost associated with recruiting and retaining top talent. A mere 18 per cent of respondents believed that cost management was a responsibility for all staff, which KPMG claimed shows a ‘worrying lack of accountability’.

Tim Jones, partner at KPMG Advisory said: “Executives around the world admit that the more successful a company becomes the more likely it is to lose control of costs. Basically, increased profits and revenues are masking a bloated cost base that could leave a company at risk of hostile takeover.”

When companies did turn their attention to reducing costs, the most frequently cited reasons were a challenging competitive environment (49 per cent), downward price pressure (49 per cent) and a need to fund growth (37 per cent).

Despite the pressure to reduce costs and increase shareholder value, senior executives were unclear as to who was responsible for cost reduction, with only 43 percent saying that they believed managers had a responsibility for cost management.

“Reducing costs that are built into a company’s business model requires changing embedded culture and practices” added Jones. “This isn’t something that can be achieved overnight. It requires clear leadership and communication from the board to change practices that will deliver long-term benefits.”

“Company executives flying economy instead of business class or not giving out biscuits at meetings is simply not enough,” he said. “To achieve a true cost advantage a company needs to look at lowering costs across its whole business model and be prepared to make significant changes to the organisation or its supply chain.”