Deloitte Debates

Resizing a business in a downturn

Tactical or structural cost reduction?
The recession and credit crisis are causing precipitous declines in consumer and business demand. In response to
declining sales, many companies need to resize their business and reduce costs in order to maintain acceptable
margins — or even just to stay afloat. The main question is how far to go. Should you focus on a tactical approach
that delivers incremental savings in a relatively short time? Or a structural approach that delivers results that are
larger and more sustainable?

Point Counterpoint

Tactical improvements such True. But there’s a good chance most of the easy
Trim costs as hiring freezes, reduced improvements have already been done. What do
through tactical travel and training, and you do next?
improvements. across-the-board budget
cuts deliver fast results.
“Focus on areas
such as Across-the-board reductions These types of cost reduction programs invariably
discretionary are the fairest way to cut cut too much in some areas and not enough in
spending, SG&A, costs. others. A more thoughtful approach can better
and incremental position you to cut fat without cutting muscle.
process It can also deliver greater savings.
improvement.”
The company is already Continuous improvement is a good way to boost
managing costs through operating efficiency; however, because it focuses
continuous improvement. on detailed improvements, it often overlooks
Isn’t that enough? many of the biggest savings opportunities that
span organizational boundaries. Continuous
improvement is certainly worth doing, but it’s
not a cure-all.

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 Point Counterpoint

Focus on structural In a deep recession, companies need Unless you manage structural costs
cost reduction. big savings. Attacking structural aggressively — from the top-down —
cost is the only way to resize the the results may not show up fast enough.
“Pursue sustainable business and achieve step-change
improvements such improvements in underlying costs.
as streamlined
infrastructure, Focusing on structural costs addresses A structural approach requires new cost
reduced product areas that a tactical approach reduction initiatives. Where will you find
complexity, and new overlooks. the time and money? Also, are you willing
business models.” to take on the sacred cows?

Structural improvements such That’s true in theory. But such benefits

as reducing product complexity,
rationalizing the customer base,
exiting geographies, and changing
the operating model can make your
company more agile and responsive,
not just more cost efficient.
only matter if you survive the short term.
You need improvement now — not a year
from now. Tactical improvements should
be job one.

My take
Omar Aguilar
Principal, Enterprise Cost Management Leader, Deloitte Consulting LLP
The current economic crisis is shaping up to be worse than expected. As a result, many companies are finding they
must become more aggressive about reducing costs and resizing the business to operate efficiently at reduced
volume. Tactical improvements alone are unlikely to deliver the necessary savings.

To achieve the required reductions, most companies must apply a structural approach that focuses greater attention
on strategic improvements such as streamlining their infrastructure, adjusting their service delivery model, and
redesigning their business model. These types of improvements can deliver cost savings that are larger and more
sustainable. And the good news is that a structural approach doesn’t have to take a long time. If done right, it can
start delivering results just as quickly as a more tactical approach. Here are some tips for getting started:

Know where you stand. Many companies are in worse shape than they think. For example, debt covenants often
have strict requirements for cash flow and profitability, which means that even a company that is handling the
downturn gracefully may find its existing loans suddenly withdrawn — leaving the business desperately short of cash.

Dig deeper. Companies must accept the fact that their initial 10-20% cost reduction targets may not be sufficient
to weather the storm. In many cases, a total reduction of 30-50% could be needed. The sooner a company faces
reality, the faster it can start seeing results — and the greater its chances for survival and competitive advantage.

Look at everything. In a deep and prolonged recession, traditional belt-tightening activities such as hiring
freezes, expense deferrals, reduced travel and training, and across-the-board budget cuts won’t be good enough.
Companies must look at structural improvements such as direct spend and COGS reduction, infrastructure
optimization, and financial restructuring. They must also give more attention to their balance sheet and cash flow.

Focus on major cost drivers. When resizing your business, focus on the structural drivers that drive complexity
and cost. Customers, product mix and number of SKUs, geographic footprint, and physical assets can all play
a significant role in determining a company’s structural costs. Rethink what you can afford for the current and
expected market conditions, while preserving your core business and capabilities.

Deloitte Debate 
 Shed non-core operations. As the economy contracts, many companies are finding they have become too large
and diversified for their own good. Divestitures and portfolio rebalancing are critical tools in the resizing arsenal.
However, it’s important to consider the impact that a spin-off or carve-out might have on sales, the supply chain,
and supporting business functions.

Take a holistic approach. Different cost reduction initiatives have different timelines and produce different results.
By applying a comprehensive and integrated approach, companies can better manage the overall effort to achieve
both immediate savings and large-scale improvement.

A structural approach to cost reduction can better position a company to protect its margins, capture market share,
and capitalize on opportunities such as bargain-priced acquisitions. It can also free up resources to invest in new
products and services, marketing, and advertising. These activities can help a company survive the downturn and get
a jump on competitors when the economy turns around.

A view from the life sciences sector

Sanjay Behl
Principal, Health Sciences & Government, Deloitte Consulting LLP
Life sciences companies are wrestling with a wide range of challenges, including major product failures, slowing
sales, price pressure, and weak product pipelines. In addition, many pharmaceuticals companies face expiring
patents that in the near future could significantly reduce their sales. These challenges have caused most life sciences
companies to underperform the S&P 500 over the last five years.

Typical responses include mergers and acquisitions, as well as licensing to strengthen product pipelines. However,
cost reduction must also play a key role. An effective cost reduction program can improve earnings and share
value while the company waits for future revenue to kick in. It can also boost long-term margins and improve
competitiveness.

Recently, large pharmaceutical companies have announced layoffs in SG&A, R&D, and manufacturing as part of an
ongoing effort to keep costs in line with revenue. They are also significantly reducing costs in other areas. Some
leading medical device companies have taken similar steps. Yet, many other companies in the sector have yet to
take action. Here’s our advice:

Get started. In this troubled economy, no company is immune from cost pressure. If you haven’t put a cost
reduction plan in place, now is the time to start. Create a balanced mix of near-term tactical opportunities and
longer-term structural opportunities that give you the flexibility to respond to an uncertain future.

Examine the core. Many companies are understandably reluctant to cut costs in fundamental areas such as
sales, manufacturing, and R&D. However, we believe there are ways to reduce costs without damaging the core
business. Companies should examine their operating models and identify opportunities to reduce costs for general
and administrative activities and support functions. For example, establishing a shared services model for support
activities — such as sales operations or research operations — can save money while at the same time improving
service levels by creating a critical mass of capabilities and greater cost flexibility. Also, it may be possible to reduce
service levels in ancillary areas such as market research, analytics, creative services, and alliance management
without significantly undermining the company’s overall performance.

Aggressively reduce spending. Negotiate better prices on external marketing spend. Reduce expenses in areas
that lack a clear ROI, such as grants, investigator initiated trials, and field medical team activity. Work with contract
manufacturers to secure better service levels and eliminate minimum order quantities that limit your flexibility.
Reduce the scale and scope of existing R&D projects, keeping projects alive but eliminating non-essential activities.

Think big. In some cases, structural change might be the best way to do more with less. For example, some
companies are reducing the size of their sales staff — which is a huge expense — while at the same time investing
to make the sales staff more effective through improved targeting, a stronger contracting strategy, and higher
requirements for education and experience.

Actions like these can help companies compete successfully in the rapidly changing life sciences marketplace and
position them to thrive when the economy turns around.

Deloitte Debate 
 A view from the oil & gas sector
Sampat Prakash, Principal, Oil & Gas Sector Leader, Deloitte Consulting LLP
The sharp decline in oil and gas prices is having a varied impact on companies in the sector. Major oil producers — flush
with cash — continue to focus on the long term. Their major strategic initiatives typically take years or decades to
complete, which requires them to stay insulated from short-term market fluctuations. Like most businesses, these
companies are taking steps to reduce discretionary expenses such as travel and training. However, their cut backs are
mostly an effort to stay lean and mean — not a matter of survival.

It’s a different story for many smaller companies such as oil field service providers, onshore drilling companies, and
some independent oil producers. These businesses are already feeling the squeeze from reduced production volumes
and need to reduce costs quickly. To date, most of their efforts have focused on tactical areas that provide immediate
savings with a focus on cash flow improvements. However, it’s likely that cuts in these areas alone won’t be sufficient to
weather the storm.

To increase their chances for survival, companies at risk must look for strategic and structural improvements that offer
cost savings that are both substantial and sustainable. These changes generally take longer than tactical improvements,
so it’s important to get started early. Some of the companies we are working with are not waiting for their tactical
savings to dry up before expanding the search to include strategic opportunities. They are anticipating the need, and
have started looking now.

A view from the telecommunications sector

Michal Locker
Director, Technology, Media and Telecommunications, Deloitte Consulting LLP
For several months many thought the telecommunications sector would withstand the current economic crisis; however,
economic conditions are starting to affect telecom service providers and the companies that supply their equipment.
Telcos have recently seen consumer demand for broadband leveling off, residential customers ditching traditional
wireline phones for wireless service or cheaper options from cable and VoIP providers, and enterprise demand falling
as companies continue to reduce their work forces. In addition, Telcos are delaying some capital investments, which is
having a significant carry over effect on equipment providers.

While the downturn impact on Telcos is not expected to be severe, they cannot stand still. Consumers continue to shift
toward increasingly complex products such as IPTV, internet services, and mobile data — an ongoing trend that drives
operational costs through the roof.

• Customer support costs are increasing due to the higher call volumes and longer call times required to handle
complex products.
• Network costs are rising as carriers deploy and maintain new infrastructure to support advanced services.
• Customer acquisition and retention costs are likely to increase due to market saturation and competition.

In order to maintain and improve their margins in this challenging environment, Telcos must find new ways to optimize
operations and reduce costs. Here are two primary ways to do this:

• Improve the efficiency of operational areas such as call centers, field sales, retail stores, installation, and repair. This
includes optimizing the order-to-cash process. Based on our experience, these types of improvements can deliver
savings in the range of 22–35%.

• Optimize business support areas such as Marketing, Product Management, Finance, Human Resources, Benefits,
Sourcing & Procurement, and Information Technology, which can result, based on our experience, in savings of
11–24%.

By focusing on both types of areas, Telcos can reduce their short-term costs while at the same time strengthening their
long-term competitive position.

Deloitte Debate 
 On the equipment side, although many providers have already announced significant lay-offs, they should continue
to focus on improving efficiency and reducing external spending — particularly in light of increasing demand from
very low cost overseas providers. However, they should not do this in a vacuum. Every equipment manufacturer
must take a critical look at its product portfolio and R&D investments and ensure both are aligned with its long-
term strategy. This focus — combined with a continued, relentless focus on costs — will better position equipment
providers to emerge from the current crisis stronger, even if smaller.

For more information, please visit: www.deloitte.com/us/debates/resizing.

For further information about this debate, please contact:

Omar Aguilar Sanjay Behl Sampat Prakash Michal Locker

Principal Principal Principal Director
Enterprise Cost Health Sciences & Government Oil & Gas Sector Leader Technology, Media &
Management Leader Deloitte Consulting LLP Deloitte Consulting LLP Telecommunications
Deloitte Consulting LLP sxbehl@deloitte.com saprakash@deloitte.com Deloitte Consulting LLP
oaguilar@deloitte.com miclocker@deloitte.com

Related Insight:
Seven Secrets to Downturn Survival
Existing cost management programs may not be sufficient to survive and thrive in a downturn.

Cutting Costs Effectively: SG&A Cost Reduction

Finding a way to lower selling, general and administrative (SG&A) expenses — even a little — goes a long way toward
cutting a company’s overall spend.

Enterprise Cost Reduction As Part of a Divestiture

The divestiture or spin-off of a peripheral business often provides companies with an ideal opportunity to reevaluate
existing cost structures and enhance shareholder value.

Related Content:
Library: Deloitte Debates
Services: Consulting
Industries: Life Sciences, Oil & Gas and Telecommunications
Overview: Enterprise Cost Management

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