Cost control is still vital

SIMON HAMMERSCHMIDT of KPMG warns of costs creeping back into businesses following recession-inspired cuts

FOR local businesses, there is very little that is within their own power when it comes to the issues of inflation pressures and the threat of a double dip recession.

But there is one area of threat that is completely in the hands of businesses – how to hold down costs.

Despite many businesses feeling as if they managed down their cost base as far and as fast as they could during the recession, there is a need to take a look at whether costs have been creeping back into an organisation, and whether the cost cutting done so far is sustainable on a long term basis.

A recent study by KPMG, “Cost Boomerang”, found that following recession-induced streamlining, more than 95% of costs cut by businesses during recession – some �90billion – will return if sustainable cost cutting does not remain a priority.

It is still very tough out there and, having made it through the recession, many businesses are now being hit by a new set of issues around uncontrollable rising costs, such as increases in fuel prices and raw materials, the new higher VAT rate, rising inflation and an increase in the National Insurance Contribution rate, and these issues look set to stay with us for a while. Staying lean has to be as important post-downturn as it was during the recession.

Returning costs are driven by two factors: short term cost cutting during the recession and a lack of cost control as businesses spy signs of recovery. But what does long term sustainable cost cutting look like?

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Long term sustainable ways to reduce cost involves looking at issues such as back office process consolidation through effective shared services, or further optimisation of shared services if they have already been implemented, and obvious stuff such as outsourcing/out-tasking those activities not core to the business in order to help move to a more flexible, predictable cost-base.

Keeping an eye on cost is not just the responsibility of the management team; there is a need for a businesses to create a culture of cost consciousness within the organisations, otherwise they will not be able to maintain the savings made during recession.

This means giving the workforce the tools and training to influence cost performance within their firms. Broadcasting hopes and aspirations to the frontline is not enough. Management needs to understand their business from a frontline perspective, and ensure that junior ranks feel more connected to the business.

The overriding message is there are only two things that you need to remember about costs: mounting costs will quickly erode already tight profit margins and eliminate bottom line growth.