Hackett: Targeted back-office cuts can soften blow of recession
By Manufacturing Business Technology Staff -- Manufacturing Business Technology, 5/21/2008 11:00:00 AM
As the recession looms, many companies are reacting by mandating across the board cuts in key administrative areas such as IT, finance, HR, and procurement. But new research from the Atlanta-based Hackett Group, Inc. indicates targeted, strategic reductions that can offset nearly half the impact of a potential recession while minimally affecting service delivery and the ability to provide strategic value.
According to Hackett, typical Global 1000 companies (with $23.4 billion in annual revenue) can generate $200 million to $400 million per year in savings through targeted administrative cuts, an amount that represents up to 45 percent of the potential decline in pre-tax profit due to a recession. The cost reduction opportunities exist in two primary areas:
• IT, accounting for more than 40 percent of potential savings, or up to $171 million per year; and
• Finance, offering more than one third of potential savings, or up $145 million per year.
Hackett’s research details the strategies and tactics companies can use to accomplish cost reductions, including reducing labor costs, cutting technology spending, and selective globalization of business processes. Hackett also identifies the 10 process areas where companies can find the largest savings, the least risk, and the quickest return.
In IT, for example, Hackett’s research showed that organizations can cut costs by more than 40 percent largely by reducing the complexity of their application portfolios, taking a more disciplined approach to application disposition planning, and improving demand management.
Hackett also announced that its REL division is currently preparing a separate research piece addressing working capital optimization strategies to address a possible recession. The current economic climate has made access to capital challenging, and many CEOs and CFOs are focusing on working capital optimization to address this. REL’s research estimates the working capital improvement opportunity for an average Global 1000 company at $2.9 billion.
“In today’s economic environment, reductions in back office functions costs are virtually a given,” said Hackett President Wayne Mincey. “But one of the biggest challenges faced by senior executives is knowing when, where, and how to pare costs. Our analysis provides some very clear guidelines, identifying areas that offer the maximum potential for cost savings in the short to medium term and that are likely to put the business in the best position for long-term success.”
Adds Hackett Chief Research Officer Michel Janssen, “Companies cannot overlook the cost savings opportunities available through globalization. Under recessionary conditions, time to benefits is key, and one of the ways of accelerating the potential cost reduction is not to try to untangle a web of complicated processes but rather consider a lift and shift scenario, that is, moving processes in their as-is state offshore to take advantage of labor arbitrage opportunities.”
To estimate the ability of its recommendations to offset the impact of a possible recession, Hackett began with the assumption that if a recession took place in 2008 average pre-tax profit margins of Global 1000 companies could potentially fall from their 2007 level (9.3 percent) to those seen in 2001 recession (5.5 percent). Under these circumstances, the general and administrative savings opportunities identified in Hackett’s research would absorb between a low of 21 percent and a high of 45 percent of the commensurate drop in pre-tax profits.
A Research Insight providing more details on the findings described here is available: http://www.thehackettgroup.com/studies/ga/
