Cost-slashing firms are more likely to fail in a financial crisis

PA survey shows that conventional response to recession 'guarantees that a business will lose'

Companies that made the most severe cuts to their costs to cope with the financial crisis are the ones which most often failed, according to new research carried out by PA Consulting.

A survey of 200 business leaders found that the firms which slashed costs, particularly staff costs, had a 10 per cent lower Total Shareholder Return than those which did not. By contrast, the research, led by PA's Mark Thomas, found that the minority of firms who saw the crisis as a time to gain market share – either by increasing money spent on marketing or by buying new assets – performed the strongest and had the highest TSR.

PA's findings are backed by Sir John Banham, a senior independent director at Invesco and former chairman of Johnson Matthey, who says in the survey that too many companies took too long to react to the financial crisis of 2008. Sir John pointed out that in the previous crisis, while chairman of Johnson Matthey, his company actually increased investment in capital and R&D, and came out of the downturn stronger as a result.

Mr Thomas said: "Many companies are discovering that the conventional response to recession guarantees that a business will lose. The reason for the failure of these conventional management strategies is that they are designed for conventional inventory-cycle recessions, and a balance-sheet recession is a completely different beast."

PA used TSR as a good measure of medium and long-term performance because it looks at the value the market places on a firm's stocks and shares over time, he added. The survey, "Managing Uncertainty", used data from 2007 to 2010, and looked at firms worldwide. It also concludes that most companies were too cost-focused, too slow and too passive. Those that cut costs drastically performed worse than those that adopted a moderate approach to cuts; many took 18 months to respond and they performed worse than those who acted quickly.

Only a third of the 200 business leaders interviewed saw the 2008 financial crisis as an opportunity, but those that did had a higher TSR by 10 per cent, claims PA. The survey also shows that decisions made quicker are better. Companies that made quick decisions had a TSR 13 per cent higher.

But the highest-performing companies, said Mr Thomas, took a different approach: they identified the crisis early and responded quickly: "They had a moderate approach to cost reduction, and they looked beyond this to focus on the opportunities to get ahead. A fundamentally different approach is what produces the highest performance and this needs to be heeded by companies."

PA has come up with four recommendations: avoid drastic, panic cost cutting; prepare ahead of time; develop contingency plans and secure financing – avoid fire sales at the lowest point of the economic cycle; and take opportunities – acquisitive and organic – to gain share in key markets.

Start your day with The Independent, sign up for daily news emails
News
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Digital Optimisation Executive - Marketing

£30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

Recruitment Genius: Financial Reporting Manager

£70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

Recruitment Genius: Payments Operations Assistant

£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

Recruitment Genius: Telephone Debt Negotiator

£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

Day In a Page

On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back
Thurston Moore interview

Thurston Moore interview

On living in London, Sonic Youth and musical memoirs
In full bloom

In full bloom

Floral print womenswear
From leading man to Elephant Man, Bradley Cooper is terrific

From leading man to Elephant Man

Bradley Cooper is terrific
In this the person to restore our trust in the banks?

In this the person to restore our trust in the banks?

Dame Colette Bowe - interview
When do the creative juices dry up?

When do the creative juices dry up?

David Lodge thinks he knows
The 'Cher moment' happening across fashion just now

Fashion's Cher moment

Ageing beauty will always be more classy than all that booty
Thousands of teenage girls enduring debilitating illnesses after routine school cancer vaccination

Health fears over school cancer jab

Shock new Freedom of Information figures show how thousands of girls have suffered serious symptoms after routine HPV injection
Fifa President Sepp Blatter warns his opponents: 'I forgive everyone, but I don't forget'

'I forgive everyone, but I don't forget'

Fifa president Sepp Blatter issues defiant warning to opponents
Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report

Weather warning

Extreme summer temperatures will soon cause deaths of up to 1,700 more Britons a year, says government report
LSD: Speaking to volunteer users of the drug as trials get underway to see if it cures depression and addiction

High hopes for LSD

Meet the volunteer users helping to see if it cures depression and addiction
German soldier who died fighting for UK in Battle of Waterloo should be removed from museum display and given dignified funeral, say historians

Saving Private Brandt

A Belgian museum's display of the skeleton of a soldier killed at Waterloo prompts calls for him to be given a dignified funeral