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April 26, 2002 at 08:00 PM
NU Online News Service, April 26, 1:15 p.m.– Consultants in the New York office of Deloitte & Touche say investors really do reward cost-efficient financial services companies with higher share prices.
While the economy boomed between 1997 and 2000, the large banks that had the most improved cost-efficiency ratios saw their share prices increase by an average annual rate of 19.2%, compared with an average gain of 9.6 % for all of the 100 largest banks, the consultants write in a study on the benefits of “strategic cost reduction.”
Deloitte is one of the firms that give big companies advice on cutting costs. Critics say drastic cost-cutting efforts, such as massive layoffs, may create more problems than they solve.
The Deloitte consultants concede that companies have to plan cuts carefully.
“Cost optimization and business strategy are joined at the hip,” says Dennis Yeskey, a Deloitte & Touche principal. “A cost reduction program that doesn’t consider a company’s overall strategy risks the attainment of long-term strategic goals.”
Executives that want to cut costs well really need to understand their businesses, the Deloitte consultants say.
While setting goals, a firm should analyze its competitive position, evaluate potential savings across each line of business and determine the level of cost reduction required to support the firm’s current share price, the consultants say.
The consultants suggest, for example, that a company can cut the cost of layoffs more than 10% by using cash from its pension plan to pay the severance benefits.
