By The Staff of the Corporate Executive Board

In the wake of the global credit crisis, companies have been cutting costs on a dramatic scale, with many indicating plans to make further cuts. A recent survey of more than 120 of the Corporate Executive Board's (CEB) finance practice clients reveals:

• 90% are cutting discretionary spending this year;
• 78% are reducing travel and entertainment;
• 61% are suspending capital projects; and
• 59% are reducing headcount.

As a result, getting managers to focus on the right types of cost savings is more critical this year than ever. Organizations must ensure that they are driving surgical, sustainable cost reductions rather than indiscriminate cuts that will creep back into the organization (or, even worse, cripple future growth). Sounds good in theory, but how do the world's best companies do it in practice?

Companies under pressure to cut costs tend to focus on the large variable costs that have an immediate, significant impact (e.g., travel and entertainment, administrative staff). Unfortunately, as soon as external pressure dissipates, these costs often creep back into the cost base. In fact, CEB studies have shown that nearly 90% of companies that make cuts fail to sustain those cost reductions for more than three years.

CEB's Finance Practice examined 230 major corporate cost-cutting initiatives at S&P 500 companies from 1999–2004. In the first year, only 100 companies, or 43%, achieved cost reductions. After three years, that number fell to 24 companies, or just 11%. This group was appropriately named the "Elite Cost Cutters."

So, what made this group so much more adept than their peers at reducing costs sustainably?

Quite simply, the "Elite Cost Cutters" were successful because they were proficient in controlling the cost of goods sold, rather than just quickly (and sometimes indiscriminately) cutting sales, and general and administrative or 'overhead' costs, such as IT spending and travel. In fact, most would be surprised to learn that the "Elite Cost Cutters" actually spend proportionally more on overhead than their peers as a way to effectively drive long-term operational efficiency across the business.

Provided by Corporate Executive Board —What the Best Companies Do™