Why is cost reduction important

The effects of cost reductions often do not last long

×
Companies repeatedly check the cost developments in their departments and try to identify potential savings. However, many cost-cutting measures are unsustainable.

The current barometer of cost management by Expense Reduction Analysts and the EBS Business School shows that in many companies the effect of cost savings does not last long. In 73 percent of companies, this fizzles out after three years at the latest. The result is surprising, considering how much cost management can contribute to strategic corporate governance.

2014 | OriginalPaper | Book chapter

Cost management

Cost management is used to influence costs in terms of cost level, cost structure and cost trend in order to improve the profitability of the provision of services in the company. The measures in cost management set

Measures have to be long-term

The Springer authors Ralf Ewert and Alfred Wagenhofer explain in their book "Internal Corporate Accounting" (page 238) that cost management serves to influence costs in terms of cost level, cost structure and cost trend to improve the profitability of the provision of services in the company. They also mean:

More recently, cost management has mainly dealt with longer-term measures to influence costs.

The authors explain that short-term cost management often cannot change the actual causes of the expenses. These are often based on strategic decisions. It is all the more surprising that cost reductions are unlikely to be sustainable. However, the analysis also shows that companies do not allow themselves to be deterred in their planning. And this despite the external framework conditions, such as low raw material prices, Brexit and the low interest rate phase. The companies surveyed see the greatest potential for savings in mobility management. But also in the areas of the supply chain and telecommunications / IT, many people in charge suspect that there are still possibilities.

Increase in profit by reducing costs

Many companies want to cut costs in order to increase profits. Every fifth company uses at least its savings for this purpose. However, other uses were also identified in the study:

  • Marketing and sales activities (12.5 percent)
  • Machines and plants (11.8 percent)
  • Employee development (11.5 percent)

Successful companies invest what they have saved in new business areas

It is particularly interesting that the most successful companies invest significantly more savings (46 percent) in business expansion and in research and development as well as in marketing and sales (34 percent) than less successful companies. It can be assumed here that cost management is linked to long-term planning.