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Is blind global cost-cutting driving SA's recession?


Johannesburg, 25 Jun 2009
Read time 2min 50sec

Should South Africa, based on the fundamentals of its economy, be in recession? We are certainly being driven into it, partly by blind cost-cutting orders emanating from the global head offices of multinational companies.

A significant proportion of our clients with overseas head offices have reported being ordered to freeze all capex spending and severely cut operating costs. If you consider only the local economy, this makes no sense: we have been insulated from much of the worst of the global downturn and, in fact, many local divisions of multinationals are in a good position to expand right now. Yet their ability to make business decisions - and to be profitable in the future - is being undermined.

The deep recession in Europe and the United States, where the head offices of most multinationals are located, is leading to panic and some very short-sighted decision-making. A blanket spending freeze might seem like the most effective way to cut costs from the top of the pyramid, but on the ground it looks less sensible. Blind cost-cutting means local divisions are prevented from making practical business decisions - and everyone suffers, including their employees, their suppliers and the customers they can't reach.

This is always going to happen when you manage from the top down. Senior executives just don't have a sufficiently fine-grained view of the entire organisation to devise appropriate cost-saving measures for different departments or divisions.

We believe it's far more effective to manage any business from the bottom up. What if the directive was simply “cut your spending by 20%”? Local managers who know their own local markets, including the specific threats and opportunities they face, are likely to make different decisions about where to cut those costs. A contact centre manager might happily cut 80% of the travel and entertainment budget, where a sales manager might more sensibly target capex. Every cost centre manager should be able to take whatever measures are the best for their business area in order to meet head office targets.

The same rule applies to any business, whether it's a major multinational or a medium-sized local firm.

That means, of course, that individual cost centre managers need to be equipped with the financial information they need to make those decisions. In this day and age, accountants are not the only ones who need access to financial information. Every manager of every cost centre should have easy access to accurate, up-to-date information in a format that's easy for them understand.

If they have this information and are empowered to use it, they'll be able to make informed cost-cutting decisions that will have a less damaging effect on the future of their local business unit. If they don't - if they are compelled to more or less blindly follow head office directives - their abilities are being wasted.

On the micro scale, including information from the bottom of the organisation in the decision-making process can make or break the future of an individual firm. On the global scale, as we are discovering to our cost in South Africa, it can affect entire countries.

idu Software

IDU simplifies financial management for non-financial managers. Its flagship product, idu-Concept, provides easy, effective budgeting and financial reporting for medium-sized to large businesses, including many of South Africa's top firms. idu-Concept integrates easily with ERP software, but unlike more cumbersome offerings, idu-Concept can be implemented quickly, requires little or no ongoing consulting fees and reduces budgeting cycles from months to weeks. For more information, visit http://www.idu.co.za.

Editorial contacts
DUO Marketing + Communications Judith Ancketill judith.ancketill@duomarketing.co.za
Beth Burke (021) 712 4980 beth@idu.co.za
IDU Software Kevin Phillips (021) 712 4980 kevin@idu.co.za
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