Unprecedented cost-cutting threatens long-term damage to UK Plc

ï 271 billion in cuts this year as companies respond to recession
ï 90 per cent of companies plan operational cuts in 2009/10
ï 12 billion to be wiped off profits - 620,000 jobs to go
ï Senior managers admit to cost-cutting to demonstrate leadership

Unprecedented cost-cutting measures among major companies will add up to 271 billion during the coming financial year, according to research published today by global management consultancy Hay Group.

The recession is forcing 90% of large firms to implement significant cost reduction programmes, the study finds.

The study, Cutting It Fine, is based on independent research among senior finance managers in over 140 of the top 1000 publicly listed and privately owned firms in the UK and Ireland.

Operational cuts
Nine in ten large firms will be forced to make operational cuts during FY 2009/10, taking some 271 billion of spending out of the UK economy, Hay Group found.

Some 40 per cent need to make cuts on unprecedented levels to combat the impact of recession. A fifth (20 per cent) are planning a fundamental restructure of the entire firm.

Russell Hobby, Associate Director at Hay Group comments: ìThere is a right and wrong way for firms to take out costs. Successful companies will focus on under-performing areas and look to increase productivity throughout.î

Job cuts and wage freezes
Jobs and wages are in the firing line as a result. Almost half of large companies (45%) plan to reduce headcount by an average of around 10% during 2009 – leading to an overall 3.6 per cent reduction of large firmsí workforces, or some 620,000 job cuts.

A quarter of redundancies (24 per cent) – around 157,000 job cuts - will be made with immediate effect.

Two thirds of companies (66%) expect to cut between a tenth and a third (11%-30%) of their compensation budgets – around 191 billion in pay and benefits – over the coming financial year.

Declining performance and financial distress
The recessionís impact on profitability is driving the pressure to cut costs: large corporations in the UK expect an overall decline in profits of 4.2 per cent for during the coming year - a fall of some 11.8 billion.

Falling demand is a driving force for cost reduction at over half (55 per cent) of firms. Over a fifth (21 per cent) have seen profit margins narrowed to between zero and five per cent.

As a result, more than half (53 per cent) of firms also cite the need for prudence in unpredictable conditions as a key driver of cost reduction initiatives.

Financial distress is also a cause in some cases. Over a third (36 per cent) of companies are reducing costs to keep within banking covenants. Similar numbers (35 per cent) blame liquidity issues, while over a quarter (27 per cent) point to credit shortages.

Under pressure
Firms are keen to deliver cost-cutting exercises quickly. Over four fifths (84 per cent) of firms report the need to realise the benefits of cost cutting within six months – almost a fifth (18 per cent) immediately.

More than half (52 per cent) of financial controllers in public firms admitted making cuts to reassure the investment community - despite being in a stable condition. Some 41 per cent of private companies are doing likewise to placate investors and/or owners, despite the business being stable.

Nearly half (46 per cent) confessed to cuts being made due to pressure on the board to demonstrate robust leadership.

Russell Hobby comments: ìThe pressure to reduce costs in a tough economic climate is understandable. But there are other ways of demonstrating strong leadership and vision.î

Long-term damage
As a result, significant numbers of firms risk getting cost-cutting wrong: over a quarter (28 per cent) plan to slice out a proportion of costs across the board, rather than strategically addressing underperforming units.

Senior finance managers fear the potential damage to their firms from indiscrimate cost-cutting. Over half (53 per cent) believe valuable knowledge and expertise may be lost; while half are concerned about damage to staff morale (50 per cent) and losing their best talent to competitors (48 per cent).

Close to half (41 per cent) fear damage to client relationships as a result of the sheer scale of cuts, while over a third (37 per cent) are worried that the extent of cuts planned will hamper their ability to respond to the eventual upturn.

Russell Hobby comments: ìThere are opportunities for increased efficiency in many companies, but this must be driven by a focused, engaged and skilled workforce.

ìCuts that damage morale, weaken relationships and destroy valuable knowledge will hurt company performance over the long term. Ironically, this is exactly what may be lost through knee-jerk cuts.

ìCompanies need to be honest with their staff about the extent of the problem and work with them to find solutions which share risk across the company and individuals.î