VideoTo say that corporate America has its eyes on costs these days is a bit of an understatement. Hardly a day goes by without some announcement of a layoff, stalled capital investment, or acquisition put on hold. In January alone, Ford Motor Co. announced the closing of five plants in North America; AT&T Corp. slashed an additional 5,000 jobs; and The Walt Disney Co. shed a number of its Disney Stores.
What companies are doing is cost cutting by "brute force," says Jon Scheumann, a director with business-process consulting firm Gunn Partners. For most companies, he explains, "it's a struggle to adjust SG&A [selling, general, and administrative] costs in concert with fluctuations in their business cycles." Confronted with an economic downturn, companies take out costs as quickly as possible, which often translates into workforce reductions. Conversely, in the midst of an economic boom, costs often escalate wildly in the quest for growth.
"It's the bane of many CFOs," says Scheumann. "How to break that cycle."
To get a handle on which companies are best at doing just that, CFO teamed with Gunn Partners for the eighth annual Cost Management Survey (formerly the SG&A Survey). The survey ranks the largest companies (revenues of at least $750 million per year from 1997 through 2000) publicly traded in the United States, according to their cost management index. The CMI is calculated by adding a company's cost of goods sold to its SG&A expenses and dividing the sum by operating revenue.
Using figures from 2000, the survey found that Corporate America again made improvements in cost control — albeit marginally. The median company improved its costs-to-revenue ratio by 41 basis points from 1997 to 2000, compared with a 64 basis point improvement in last year's survey. It's the improvements at individual companies, however, that offer clues as to which have been best able to weather the current economic climate.
Last year's leanest operator, Apache Corp., for example, again topped the list in the Energy—Oil & Gas sector, with a CMI of 14.5 percent, compared with 77.0 percent for the industry. While 2000 was a boom year for that industry, Apache maintained its focus on costs, says Roger Plank, CFO of the Houston-based oil-and-gas exploration and production company. Riding business cycles, he explains, "is a way of life" at Apache. "And while I'm not saying we're going to guess every cyclical turn right, we aren't afraid to zig when others are zagging." As an example, he points to the fact that Apache has sat on the acquisition sidelines for the past 11 months, because "everyone else is paying too much."
The airline industry has been no less volatile in recent months. And the numerous layoffs post-September 11, says Scheumann, "are a direct reflection of how inflexible the airlines are." Bucking the trend, of course, is Dallas-based Southwest Airlines, which remains one of the only airlines not to have laid off employees since the terrorist attacks. In 2000, the low-cost leader spent 40.8 cents on SG&A expenses for every dollar of operating revenue generated, 560 basis points lower than the industry, and had a CMI of 76.6 percent, compared with the industry median of 91.7 percent. "We do run a tight ship," says CFO Gary Kelly. "But there are always opportunities to improve." And many of those opportunities come from employees, who have been challenged to save $5 a day for the past four years.
For Cox Communications Inc., the Atlanta-based cable operator, success depends on "developing new products and applications for future deployment" even though the industry is "somewhat recession resistant," says CFO Jimmy Hayes. While such developments require a continued investment in SG&A, he says, it must be done with "a balanced perspective." In 2000, that perspective meant spending only 36.3 cents on SG&A for every dollar of operating revenue it generated, and recording a CMI of 60.7 — 1,730 basis points better than its industry.
Of course, the CMI is not a perfect indicator of the future, as Ford's first-place finish in the auto industry certainly illustrates. And considering how earnings have dropped at many companies, Scheumann says the index is destined to go up next year — although not as much as one might expect. "Historically, SG&A rises as the business cycle is on the upswing and declines are on the downside, but on a lag basis. So in 2001, revenues will be down, but SG&A won't be down in proportion." The true reflection of the current cost-cutting binge, therefore, won't be seen until the 2002 numbers. "It all goes back to the flexibility question," he says.
Lori Calabro is a deputy editor of CFO.
Methodology: A Focus on Flexible Cost Cutting
CFO magazine teamed with Gunn Partners, an Exult company, on this year's annual Cost Management Survey. The survey sample is based on publicly traded companies, including international companies, that reported at least $750 million in revenue annually for the years 1997 through 2000. More than 1,000 companies were grouped into 40 major industry groups. Company data was sourced in a standardized format from Media General Financial Services Inc., in Richmond, Virginia.
Reader Comments» Post a comment