Cost transformation and shareholder value in 2012

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As 2012 comes to an end, 4C Associates looks back at some of the predictions made earlier this year. Edward Ainsworth considers predictions four and five: “There will be more of a focus on the link between cost reduction and shareholder value,” and “Significant savings will come from broader company-wide cost reduction programmes.”

These predictions have come partially true.

As most western economies continue to struggle, it has become increasingly difficult for businesses to achieve growth through sales. 4C Associates suggested that this would lead companies to focus on cost transformation, to drive growth and shareholder value. Although successful companies such as Whitbread, Ryanair and Tesco have successfully placed cost transformation at the centre of business strategy, a large number of corporates have yet to do so. BT provides a recent example of why cost transformation can provide much needed growth in a challenging climate.

Smaller Revenues and Bigger Savings

The British telecommunications services company, recently announced that pre-tax profits for second quarter and half-year figures, were up by eight per cent despite a revenue drop of nine per cent. The company saw its revenues negatively affected by events including the recession in the Mediterranean and heavy rain in the UK which increased the need for repairs. Cost transformation procedures, such as a reduction in operating costs, installing new contract management shared service centres and more efficient procurement, allowed the company to turn a profit.

In the section dedicated to cost transformation, BT’s Annual Report states; “Overall, we made good progress with our cost transformation activities during 2012. We reduced operating costs by £933m or six per cent, with savings across all our main cost categories. This represents a cumulative reduction in operating costs of £2.9bn over the last three years.”

More Responsibility and More Opportunities   

By taking advantage of the increased level of responsibility bestowed on procurement, CPOs have been able to impact areas of the business which may have been previously out of bounds. Several of our client’s procurement functions have seen their visibility increase dramatically in the recent past. Newfound responsibilities can range from integrating supply chain in the early stages of a project to managing an entire operation from start to finish.

Given the success of many of this year’s cost transformation programmes, procurement’s role within the business looks set to continue expanding. A combination of cost transformation success stories and sustained economic pressure should convince a number of companies to try and replicate these achievements in 2013.

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