Companies that spend for revenue growth while also proactively cutting costs, significantly outperformed those companies that focused on high growth.
The best CFO approaches to cost management deliver up to a 7 percentage point return on invested capital premium since 2010, according to Gartner. The findings come from a new study of long-term value creation in more than 1,000 of the world’s largest companies.
“Company costs have increased faster than revenue since 2013, creating a profitability gap that has not been filled even as earnings have improved from their 2014 slump,” said Jason Boldt, director at Gartner. “The choices CFOs make about how to allocate resources to pursue growth and how to cut costs show quantifiable differences to returns on invested capital.”
The findings indicate that companies that spend for revenue growth while also proactively cutting costs, an approach Gartner calls “Efficient Growth,” significantly outperformed those companies that focused on high growth or on reducing costs alone.
“Managing costs is a prevalent theme in recent earnings transcripts, and many large companies have already launched significant cost-reduction programs,” said Mr. Boldt. “While, on average, 81 percent of a company’s costs are defined by the industry they are in, the remaining 19 percent are largely determined by executive decision-making, and this is where high-performing CFOs — who deliver the best return on capital — are making their impact felt.”
The research showed four key “cost anchors” — or negative management behaviours that drag down earnings — that most companies suffered from. Eighty-seven percent of companies suffered from poor cost visibility, 89 percent from cost equivalence, 84 percent used outdated cost models and 90 percent suffered from business resistance.
