With legal expenses incurring considerable costs and revenue remaining relatively low, Morgan Stanley Chief Financial Officer Ruth Porat explains that the company’s strategy is on cutting costs. Just this year alone, the bank has cut over 1,600 positions as part of a broader initiative to lower the company’s expenses by $1.4 billion over the cost of the year. Because legal expenses are expected to remain high, budget cuts will have to occur elsewhere on the pipeline.
This revelation from Ruth Porat highlights the role of CFOs in cost reduction. As CFOs earn greater influence as executives in the company, they are able to create strategies, address fixes, and communicate ways to cut costs across the board. Companies grappling with uncertain economic terrain can rely on the CFO to make significant and sustainable moves.
However, a new report suggests that cost cuts from CFOs may not be having the desired effect. Why? Because revenue is falling across the board. Consider the facts: at many S&P 500 companies, revenue is expected to rise by 1.1 percent, but earnings themselves are down 0.6 percent. What does this mean? The reality is that it’s only because of corporate cost-cutting that these companies are seeing growing profits with falling earnings – and this model can only survive for so long.
How to Cut Costs Effectively
Still, a survey from Deloitte finds that cost management initiatives are going to be a primary way in which corporations improve the bottom line. So how should CFOs approach the cost cutting battle?
- Focus on how, not how much. The main reasons that tighter budgets are losing their impact is because CFOs are working too hard to satisfy the question, “How much do we want to save?” The more poignant strategy would be to ask, “How are we going to save?” Relying on part time employees is important. So are benchmarks and revised company policies.
- Create a connection with company strategy. When cost-cutting initiatives begin dictating company policy, it’s traditionally an unsustainable way to perform business. Rather, strategy must not only lead these efforts, but also define the monetary benchmarks that should be met. The link between strategy and budget must be as detailed and consistent as possible.