Although nine out of ten South African companies are planning to undertake cost-cutting programmes within the next two years, more than 70% of local companies are likely to miss their cost targets, Monitor Deloitte research shows.

A cost survey by the research firm, titled ‘Thriving in Uncertainty’, also pointed out that while local companies tended towards higher cost-reduction targets, their failure rates were also higher.

Including South Africa for the first time, the survey revealed that two-thirds of local companies planned to cut costs by more than 10% a year, but programme failure rates were higher than for other regions.

“Our research shows that South African companies are more likely to engage in narrow, tactical approaches to cost-saving, such as cutting down on external spend and streamlining business processes, but these are the very tactics that often result in implementation problems and an inability to achieve desired cost reduction objectives,” said Deloitte Africa strategic cost transformation leader Daryl Elliott.

He added that companies needed to be more strategic about reducing costs, and examine their business and operating models to implement fundamental change. “Ultimately, this leads to changes in their cost structure which are more sustainable and longer lasting.”

Globally, more than 80% of companies say they plan to implement cost-cutting measures, with 57% of European companies and 58% of US companies, however, reporting they were unable to meet their cost-cutting targets. This highlights the importance of cost management to companies worldwide.

South African respondents were most likely to say their approach to cost management was to take targeted actions in specific areas, with 59% reporting this.

In addition, 45% of local respondents said they intensified existing productivity improvement programmes, which may indicate proactive cost management.

However, only 18% said they had conducted an enterprise-wide analysis of cost structure, followed by the deployment of a broad programme to restructure and manage the cost base across all operating companies and business units. This was markedly below the rate for other regions, with 32% of European companies, 49% of US companies, and 51% of Latin American companies choosing this strategy.

“If companies continue to pursue tactical cost reduction programmes, they may need to relook at focus areas to increase the impact and effectiveness of cost reduction programmes,” the report stated.

Half of South African companies looked at streamlining business processes, compared to 38% of European companies, and 41% of local companies, against 32% of European companies, looked for ways to reduce their external spending.

However, it was found that higher targets and better results can be obtained by multipronged tactics, including a streamlined organisation structure and improved policy compliance.

The data also found that South African respondents were optimistic for the next 24 months, with 90% projecting higher growth, but they were still planning to cut costs. However, 36% of companies expect below-inflation growth, against a backdrop of a sluggish economy with significant political and macroeconomic risks.

“To tackle these complex and varied challenges, many South African companies may need to pursue cost reduction more aggressively. Tactical cost actions alone will likely not be able to deliver the required level of cost savings.

“Instead, companies in South Africa may need to adopt new approaches to cost management, shifting to actions that are more strategic and structural, such as increasing centralisation, reconfiguring the business and outsourcing/offshoring business processes,” the report said.

Elliot added that, during periods of uncertainty, companies that took bold action could recover more quickly and gain sustainable competitive advantages that boost performance both in “good times and bad”.

“Companies that are able and willing to make bold cost moves could find the current economic environment is a prime opportunity to position themselves for long-term success,” he said.