Proactive and Reactive Cost Cutting:

International Evidence on Modern Cost Management

SHANNON W. ANDERSON (*)

University of California, Davis, Graduate School of Management
540 Alumni Ln, Davis, CA 95616, United States
e-mail: swanderson@ucdavis.edu

HENRI C. DEKKER
Vrije Universiteit Amsterdam, School of Business and Economics
De Boelelaan 1105, 1081 HV Amsterdam, The Netherlands
Phone: +31205982190
e-mail: h.c.dekker@vu.nl

OMAR AGUILAR
Deloitte Consulting LLP
1700 Market Street
Philadelphia, PA 19103, United States

May 2019

Preliminary draft. Please do not quote or distribute.

* Corresponding author. The authors are grateful to Deloitte Consulting LLP for authorizing use of the survey data
and providing access to the survey research firm that administered the surveys. The data are the property of Deloitte
Consulting LLP and are used with permission. Anderson acknowledges research support from the Michael and
Joelle Hurlston Presidential Chair at the University of California Davis and from the Amsterdam Business Research
Institute at Vrije Universiteit Amsterdam. We are grateful to Jordan Bable, Gary Hecht, and Clara Chen for
thoughtful suggestions for the paper. We also thank participants in the CPA Ontario Center for Performance
Management Research and Education 2019 conference and workshop participants from Deloitte Consulting LLP,
Aarhus University, University of Illinois Urbana-Champaign, Université Paris Dauphine, Universidad Carlos III de
Madrid, and Vrije Universiteit Amsterdam for comments on early drafts of the paper.
 ABSTRACT

This paper uses an international survey of 1023 senior managers of large firms in 20 countries in 2016 to
examine motivations and practices of contemporary cost management. The study is descriptive, but
guided by economic theory and prior studies. The survey focuses on cost reduction associated with
efficiency improvements. Fewer than two percent of firms have no annual cost reduction target and most
report targets of 5 to 20 percent. Thus, managers view cost reduction as a continual rather than an
episodic activity. Cost reduction targets exhibit a U-shape relation with revenue change in the prior 24
months; that is, targets are highest for firms that have experienced steep revenue decreases or increases.
The U-shape relation is striking in light of classical economics’ fixed and variable cost function and in
relation to prior research that finds that costs are relatively less responsive to revenue decline. Revenue
changes are also associated with different motivations for and modes of cost cutting: 1) reactive cost
reduction, typically used to “right-size” in the face of diminished demand, and 2) proactive cost reduction,
used primarily to fund growth expected to persist. Firms with revenue declines often institute mandatory
across-the-board, fixed-percentage cost reduction, and focus more on reducing operating and
administrative costs. Growth firms instead employ targeted and enterprise-wide cost reduction programs
and focus more on reducing working capital. . We find that target achievement is unrelated to target level,
approaches undertaken, or costs targeted, but relates positively to investments in capabilities that facilitate
cost reduction.

JEL codes: [to be added]

Keywords: cost reduction, cost behavior, target setting, productivity

 Proactive and Reactive Cost Cutting:
International Evidence on Modern Cost Management

1. Introduction

Cost management is a central topic of accounting that covers evaluating cost structure, discerning

relevant information, and designing and using cost systems to support decision-making. Cost structure

and cost behavior are the result of managerial actions and choices, collectively termed “cost

management”. However, with the exception of experimental studies of individual decision-making, the

theoretical frameworks that underpin cost management research tend to focus on the relation between

input and output, often neglecting “management”; namely, why and how managers act to influence costs.

This paper focuses on the microstructure of cost management practices and how they are employed

separately and together to yield the cost behavior observed in public accounting data. We use survey data

collected in 2016 from 1023 senior managers with primary cost management responsibility who work in

large companies in 20 countries. The paper is descriptive; however, the inquiry is guided by prior research

in economics and accounting. The types of questions that we address include: What motivates managers

to pursue efficiency-related cost reduction and shapes their annual cost reduction target? How do these

motivations influence the cost management approaches used, the types of costs targeted for reduction, and

the firm’s investment in cost reduction capabilities? Which cost management tactics are associated with

desired cost reduction outcomes? The survey covers business conditions in the 24 months prior,

contemporaneous cost management practices, and the firm’s business outlook and cost management plans

for the near future (24 months). Thus, although the survey was completed at a single point in time, the

analysis considers cost management dynamics.

The survey focuses on managers’ plans for obtaining efficiency gains from year to year, rather

than on more mechanical relations between cost and volume or between cost and input prices.1 We use

1
Although the survey does not decompose cost change into its constituent elements (i.e., efficiency, volume, input
prices), fewer than 2 percent of respondents report no cost reduction target even though 74% report increasing
revenues in the prior 24 months and 82% report expecting increased revenues in the upcoming 24 months. From this
and other evidence we conclude that cost reduction targets are primarily related to targeted efficiency improvement.
We consider the role of revenue change (similar to its use in prior studies as a proxy for output levels) and

1
economic theory of adjustment costs as well as empirical studies of cost behavior to structure our inquiry.

The adjustment cost literature (e.g., Alchian 1959; Lucas 1967; Gould 1968; Treadway 1970; Pindyck

1982) specifies a cost of adjusting inputs to alter the level of output. Uncertainties about the future

influence managers’ adjustment decisions, which in turn influence the relation between total costs and

output. Efficiency changes, the focus of this study, are another source of dynamics. Specifically,

productivity growth associated with human (e.g., learning) and technical innovation, and productivity

impairment associated with asset depreciation or obsolescence are a source of (positive or negative)

adjustment costs that are distinct from but potentially correlated with positive adjustment costs associated

with volume change. In addition to the production function or the external business environment,

adjustment costs may stem from the managers who make adjustment decisions. For example, agency

theory implicates managers’ private incentives in adjustment costs (e.g., Jensen 1986; Pinnuck and Lillis

2007; Chen, Lu and Sougiannis 2013; Kama and Weiss 2013) and behavioral theories link cognitive

biases (e.g., escalation of commitment) and errors in decision making (e.g., sunk cost fallacy) to

adjustment costs (e.g., Sleesman, Conlon, McNamara and Miles 2012; Bruggen and Luft 2016).

Empirical studies of cost management and cost structure typically use aggregate cost and revenue

data from public accounting reports to test whether the input-output relation evinces patterns consistent

with adjustment cost theory (e.g., Hamermesh 1989; Bresnahan and Ramey 1994; Kallapur and

Eldenburg 2005; Holzacker, Krishan and Mahlendorf 2015a, 2015b; Dierynck, Landsman and Renders

2012). Of necessity, these studies confound the effects of volume change, price change (both inputs and

outputs), and production efficiency change and define “cost management” in relation to a measured

change in total costs or cost structure. While it is a truism that changes in costs and cost structure are the

result of cost management, as the adjustment cost literature makes clear, the converse is not true. Absence

of change in the level or structure of costs does not imply an absence of cost management in the period.

competitive input and output markets on cost management practices aimed at increased efficiency. Thus, we
recognize that the three components of cost variance are interdependent even though we cannot separately analyze
changes in cost due to volume or price effects.

2
Specifically, even a zero net change could be accompanied by a multitude of cost management actions to

maintain the desired relation between input and output. While extant studies have opened a window on

correlates of net cost adjustment, they have supplied limited understanding of the collection of managerial

practices that produce the result. In this paper the data are direct measures of firm’s cost management

intentions, actions, and outcomes. While there are caveats to data interpretation, it is nonetheless a new

vantage point from which to consider the microstructure of cost management.

As depicted in Figure 1, the analysis is structured according to the premise that antecedent firm

characteristics and the external business context influence cost reduction targets and cost management

practices. The former follows from the adjustment cost literature while the latter relations find support in

the management accounting and control literatures.2 Together the cost management tactics are posited to

influence the timely achievement of desired outcomes and to foreshadow future cost management plans.

The analysis is presented in two parts, with the first part focused on annual cost reduction targets. The

modal range of the cost reduction target is five to 20 percent. Modelling the analysis after prior

accounting studies of how costs change with a change in revenue, we estimate the relation between cost

reduction targets and revenue change in the prior 24 months to reveal an economically meaningful and

statistically significant U-shaped relation that reaches its extremum when revenues have declined

approximately ten percent. Cost reduction targets are highest for firms that recently experienced steep

decreases or steep increases in revenue. The U-shape relation is striking. On the “left” side where firm

revenue has been declining, the classical economics’ cost function of fixed and variable costs suggests

decreasing total costs and increasing average costs with lower volume, but also increasing marginal costs

2
For example, the target-setting literature suggests that managers tend to overestimate operational costs (e.g., slack
creation, Fisher, Maines, Peffer and Sprinkle 2002; Indjejikian and Matejka 2006) to obtain more achievable budget
targets and increase the likelihood of contingent compensation. This suggests that reported cost reduction targets
may, on average, be relatively easy and associated with high target achievement. In contrast, the literature on
corporate downsizing and cost cutting (e.g., Repenning 2000; Love and Nohria 2005; Banerji, Leinwand and
Mainardi 2009) predicts that challenging targets and budgets that are focused on reducing slack mobilize managers.
Thus, depending on the context for cost reduction, targets may be more difficult, “stretch” targets that on average are
unlikely to be attained. This is but one example of how a given level of cost reduction may obscure diverse
motivations and cost management practices.

3
of cost reduction (i.e., adjustment costs) because “fixed” costs are more difficult to reduce. In contrast, the

“right” side represents increasing total costs and decreasing average costs due to increased volume, and

the latter effect is amplified if a learning curve further reduces variable costs. Setting aside the effects of

volume, the classical cost function with adjustment costs suggests that for a given level of effort and

target difficulty, the cost reduction target associated with planned productivity improvements will be

lower when revenues are declining and higher when revenues are increasing.

The management accounting literature on “sticky costs” posits that managers have asymmetric

incentives or face asymmetric adjustment costs (e.g., labor cost rigidities) in growth versus decline

situations. The maintained hypothesis is that costs decline less with a given decline in revenue than they

increase for the same increase in revenue. Thus, these studies predict a positive log linear relation

between revenue changes and cost changes when revenues are increasing, but a diminished slope of the

same relation when revenues are declining. Inferring target-setting behavior underpinning this piecewise

linear cost schedule conflates the effects of output volume with efforts at continuous improvement and

associated “cost reduction.” However, if cost reduction targets isolate continuous improvement under

ceteris paribus conditions, then the sticky cost hypothesis suggests that cost reduction targeted during

periods of growth will be less than that targeted during periods of decline. In the extreme, a manager may

resist both the imperative of reduced demand to cut input volumes and the imperative of continuous

improvement. Both production economics and the sticky cost hypothesis suggest that, all else equal, cost

reduction targets related to productivity improvement will be systematically lower for declining firms

than for growing firms, yet this is not what we find.

To explore this phenomenon, we examine the degree to which six conditions are reported to have

motivated cost management activities. The six conditions fall into two distinct categories that we term: 1)

reactive cost reduction, to “right-size” the organizational in the face of persistent diminished demand, and

2) proactive cost reduction, to fund organic growth that is expected to persist. When we examine firms’

positions on the two scales in relation to recent changes in revenue we find that reactive cost reduction is

positively associated with recent revenue change, particularly but not exclusively, of a negative nature,

4
and is more common for geographically dispersed firms. Proactive cost reduction is less common for

firms with recent revenue declines and is positively associated with a positive business outlook. Reactive

cost reduction is unrelated to business outlook. The importance of business outlook to proactive cost

reduction is consistent with the important role of expectations in the adjustment cost literature, where

positive business prospects are the basis for investments to prepare for growth. Similarly, the irrelevance

of business outlook for firms engaging in reactive cost reduction is consistent with research (e.g.,

Cameron 1994) that finds that immediate concerns crowd out long-term planning in firms in decline.

Proactive cost reduction motivations are also positively associated with top managers having primary

responsibility for cost management and with firm size. These two motivations for cost reduction provide

intuition for why large cost reduction targets arise among firms with both revenue declines where reactive

cost reduction is a survival response, as well as those with revenue increases, where proactive cost

reduction to fund growth is operative.

The second part of the analysis addresses the question, “Do cost management tactics differ when

different motivations prompt cost reduction?” Considering first the approach to cost management, we find

that firms in decline adopt general cost reduction programs of productivity improvement less often and

institute across-the-board, fixed-percentage cost reduction requirements more often. In contrast, growing

firms are more inclined to employ targeted cost reduction programs and enterprise-wide programs that

promote cost reduction without stipulating a fixed-percentage reduction for all business units. Context

also matters for which costs firms target for reduction. Declining firms are more inclined to cut operating

costs and administrative costs while growing firms focus on reducing working capital. In contrast to prior

studies that analyze discretionary cost categories that are presumed more vulnerable to manipulation, we

find no relation between revenue change and a focus on reducing either sales and marketing costs or

overhead costs. We conclude the analysis by examining reported cost reduction achievements. Perhaps

counterintuitively, we find that target achievement is unrelated to the level of the target, the cost

management approaches used, or the specific costs targeted. Instead, the most consistent correlate of

target achievement is investments in embedded capabilities that facilitate cost reduction.

5
 Overall, the paper provides some of the first large-scale evidence of a nuanced picture of cost

management practices. As such it contributes important detail that both complements and challenges

results of prior studies and suggests directions for future research. The remainder of the paper is

organized as follows. Section 2 reviews selected literature from economics and management accounting

as context for the analysis. Section 3 describes the survey and the research sample. Section 4 provides a

rich description of cost reduction targets and their association with organizational and environmental

factors, as well as the relation between cost reduction targets and revenue change. Section 5 turns to cost

management, in particular, the programmatic approach to cost reduction, the costs that are targeted for

reduction, and the enablers associated with achieving cost reduction targets. Section 6 concludes with a

brief summary of key results and a discussion of the limitations of the study.

2. Selected Literature on Cost Reduction

Two research literatures guide the analysis of cost management practices: the theoretical literature

on production economics and adjustment costs; and, empirical studies that explore a wide range of

adjustment costs including those based in production as well as those with roots in agency theory and

behavioral science. We review a selection of influential, representative studies.

2.1 Economics and adjustment costs

Economists define the relation between output value and input costs as the production function.

Adjustment costs are introduced to the production function to reconcile theory with empirical regularities;

specifically, the models presume competitive input and output markets that adjust instantaneously to

changes in demand or input prices, but data indicate that firms often respond gradually if at all (Alchian

1959). Capital is posited to be a source of frictions because it is often acquired in “lumps,” is

accompanied by installation costs, and depreciates with time or use. Thus, the production function is

augmented with a cost per unit of investment input to address costs of adding and depreciating capital

(Lucas 1967). Treadway (1970) extends these arguments to include labor that installs and decommissions

capital. Prescott and Visscher (1980) introduce additional adjustment costs of labor associated with

learning and acquiring new skills or conversely, failing to maintain skills.

6
 Adjustment is a shift between states; however, if the future is uncertain, weighing the decision to

change includes evaluating the likelihood of various future states of demand over an extended time period

(Pindyck 1982). A manager who contemplates adjusting to a known, current demand shift from prior

periods must weigh the likelihood of needing to unwind these adjustments (with associated “roundtrip”

costs of adjustment) in the future. If current conditions are transitory, the manager may conclude that a

temporary mismatch (over or under supply) between inputs and demand is warranted to avoid adjustment

costs. Pindyck (1982) highlights the role of inventory to buffer short term demand variability, noting

more generally the moderating role of slack resources on adjustment.

While early studies treat the firm as an abstraction --- a “black box” production function ---

Hamermesh and Pfann (1996) connect the theory to the ebb and flow of activity in the firm. They

describe two types of adjustment costs: costs to alter the net stock of an input versus costs associated with

input flows. Using labor as an example, adjustment costs to alter the stock of labor includes search costs,

training costs, and severance costs. However, even if the stock of an input is unchanged, there are hidden

flows that carry adjustment costs. For example, even if the level of employment is unchanged, the “stock”

may hide significant turnover as employees retire or separate and are offset with new hires.

Many economists conceive of adjustment costs as rooted in the production or investment

functions of the firm or as an attribute of the external environment (e.g., when governments impose

policies related to labor costs such as unemployment payments, minimum wages, constraints on firing, or

to capital costs such as favorable tax treatment of certain investments). However, two research streams

theorize that managers are also a source of adjustment costs. Agency theory posits that managers’

personal risk preferences may diverge from those of the firm and influence investment decisions (e.g.,

Jensen 1986), while behavioral science posits cognitive biases (e.g., escalation of commitment as in

Sleesman, Conlon, McNamara and Miles 2012) and errors (e.g., the sunk cost fallacy as in Arkes and

Blumer 1985) as sources of adjustment costs.

When economic theory is translated into managerial actions and cost management, it becomes

important to consider what accountants term “cost structure” and to recognize that the practice of

7
accounting itself creates new constraints on adjustment. Cost accounting recognizes fixed costs and

variable (with some unit of output or activity) costs. These correspond roughly to economic notions of

long-run and short-run costs, which are distinguished by the speed with which they may be adjusted.3

Banker and Byzalov (2014) provide a descriptive model that links adjustment costs to how managers

respond (or not) to changes in demand given the production function, past and future expected business

conditions, and adjustment costs. However, accounting is notably silent on opportunity costs. For

example, Gould (1968) notes that the time to assimilate new capital creates adjustment costs in the form

of reduced output and foregone sales (e.g., opportunity costs). This highlights a weakness of studying

adjustment processes using archival accounting data alone and an opportunity for other research methods

to shed light on managers’ consideration of opportunity costs in adjustment decisions.

While economic theory distinguishes adjustment costs related to capital versus labor, cost

accounting employs myriad classifications within these broad categories of spending and each type of

cost may be subject to different levels and sources of adjustment cost. For example, responsibility for

costs in different parts of the organization falls to different managers and typically, costs budgeted for

different parts of the organization are not fungible in the short run. Moreover, even within a responsibility

accounting business unit, managers may have real or mental categories (Thaler 1999) that shield some

costs from reduction and scrutiny while making other costs a focal point for reduction. These distinctions

take on added importance in the empirical literature that we consider next.

2.2 Empirical research on adjustment costs and cost reduction

Broadly speaking, empirical research on adjustment costs and on firm growth and downsizing

examines how cost structure, uncertainty, and adjustment costs influence management decisions. Studies

that follow most directly from economic theory and use microeconomic data include: Lichtenberg (1988),

Hamermesh (1989), and Bresnahan and Ramey (1994). For example, Bresnahan and Ramey (1994) use

detailed knowledge of adjustments costs related to plant closures, the addition or removal of a production

3
Speed of adjustment may be technologically determined or a result of optimizing behavior in light of adjustment
costs; hence the truism that “all costs are variable in the long run.”

8
shift, the alteration of production line speed, and the presence of overtime work to study how weekly

production volume changes are achieved in auto assembly plants. They provide a complex picture of

managers dynamically shifting resources to equilibrate production output and demand.

Kallapur and Eldenburg (2005) study the role of uncertainty on adjustment costs in a study of the

real-option theory of investment. They hypothesize that uncertainty causes firms “to prefer technologies

with low fixed and high variable costs.” If fixed costs are more subject to adjustment costs than variable

costs, there should be a preference for technologies with low costs of adjustment. Their thesis is supported

by data on the cost structure of hospitals before and after a change in insurance reimbursement that

increased revenue uncertainty. Holzhacker et al.(2015b) extend this work to show that demand

uncertainty and financial risk influence cost management decisions: outsourcing, equipment leasing, and

the use of temporary workers --- actions that shift cost structure from fixed to more variable costs. In

counterpoint to these studies, Banker, Byzalov and Plehn-Dujowich (2014) hypothesize that demand

uncertainty is characterized by both unusually high and low demand realizations. They argue that because

congestion increases nonlinearly with capacity utilization, demand uncertainty favors greater investments

in fixed assets. An important consideration in reconciling these studies is that Kallapur and Eldenburg

study a service industry where demand and production are contemporaneous and unused capacity is lost

while Banker et al. study manufacturing firms, that may use inventory to buffer demand uncertainty.

Inventory diminishes the realized costs and the opportunity costs of mismatched capacity and peak

demand (Pindyck 1982). These studies highlight the role of industry differences in cost management.

Organizational studies provide further context for considering how firm-level or time-period

effects alter adjustment costs. For example, Anderson and Lillis (2011) document an organizational cost

management culture variable, termed “frugality,” that is associated with cost management practices.

Holzhacker, et al. (2015a) extend earlier studies of how demand uncertainty influences hospitals’ cost

structure by examining how firm ownership (for-profit versus nonprofit and governmental hospitals)

moderates adjustment processes. Consistent with institutional theory, they find that in addition to

economic pressures, institutional pressures alter the calculus of adjustment.

9
 Agency theory is the basis for many studies of adjustment. Pinnuck and Lillis (2007), Dierynck,

et al. (2012) and Kama and Weiss (2013) study how managers’ incentives to meet or beat earnings targets

for periodic financial reporting influence cost structure. Focusing on labor costs, Dierynck et al. show that

downsizing motivated by meeting or beating a zero earnings benchmark is associated with dismissal of

low wage workers; those associated with the lowest adjustment costs. Moreover, firms with healthy

earnings limit employee dismissals to protect their reputation in the labor market (i.e., lowering their costs

of hiring and reducing voluntary turnover) and instead adjust labor hours to meet demand uncertainty.

The latter finding is consistent with Love and Nohria’s (2005) large scale study of firm downsizings in

which the level of organizational slack is a critical determinant of the form that downsizing takes. In

considering specific types of workers and varying managerial motivations, Dierynck et al. address

Hamermesh’s (1989, p. 687) concern that a common failure to conduct analysis at the micro level often

leads to incorrect conclusions about the influence of adjustment costs on managerial actions:

“more attention needs to be paid to linking maximizing behavior to the underlying

structure of adjustment costs. That linkage must be made at the micro level, with
implications for macro behavior deduced by determining the correct mechanisms for
aggregation […] the most profitable approach to studying factor, and particularly
employment adjustment requires microeconomic data to discover what firms actually do.”

Chen et al. (2012) also consider misalignment of interests as a basis for adjustment costs, but, similar to

Holzhacker, et al. (2015a), find evidence that firm governance mitigates managerial empire building that

is evidenced by an eagerness to grow and reluctance to downsize.

Studies using behavioral theory provide another window on managers as a source of adjustment

costs. Managers may make systematic errors about adjustment or their adjustment decisions may be

biased. For example, Northcraft and Neale (1986) identify systematic decision errors in their study of

managers’ response to cost information. They find that although opportunity costs are typically ignored,

decisions can be improved with better information systems that help managers overcome myopia and

reduce reliance on overly-simple heuristics. Bruggen and Luft (2016) focus on the behavioral bias of

escalation of commitment as a source of adjustment cost and consider how management controls related

to assigning responsibility and increased reporting may be used to mitigate biased spending decisions.

10
This is but one example of a behavioral bias that may influence managers’ consideration of whether to

adjust or not in the face of changed circumstances (Banker and Byzalov (2014) review other biases).

A variety of empirical methods has been used to study adjustment processes and their outcomes.

Some archival studies use data from a firm or several firms in an industry while other studies use public

accounting data to test associations between changes in aggregate revenue and changes in either total cost

or a subset of costs in settings that approximate differing levels and sources of adjustment costs (See

Balakrishnan, Labro and Soderstrom (2014) for a review of the literature). Experimental methods focus

on factors that influence individual managers’ decisions. Surveys are used to probe more deeply into cost

management practices and manager’s reasoning behind the use of these practices, filling a gap between

individual managers’ decisions and aggregate cost outcomes of the firm. This survey-based study fits in

the latter category but greatly extends the scope of inquiry using an unusually large sample of

international firms, both public and private.

2.3 The research map

The associations that are examined in this paper are structured in relation to a research map that

underpins the survey instrument. The instrument measures characteristics of the firm and business

conditions as well as managers’ motivations for cost reduction, and how these motivations are manifest in

cost management tactics; specifically, in cost reduction targets, the costs targeted for reduction, the

approaches used, and investments in cost reduction capabilities. The survey covers firm conditions in the

24 months prior, contemporaneous cost management practices, and the firm’s business outlook and cost

management plans for the near future (24 months). Figure 1organizes the available data into a logical,

sequential research map.4 Although the map suggests a causal flow, because the survey was conducted at

a single point in time, the analysis documents correlation rather than causation. The primary focus of the

paper is associations between cost management tactics and the characteristics of the firm and the business

environment that provide context for these choices. These relationships speak to the paper’s objective of

4
Figure 1 was created by the authors after reviewing the survey instrument and grouping survey questions and items
in a logical structure. Figure 1 was not used by the survey developers nor was it shared with survey participants.

11
describing the motivations for and methods of cost management. A secondary focus is on the association

between these choices and reported cost management outcomes and future plans.

3. The survey, research sample, and variable measures

3.1 Survey administration

In 2016, Deloitte Consulting LLP (hereafter, “Deloitte”) commissioned a survey of cost

management practices from a third-party survey research firm. The U.S. survey is a revised and updated

version of surveys that Deloitte administered in 2008 and that the same survey research firm administered

in 2011 and 2013 to similar samples of large U.S. firms.5 6 In 2016 the survey was extended to three new

geographic regions: U.K. and Europe, South America, and the Asia Pacific Region. Surveys were

administered in the language of the host country, or, when many languages prevail, in the common

business language for the country. Consistent with best practice, the U.S. English-language survey was

translated into the target language. Then another party performed a “back-translation” of the translated

survey into English. Discrepancies between the original survey and the back-translation precipitated

revision of the translated survey to ensure common meaning for all regional versions of the survey.

The survey was conducted primarily online. In a minority of cases and primarily in two countries

(Australia and the Netherlands) where online mail lists were inadequate to deliver the required sample,

the survey research firm used computer aided telephone interviews (CATI) to contact potential survey

respondents. The survey firm’s contract with Deloitte was written to ensure a certain sample size in each

region of qualified respondents (i.e., who pass the screening) who completed the survey (i.e., reached the

end of the survey and substantially completed all survey items). The survey firm did not retain detailed

records on the number of survey invitations sent, the number of surveys that were started but closed due

to screening, or the number of surveys that passed the initial screening but were not completed. As a

5
Although sample characteristics are similar over time and firms may appear coincidentally in multiple surveys,
there was no attempt to re-survey the same U.S. respondents with each survey. Thus the survey data from the four
periods cannot be assembled into a panel. Firms are not identified by name in the surveys.
6
The academic authors were not involved in survey design or administration and gained access to the data only after
data collection was completed. The third author was involved with survey design and administration.

12
result, we are unable to provide reliable measures of survey response rate or selection bias. While this is

an unfortunate consequence of using data collected for commercial purposes, it does not mean that there

is no research value of the database. As always, in evaluating results we must weigh whether the findings

could be influenced by the sampling plan.

3.2 Survey respondents and sample description

Although Deloitte sponsored the work and was engaged in the design of the survey instrument,

the survey research firm assembled the sample of respondents without reference to the Deloitte brand.

Survey participants may coincidentally be Deloitte clients; however, the research firm did not use client

lists to assemble the sample and did not question the participants about their external auditor’s identity or

engagement of consultants. Screening questions ensure that surveys are completed by informed

respondents with firsthand knowledge of the firm’s cost management practices. Table 1, Panel A shows

that survey respondents serve in high-level roles with significant authority for cost management decisions.

Panel B indicates that the locus of authority for cost management tends to be centralized in the higher-

level roles and functions. This attests to the worldwide strategic significance of cost management.

Screening questions were also applied to include only firms greater than a specified size (measured by

sales revenue). Across all of the regional surveys, 1,023 complete valid responses were obtained and this

is the starting point for analysis. “Skip-logic” or branching survey questions that make subsequent

questions irrelevant to the respondent reduce the sample for some of the analyses that follow.

Table 2, Panel A provides descriptive data on the firms in the sample, including: revenues,

number of employees, primary industry, and ownership. 7 Subject to the lower bound used for screening,

the sample is well-dispersed across 10 categories of revenues and 8 categories of employee size. Publicly

listed firms represent 58% of the sample; the remaining 42% are privately held. Panels B and C identify

sample firms’ country of origin, the proportion of revenue earned in their own geographic region, and the

geographic regions where firms are active. Twenty percent are U.S. firms and the other 80% are well

7
Only revenues are used to screen survey respondents, not the number of employees, industry, or ownership.

13
dispersed over 19 other countries. On average, firms earn more than half (52.73%) of their revenue in

their primary geographic region but also have significant earnings in the other geographic regions where

they are active. Panel C indicates that most firms are active in the U.S. and E.U., where, if present, they

on average earn one-third of revenue; however, we also see significant presence and revenue in Asia-

Pacific countries, Latin America, and Middle East/African countries. Indeed, 30% of the sample firms

earn revenue in all of the regions, while less than 20% are active only in their primary geographic region.

Table 2 is consistent with the survey being targeted to large, often internationally active, firms.

3.3 Survey design and variable measures

The survey questions were presented in a fixed order beginning with questions about the current

conditions of the firm and progressing to the business outlook for the next 24 months. Survey items

within a question block are presented in random order to guard against ordering effects on responses.

Most survey questions are of an objective nature which mitigates potential biases associated with

perceptual measures. Below we describe the variable measures grouped according to Figure 1 categories.

3.3.1 Cost Management Antecedents

Revenue Change is measured as the firm’s approximate annual revenue change over the past 24

months, expressed as a categorical percentage range. Table 3, Panel A tabulates the response frequencies

for the eleven categories that range from significant revenue decreases to significant increases. Most firms

experienced revenue growth, although a significant proportion (18%) indicated revenue decline. The

correlation between revenue change and business outlook is positive and significant (0.38; p<0.01)

indicating that on average revenue growth is expected to persist.8

Revenue Decline is an indicator variable that takes the value 1 if revenue change indicates

decreasing revenue (i.e., a score less than 6 on the revenue change scale).

8
A reference benchmark is the International Monetary Fund’s January 2016 report on global growth, which was
estimated to have been 3.1% in 2015 and expected to be 3.4% in 2016 and 3.6% in 2017, with gains more assured in
advanced economies. https://www.imf.org/external/pubs/ft/weo/2016/update/01/ accessed October 2, 2018

14
 Revenue Outlook is the firm’s expected annual revenue change over the next 24 months relative

to its last full fiscal year (i.e., at time of survey). Table 3 Panel A tabulates the frequency distribution of

responses for the nine categories that range from significant decline to significant growth. As with

revenue change, most firms have a positive business outlook, with only 8% expecting revenue decline.

Cost Reduction Motivations. Respondents report the presence (1= present, 0 = absent) in the prior

24 months of seven motivations for cost management. Four motivations (reduced customer demand,

decrease in liquidity and access to capital, unfavorable cost position relative to peers, changed regulatory

structure) indicate that cost management is in reaction to external forces. Two motivations (investment in

growth areas, gaining competitive advantage over peers) reveal a proactive use of cost management.9

Proactive motivations and the resultant effects on cost management are illustrated in a recent news story:

… zero-based budgeting, is being implemented at Philip Morris to help free up capital

for new, alternative tobacco products.… Amid the technology shift, Philip Morris’s
capital expenditures have been on the rise. …The company aims to trim $1 billion in
costs over the coming three-year period, said Martin King, the company’s finance chief.
“We need to shift as much as we can from our current spending across our organization
and make better use of our spending,”… (Minaya and Trentmann, WSJ Oct 1, 2018)

Table 3, Panel B provides frequency distributions and correlations for the six cost reduction

motivations. Differences in what motivates cost reduction mirror findings in Cameron’s (1994) large-

scale study of organizational downsizing. Proactive motivations are reported most frequently, although

reactive motivations are also common. The correlations between individual motivations indicate that

those classified as reactive tend to co-occur (indicated by shaded region), as do those classified as

proactive, though to a lesser extent. We create two variables, Reactive Cost Management and Proactive

Cost Management, that are summed scores of the respective survey items. These are formative scales

because the items that comprise them are distinct and may not covary. That is, they are not measures of a

9
We drop from the analysis a seventh motivation (performance of the firm’s international portfolio of businesses)
primarily because it is not relevant to all firms in the sample, but also because it appears to be subsumed by several
responses in both of the two groups and its meaning is ambiguous.

15
common latent variable (i.e. a reflective scale). 10 Higher scores indicate a stronger presence of reactive

and proactive motivations, respectively, for cost management.

3.3.2 Cost Management Tactics

Cost Reduction (CR) Target is the reported range for the firm’s annual cost reduction target as a

percentage of total costs in the prior fiscal year. The six response categories range from reducing costs by

less than 5% to reduction of 50% or more. Table 3, Panel C indicates targets are most commonly set

between 5 and 20 percent of costs. The survey did not question respondents about target difficulty

explicitly; however, a meaningful proportion of the sample set what can be considered high or ambitious

targets (i.e., 8.34% set targets of 30% and higher).11 A separate response category used by 28 firms

(2.74%) allowed respondents to report that no specific cost reduction target was set.

Unfortunately, the survey does not gather data on cost levels (past or future), and the cost

reduction targets do not distinguish between reductions related to volume reduction versus productivity

improvement. However, because the question is framed as a reduction in relation to the prior year’s costs,

because few firms report setting no cost reduction target, and because even firms anticipating increased

demand report cost reduction targets, we interpret the cost reduction target as primarily a measure of

improvement plans. This interpretation is reinforced by a subsequent question that asks how likely it is

that the firm will have “a cost improvement initiative in the next 24 months (emphasis added)?”

Focal costs indicate the types of costs targeted for cost reduction. Respondents selected from

among five types of focal costs: (1) operational costs, (2) administration costs, (3) sales & marketing

costs, (4) purchased products and services contributing to overhead, and (5) working capital. We use two

sets of variables: (1) individual indicators of each cost area, and (2) the sum of the indicators as a measure

10
An exploratory factor analysis of tetrachoric correlations with a promax rotation yields two factors that correspond
to the two groupings. Items within each group exhibit moderate positive covariation with one another, but not of the
level expected if the items measure a common latent construct.
11
In a later section of the survey in which the respondent reports on target achievement, respondents were asked
whether or not the cost targets were infeasible. On average, cost reduction targets that are described as infeasible are
significantly higher than targets considered feasible (mean target reduction: 13.28% for targets reported to be
infeasible versus 10.42% for others; difference significant at p < 0.01).

16
of the scope of costs targeted. Table 3, Panel D shows that the most commonly targeted cost categories

for reduction were operational and administrative costs, while working capital was targeted least, by 32%

of sample firms. Table 3, Panel H provides the frequency distribution for the summed indicators.

Cost Management (CM) Approaches indicate methods used to manage costs over the past 24

months from the listed options: (1) targeted actions taken to reduce costs in a few divisions, business

units, functions, or geographies; (2) intensified existing productivity improvement programs such as six

sigma and lean operations; (3) drove all divisions, business units and corporate functions to reduce a fixed

percent of their costs12; (4) conducted an enterprise-wide analysis of cost structure followed by the

deployment of a broad program to restructure and manage the cost base; (5) conducted zero-based

budgeting (ZBB). We create indicator variables for each approach and sum the five indicators to create a

measure of the extent of cost management approaches undertaken (tabulated in Table 3, Panel H). Similar

to the scope of costs targeted, this summated scale assumes that firms may combine different approaches,

resulting in a greater use of approaches (i.e., without these uses necessarily being correlated, resulting in a

formative rather than a reflective scale). Table 3 Panel E reveals that the most common approach for cost

management is targeted actions (59%), followed by intensifying productivity programs (53%), and

enterprise-wide programs (50%). In contrast to these focused, programmatic approaches, 42% of firms

imposed a fixed-percentage cost reduction across divisions.

Cost management (CM) capabilities indicates which of five capabilities were used in cost

management during the prior 24 months: (1) creation of a new executive position and/or full time

positions to drive cost management, (2) setting up IT infrastructure, IT systems and business intelligence

platform to refine the collection and reporting of cost data, (3) implementing new policies and procedures,

and strengthening compliance mechanisms, (4) improving processes for forecasting, budgeting and

reporting to enable effective cost management, (5) implementing a ZBB system or process. These

capabilities are not mutually exclusive, and many respondents selected more than one. Accordingly, we

12
Cameron (1994, p. 195) identifies non-prioritized cutbacks as a negative attribute commonly associated with
organizational decline, noting that the general nature of across-the-board cuts reduces interpersonal conflict.

17
examine covariates of each capability as well as of the extent (i.e., sum) of CM capability (Table 3, Panel

H). As Table 3, Panel F shows, firms’ cost reduction efforts are often associated with building new

organizational capabilities (particularly relating to IT (49%), and to policies, procedures and compliance

(52%)), and improvement of existing processes (particularly relating to forecasting, budgeting and

reporting (56%)). Over 30% of the firms created a new executive position with oversight of cost

management. Compared with other capabilities, ZBB was implemented relatively infrequently (8.6%).

3.3.3 Cost Management Outcomes

Target achievement is the reported level of realized cost savings relative to target, using six

response categories (more than the target, 100%, up to 75%, about 50%, up to 25%, and none of the

target, coded so that higher scores reflect greater achievement). The majority of firms did not fully meet

their targets (Table 3 Panel G), while almost 38% reported savings that fully met or exceeded the target.

Time to savings measures whether targeted savings were realized after, at, or before the planned

deadline. A fourth response category allows for the absence of a planned deadline. For most firms the

realization of savings was before or per the planned deadline. Only 16% report delays (Table 3, Panel G).

3.3.4 Future Cost Management

New cost improvement initiative measures the likelihood of the firm undertaking a cost

improvement initiative within the next 24 months, using a five-point Likert scale (1= very likely; 5= very

unlikely, re-coded so higher values indicate a greater likelihood). Untabulated statistics show that 50% of

the sample firms expected a new cost management initiative to be very likely and another 36% considered

this somewhat likely (12.5% was neutral and only 1.5% considered this somewhat or very unlikely). This

suggests that for many firms, cost management is a continuous improvement process (and as observed in

later tests, may also relate to a large proportion of firms not fully realizing cost reduction targets).

Planned cost management (CM) approaches measures for the same five items of CM approaches

which approaches will be used in the next 24 months. We analyze covariates of the items as well as their

sum (i.e., “extent of planned CR approaches”). Consistent with the broadly held expectation of future cost

reduction initiatives, the planned use of CM approaches is substantial and shows a similar pattern to their

18
prior use (Table 3, Panel E). The correlations between prior and planned CM approaches show

persistence over time for a subset of firms, but also new and discontinued use by other firms (i.e., all

tetrachoric correlations are positive but substantially smaller than one).

3.3.5 Control Variables

In a descriptive study, the distinction between independent variables and control variables is

somewhat blurred. For our purposes, we identify as control variables exogenous factors (in the context of

cost management in a comparatively short 24 month period) that may influence costs and cost

management. The primary mechanism of influence for these controls is the firm’s production function

and the cost structure that determines the potential for economies of scale and scope. Table 2 Panels A, B

and C, describe the research sample in relation to the control variables.

Geographic sales dispersion. Survey respondents allocated 100 percent of annual firm revenues

to six regions: North America, European Union, Middle East and Africa, Latin America, Asia Pacific, and

Rest of the World. We compute as a measure of geographic sales dispersion a Herfindahl index,

calculated as the sum of the squared percentages of regional revenues. We subtract the resulting score

from one, so larger values indicate more dispersed sales across regions and smaller values indicate

concentration in few regions. All else equal, a firm with more dispersed sales enjoys diversification of

revenues and costs; however, it also faces greater demands for coordination and control across regions

which can influence cost management practices.

Firm Size is measured in two ways, as the firm’s annual revenue in the prior fiscal year and as the

number of employees that the firm has worldwide. For reasons of confidentiality, the survey only asks

respondents to select from 6-8 ranges for these measures (e.g., 4 = 30,000 to less than 70,000 employees;

5 = $1.5 billion to less than $5 billion annual revenue). For the four regional surveys, the ranges are not of

equal absolute size because they are established in light of typical firm sizes in the region and with an aim

of distributing respondents among the categories. We use the low point of the response range for the

specific survey, rather than the nominal survey response to restore to a limited degree the underlying

19
scales (revenues translated to 2016 U.S. dollar-equivalent13, and number of employees, respectively).

Recall that smaller firms in their respective markets as measured by revenues are screened from the

sample; however, number of employees is not a screen, and thus exhibits greater variation. Although the

two measures of size are correlated, we include both as control variables because they may have unique

relations with cost management practices (e.g., a large employment base may induce a greater focus on

labor costs than would be suggested by revenues alone; Pinnuck and Lillis 2007; Dierynck et al. 2012).

Public Firm indicates whether the firm is publicly traded rather than privately held. Governance

and scrutiny by analysts influence cost management (e.g. Holzhacker, et al. 2015a; Kama and Weiss

2013). Moreover, public firms are expected to face greater pressure to deliver short term profits. Profit

pressure is often associated with an increased emphasis on cost control or with reducing “discretionary”

costs. In contrast, privately held firms may enjoy “patient” long term investors.14

Industry. Survey respondents classified the firm’s primary industry using one of seven broad

categories that were further subdivided into 35 more detailed sectors. We include indicators based on the

primary industry selection from the seven categories: Consumer and Industrial Products, Energy and

Resources, Financial Services, Life Sciences and Healthcare, Public Sector, Technology, Media and

Telecommunications, and “cross industry/other.” Industry fixed effects help to control for differences in

cost structure (e.g., the mix of fixed and variable cost) and in competitive pressures to reduce costs.15

Country. Surveys were administered in 2016 in four phases with each phase directed toward a

geographic region: U.S., South America (Mexico and Brazil), Asia-Pacific (China, Japan, Singapore,

Australia, Hong Kong, and India), and Europe (U.K., France, Germany, Spain, Italy, The Netherlands,

13
For surveys conducted in countries other than the U.S. (and those where business is not typically based on the
U.S. dollar), we convert the foreign currency used in the survey question (e.g., Euro, Australian Dollar) to U.S.
dollars at the time of the survey to establish comparability among all versions of the surveys.
14
Small firms (by revenues) are screened from the sample. This makes it less likely that private firms are also
systematically younger than public firms. This is important because in recent years, younger, more entrepreneurial
firms often spend heavily to establish infrastructure and build a customer base using funds from private investors.
We do not have data on firm age, capital structure, or profitability to allow for explicit tests of these propositions.
15
Untabulated analysis that subdivides the seven industry categories yields substanticaly similar results.

20
Belgium, Norway, Denmark, Poland, South Africa16). We include fixed effects for the firm’s country of

origin, in an effort to control for regional economic differences that influence business decisions as well

as regional legal, institutional and cultural influences on cost management practices.

Taken as a whole, the five control variables above proxy for firm-level differences in the

production function and the economic settings in which the sample firms operate. A final control variable

that we employ is the location of cost management responsibility within the firm. Unlike the above

variables, this variable reflects an organizational choice and may thus be considered endogenous.

However, for purposes of this study of comparatively short-term cost management practices, we treat it as

a relatively long-lived choice that is exogenous to short-term cost management. Thus, the final control

variable, cost management responsibility is an indicator variable for whether accountability for managing

the firm’s cost management programs resides with top management (i.e., CXO level or higher in Table 1,

Panel B). High level responsibility is an indicator of “cost management culture” and the strategic

importance of cost management for the firm (Anderson and Lillis 2011).

3.4 Additional Variable Descriptive Statistics

Table 4 provides Pearson correlations between the variables, many of which are statistically

different from zero but nonetheless modest, indicating low risk of multicollinearity in multivariate

analysis. For reasons of parsimony, we report only correlations with the summed measures for the cost

management tactics variables (see note with Table 4). The variables are grouped according to the

conventions of Figure 1 and shaded regions indicate correlations among variables in the same grouping.

Considering correlations among the antecedents of cost management, reactive motivations are

correlated positively with both recent revenue change and decline, indicating that reactive motivations

coincide with both positive and negative revenue changes. Proactive motivations correlate positively with

recent revenue growth, negatively with revenue decline, and occur more frequently for firms with a

positive revenue outlook. Thus, proactive motivations are common for growing firms that manage costs

16
South Africa was surveyed with U.K. countries because respondents speak English and many have U.K. ties.

21
to free up resources for reinvestment and redeployment to support growth.17 As one would expect, the two

motives are negatively correlated. Moreover, expected serial correlation in revenue is evident in the

positive correlation between recent revenue change and revenue outlook.

Significant correlations are also present among the cost management tactics, although cost

reduction targets have a much lower correlation with the other three tactics, which are highly correlated

with one another. With correlations exceeding 0.5, focal costs, CM approaches and CM capabilities are

consistent with interrelated choices among cost management practices.

The cost management outcomes of target achievement and time to savings are positively

correlated. Interestingly, although one might expect target achievement to be negatively correlated with

the target level, we find no significant relation. Target level is positively associated with the time to

realize savings. The likelihood of a future cost improvement program and the extent of planned cost

management approaches are also positively correlated, and both variables correlate positively with the

extent of cost management tactics used in the prior period.

4. Results: Antecedents of cost management and cost reduction targets

4.1 Antecedents of cost management

Following the map in Figure 1, we first consider the antecedents to cost management, in

particular the relation between business conditions, as measured by recent revenue change and revenue

outlook and the reported motivations for cost management. In this analysis, the assignment of dependent

and independent variables is somewhat arbitrary because we presume that the changes in revenues and

business outlook are mirrored in the cost motivations that are described in business terms (e.g., demand,

competition) and vice versa. We treat revenue change and business outlook as independent variables

17
Correlations with measures of the firm’s key priorities in the next 24 months (1 = lowest priority; 5 = highest
priority) provide additional evidence that reactive and proactive motivations relate to different goals (all correlations
significant, p < 0.02). Proactive motivations correlate significantly more strongly than reactive motivations with key
priorities of sales growth (0.19 vs 0.09), product profitability improvement (0.19 vs 0.10) and organization and
talent (0.18 vs 0.08). Reactive motivations correlate significantly more strongly with cost reduction as the key future
priority (0.18 vs 0.08) and , although the difference is not significant at conventional levels, reactive motivations
have a somewhat stronger association with balance sheet management than proactive motivations (0.15 vs 0.11).

22
“explaining” cost motivations in the analysis in order to assess their associations while controlling for

other firm differences and industry and country fixed effects. We model reactive and proactive

motivations simultaneously using structural equation modeling (SEM) with maximum likelihood

estimation.18 The two motivations are expected to be negatively related and this is modeled as covariance

between them. In calculating standard errors, observations are clustered at the country level to account for

common influences on cost management within countries.

The results (Table 5) reinforce the correlation analysis, indicating that recent revenue change

(growth or decline), and especially decline, are associated with reactive motivations for cost cutting.

Additionally, reactive motivations for cost cutting are more common for firms with geographically

dispersed sales. Proactive motivations are negatively associated with revenue decline, but the coefficient

of recent revenue change (i.e., growth) that was significant in the univariate correlation is not significant.

This indicates an asymmetry in which firms facing no revenue decline are more likely to pursue cost

reduction in response to proactive motivations than those that face decline, but realized growth has little

impact. Instead, proactive motivations for cost reduction are more common for firms with a positive

revenue outlook, indicative of cost management to prepare for expected growth. Larger firms (measured

by revenue) and those that locate cost management responsibility with top management also more

frequently pursue cost reduction based on strategic motivations.

Importantly, although revenue-based measures of business conditions are associated with cost

management motivations, the model fit of cost management motivations is relatively low. There are at

least two interpretations that have implications for further analysis. First, the motivations prompting cost

management may not yet be fully reflected in revenues. Alternatively, the motivations, which measure

managers’ perception of the business situation, may indicate a management team that is more attuned to

business conditions than other firms with similar revenue changes but less vigilant managers. In either

18
Poisson regressions of the cost management motivations provide similar results and inferences as reported.

23
case, we expect that measures of cost management motivation will have incremental explanatory power

for cost management actions as compared with revenue-based measures of business conditions alone.

Reactive and proactive motivations have a negative and significant conditional covariance

(p<0.01). This indicates that, after including the antecedent and control variables that induce or coincide

with the motivations, an increase in the importance of one motivation for cost management often involves

lower importance of the other. In other words, engaging in cost management in reaction to negative

external pressures is unlikely to coexist with proactive cost management aimed at funding growth.

4.2 Covariates of cost reduction targets

Table 6 tabulates the estimated multivariate models of cost reduction targets. Model 1 includes

control variables only and shows that cost reduction targets are positively associated with geographical

sales dispersion and with size as measured by employment.19 We find no differences between public and

private firms, counter to the narrative of public firms facing greater market pressure to deliver short-run

profits. Model 2 captures the basic model of economics in which inputs and outputs are expected to move

in tandem. Model 3 is similar to models estimated in prior studies that posit that changes in cost vary

asymmetrically with positive and negative revenue change. Somewhat counter to that literature, which

hypothesizes a more muted response of costs to sales reductions than to sales increases, we find that cost

reduction targets increase with both positive and negative revenue change. This specification does

indicate an asymmetric effect with declines in revenue also being associated with even higher cost

reduction targets (Model 3). Introducing expectations about the future (Model 4), which are critical in

adjustment cost theory to predicting whether managers will adjust, does not alter these findings. However,

an alternative specification, in Model 5, provides a somewhat different picture.

Generally, the sticky cost literature of accounting uses as a focal point for predicting divergent

cost management behaviors the point of zero revenue change. Using a dummy variable to distinguish

revenue increases from revenue decreases, these studies model changes in cost as a piecewise log-linear

19
Untabulated fixed effects show significant differences in cost reduction targets between industries and countries.

24
relation with a “kink” at zero revenue change and test for a steeper slope for positive revenue change than

for negative revenue change. In Model 5, we replace the sales decline indicator with the square of revenue

change to test whether revenue change has a non-linear impact on cost reduction targets. The results show

that while the main effect of revenue change remains positive and significant, its squared value is also

positive and significant, indicating a non-linear association in the form of a U-shape. Model fit improves

significantly due to the inclusion of the squared term (R2 increases from 32% to 39%).

A test of the significance of the U-shape (Lind and Mehlum 2010) confirms that it is highly

significant (p<0.01).20 The estimated extremum indicates that the inflection point is at a revenue change

of -9.6% (95% Fieller confidence interval: -13.36; -6.49) rather than at zero, suggesting that revenue

reductions less than about 10 percent do not immediately induce firms to set higher cost reduction targets.

Recall “sticky cost” studies model change in reported (accounting) costs, which confounds changes due to

volume, input prices, and efficiency; while we model changes in cost reduction targets related to

efficiency improvements. A potential reconciliation of the sticky cost evidence of asymmetric changes in

costs in relation to upward and downward changes in revenue with our finding of a U-shaped relation that

is centered significantly left of zero between revenue change and cost reduction targets is that the

documented cost asymmetry (e.g., cost falling less than predicted by sales revenue decline) is caused by

managers allowing costs to adjust with volume without hastening to raise efficiency goals until revenue

decline becomes more pronounced (e.g., at around 10 percent). That is, the mechanism of asymmetry and

managerial influence on cost may act primarily through the intensity with which efficiency gains are

sought. Figure 2 is a graphical presentation of the estimated U-shape.

The presence of adjustment costs does not imply symmetry between costs of upward versus

downward adjustment. To that end we test separately for a positive slope for both the lower (-0.65;

p<0.01) and higher bound (0.95; p<0.01) and find both to be significant. Together these results indicate

that firms establish higher cost reduction targets under both increasing and decreasing revenues, and set

20
The Stata “utest” procedure tests the hypothesis that the relationship is decreasing at the start of the revenue
change interval and increasing at the end.

25
lower targets when they are in relatively stable market conditions. Testing for the difference in the left-

hand and right-hand slopes, we find the latter to be steeper (p=0.08).21 This may indicate that adjustment

costs differ for upward versus downward adjustments. Alternatively, it may indicate that adjustment costs

of upward and downward adjustment have a different mix of cash costs and opportunity costs, and thus

the cost reduction target is differentially incomplete as a measure of actual adjustment.

Model 6 extends Model 5 by adding the two measures of cost management motivation. The

results indicate that after including revenue-based measures of business conditions, reactive motivations

for cost management are associated with even higher cost reduction targets. In keeping with the

alternative interpretations raised in discussing Table 5, this may indicate that these motivations are known

to managers before they are fully impounded into revenues and are the basis for cost management.

Alternatively, the motivations may be present equally for all firms with similar revenue changes;

however, managers who perceive these market conditions are more likely to take reactive cost

management actions. Either explanation argues for contextualizing business conditions to improve our

understanding of cost management responses.

The finding that higher improvement targets accompany growth is consistent with intuition that it

is easier to achieve cost improvements with growth (e.g., economies of scale and scope) than with

decline. However, it stands in counterpoint to some sticky cost studies that assume that costs decline less

for a given level of revenue reduction than they increase with revenue increase (nonlinear in revenue

reduction) but are not anti-sticky (i.e., nonlinear in revenue increase). The finding that higher

improvement targets are set when revenues are decreasing also differs from adjustment cost predictions

based in agency theory that managers are reluctant to reduce costs during revenue decreases unless the

change is perceived to be permanent. Note however, that the inflection point at -9.6 percent revenue

change rather than the conventional focal point of zero may reconcile these views by portraying a

relatively “unreactive” region in which revenue is declining but is not necessarily indicative of permanent

21
In this test, we separate the sample at the extremum and compare the absolute values of the slopes.

26
decline. If more difficult targets are set during corporate downsizings than in other cost reduction efforts

(e.g., Repenning 2000; Love and Nohria 2005; Banerji, Leinwand and Mainardi 2009) this could explain

higher cost reduction targets when revenues are decreasing than when they are relatively stable. However,

this theory conflicts with the even higher cost reduction targets observed for growing firms, which would

be posited to be set at lower levels. We find no association between future revenue outlook and cost

reduction targets. This may reflect a mismatch in timing of these variables. In later results we find that a

positive outlook is associated with the expectation of a new cost reduction initiative, and thus it may be

the future cost reduction target that is influenced by these expectations.

4.3 Subsample analysis of firms with high cost reduction targets

In untabulated analysis, we examine the set of firms with relatively high (20% or greater cost

reduction) targets. These firms are well dispersed across industries; however, as compared to overall

sample proportions these firms have a somewhat greater proportion in Technology, Media and

Communication (21.5% vs 16.4% sample proportion) and Life Sciences and Health Care (8.4% vs 5.3%).

High target firms are relatively more often located in the U.S. (26.1% vs 20.3%), India (13.4% vs 7.8%)

and Mexico (11.1% vs 7.6%), and less often in the U.K. (5.0% vs 10.3%) and Japan (0.8% vs 3.8%).

High target firms have a greater focus on reducing working capital (39.5 vs 31.7% sample

average) and sales/marketing costs (41.4% vs 34.6%), and a diminished focus on administrative costs

(51.3% vs 58.4%). Although high target firms use all cost management approaches to a greater extent

than other firms, the differences are most pronounced in requiring a fixed percentage cost reduction

across business units (49.0% vs 41.9% sample average) and use of ZBB (21.1% vs 13.9%). In terms of

capabilities, these firms are also more likely to support cost management by investing in IT and business

intelligence (54.8% vs 49.5%) and ZBB (14.6% vs 8.6%). The proportion of firms failing to meet targets

is comparable between high target and other firms (60.2% vs 62.9%, p > 0.10).

5. Results: Cost management practices

5.1 Covariates of cost management practices

27
 To examine firms’ cost management practices, we simultaneously analyze the scope of focal costs

targeted and the extent of cost management approaches and of capabilities deployed. The dependent

variables are the summated scales for these cost management variables (i.e., Table 3, Panel H) and we use

SEM to model these as joint choices by including a covariance between them (Arora 1996; Brynjolfsson

and Milgrom 2013). The cost reduction target is included as a fourth dependent variable because we posit

that cost reduction targets and cost management methods are jointly determined.22 In the models that

follow, for ease of interpretation, we use the simpler specification of revenue decline. We use only the

revenue-based cost management antecedents to more closely mirror the models in prior archival studies of

cost behavior and to alleviate concerns about common method bias creating spurious correlation among

CM antecedents.23 The models estimate the absence versus presence of cost management tactics (in

contrast to the percent intervals of cost reduction targets), so this specification enables estimation of

whether firms at the tipping point of negative and positive revenue changes make different choices.

As Table 7 shows, revenue growth is associated with higher cost reduction targets, more

approaches to manage costs (p<0.05), and greater investment in capabilities (p<0.05). Firms experiencing

revenue decline target a greater number of cost categories for cost reduction (p<0.05), and also make

marginally greater use of cost management capabilities (p<0.10). Such capabilities, however, are used

primarily when there is a positive business outlook (p<0.01).24 The latter result is consistent with

adjustment cost theory, in which investment in capabilities is justified by anticipated growth.

The estimated associations with the control variables reveal that when cost management is a top

management responsibility, firms employ more modes of cost management (p<0.01), target more types of

cost for reduction (p<0.05), and deploy more cost management capabilities (p<0.05). Firms with

geographically dispersed sales appear to not only set higher targets (p<0.01), but also to manage costs

22
Using Poisson regressions for the count measures of focal costs targeted, cost management approaches, and
capabilities provides similar results and inferences as reported.
23
Untabulated models that include reactive and proactive motivations for cost management, find both to relate
positively and significantly to the number of approaches, scope of costs, and extensiveness of capabilities deployed.
24
In an untabulated model that includes an interaction between revenue outlook and revenue decline the results are
qualitatively unchanged and the interaction term is also not significant.

28
with more approaches, targeting more categories of cost and deploying more capabilities (all p<0.05). The

greater complexity of managing costs in geographically dispersed firms may require deployment of a

greater array of approaches focused on a broader set of cost types, as well as investment in capabilities to

support cost management. Larger firms as measured by revenue target a broader scope of costs for

reduction (p<0.05), while firms with a larger employee base (where labor costs are more significant) use

more cost management approaches (p<0.01).

Finally, the conditional covariance estimates show that, after controlling for antecedents of cost

management and firm differences, cost reduction targets are not significantly associated with cost

management tactics. Thus, the intensity of cost management appears independent from the savings that

firms aims to achieve. A possible explanation is that the target does not per se reflect target difficulty,

which may relate more strongly to cost management intensity.25 In contrast, the other conditional

covariances are positive and significant (all p<0.01), indicating that increases in the categories of costs

targeted, approaches used, and capabilities deployed often go together and are interrelated choices.

Table 8 reports the results of logistic regression analyses of the covariates of adopting specific cost

management tactics using indicator variables. Panels A, B and C, respectively, report the association

between the antecedents of cost management and the indicator variables for focal costs, cost management

approaches, and capabilities. In addition, the panels report conditional covariances between tactics, which

we estimate using seemingly unrelated bivariate probit regressions. These estimates indicate the

interrelations between choices after controlling for cost management antecedents and firm differences.

Panel A shows that revenue growth is positively associated with a focus on working capital

(p<0.01), such as through managing inventory and time of outstanding sales.26 In contrast, firms with

declining sales mostly target operational and administration cost for reduction (both p<0.05). Sales and

25
For instance, a 20% cost reduction target in one firm may be of similar difficulty to a 10% target in another firm
with less spare capacity and slack (e.g., Pindyck 1988; Balakrishnan et al. 2014) and achieving both targets may
require equally extensive cost management practices.
26
For instance, growing firms may significantly reduce costs by critically managing inventory to avoid overstocking
as well as opportunity costs of missed sales, and by controlling days of outstanding sales through credit terms.

29
marketing costs are targeted by firms with top management responsibility for cost management and with a

larger employee base, while firms with greater revenue focus on administration costs. The conditional

covariance estimates indicate that firms targeting working capital are less likely to focus on

administration costs (p<0.01), but often combine this with a focus on sales and marketing costs. Indeed,

sales and marketing activities can significantly influence working capital (e.g., a marketing campaign

requiring greater inventory) and vice versa. (e.g., inventory levels or days outstanding sales effecting the

focus of marketing activities).

The estimates reported in Panel B show that revenue growth is associated with targeted actions to

reduce costs (p<0.01), and to a lesser extent with enterprise-wide cost analyses and programs to

restructure costs (p<0.10). In contrast, and consistent with Cameron (1994), firms in decline more often

cut costs by driving units and functions to reduce a fixed percentage of costs (p<0.01), and are less likely

to intensify productivity improvement (p<0.05). Possibly, these firms made little use of such programs in

the past, and with worsening economic conditions revert to general untargeted practices to reduce costs.

Firms’ business outlook is unrelated to the use of any specific cost reduction approach.

Interestingly, when cost management is a top management responsibility, firms undertake more

targeted actions (p<0.01), and enterprise-wide programs (p<0.10). Firms with dispersed sales and firms

with a larger employment base focus on productivity improvement (p<0.05 and p<0.01), while firms with

greater revenue focus less on productivity (p<0.05) and more often opt for fixed cost reduction across

units (p<0.05) and zero-based budgeting (p<0.01). In addition to productivity improvement, firms with a

greater employment base more often initiate enterprise-wide programs (p<0.01), which may be aimed at

improving productivity while reducing labor costs.

Panel C reports on capabilities deployed in cost management. These relate predominantly to future

expectations, as firms’ business outlook relates positively to use of most capabilities except for new

policies and procedures and tightened compliance mechanisms. This suggests that capability investments

are particularly aimed at supporting future cost management (i.e., a lagged relation). Only firms

experiencing a revenue decline appear to respond to this by enhancing accounting processes related to

30
forecasting, budgeting and reporting (p<0.01). These practices may help to better predict demand, and

tighten cost control through budgetary control and reporting. Other results show that firms with top

management responsibility for cost management and geographically dispersed firms invest more in IT as

enabler of cost reduction (p<0.05 and p<0.01). ZBB is used by firms with greater revenue (p<0.01).

The covariance estimates show that ZBB is more frequently implemented by firms that created a

new position to drive cost management (p<0.01), and that put in place new policies and procedures, and

tightened compliance mechanisms (p<0.01). This suggests that new executives challenge existing budget

procedures and tighten control over behavior to meet budget requirements. The creation of such a new

position is negatively associated with investments in new IT (p<0.01) and in improved accounting

processes (p<0.05), suggesting these may be substitutes for compliance and procedures. Finally,

investments in IT relate negatively to both new policies and procedures (p<0.05) and improved

accounting processes (p<0.05), again pointing to substitution effects.

5.2 Outcomes of cost management practices

Table 9 reports the models for (1) achievement of cost reduction targets, and (2) timing of cost

savings. The estimates show that both improve with investments in cost management capabilities (both

p<0.01). Consistent with the role of expectations in the adjustment cost literature, a better business

outlook is associated with increased target achievement and reduced time to realize savings.27

5.3 The Future: New cost reduction initiative and planned cost management approaches

In the final set of results, we examine the likelihood of a new cost reduction initiative and planned

cost management approaches in the two years following the survey (2017-18). We first use SEM to

simultaneously analyze the likelihood of a new cost reduction initiative and the extent of planned cost

management approaches. As use of approaches can persist over time (e.g., because of their duration, or

level of completion at the time of the survey), we control for the reported prior extent of use. Table 10

show that the likelihood of a future initiative and extent of planned approaches increase with revenue

27
We refrain from causal interpretations of this result as we recognize that more successful cost management may
also help the firm position better for the future.

31
growth, decline, and future sales expectations. Thus, the drivers of past cost management approaches are

also associated with their use in the future. There is a noticeable strong effect of prior use of approaches

on planned approaches, indicating persistence over time. Geographically dispersed firms and firms larger

in revenue expect to do more on cost management. A greater likelihood of a new initiative also involves

more planned cost management approaches (conditional covariance p<0.01).

Table 10 also reports logit regressions of planned management approaches. We control for prior

use of the approach and find a significant relation indicative of persistence (all p<0.01). In addition, firms

with revenue growth (p<0.05) and a positive outlook (p<0.10) plan to undertake targeted actions to reduce

costs. Firms with a positive revenue outlook also more often plan enterprise wide programs for managing

costs (p<0.01). Geographically dispersed firms again show a greater inclination to intensify productivity

improvement (p<0.01), while firms with greater revenue plan to do more of each of the other approaches.

Table 11 reports on changes to the organizational structure or to firm boundaries that accompany

cost management plans for the next two years. We estimate the effects on both the scope (i.e., sum) of

planned actions as well as the individual actions. The scope of planned actions increases with revenues

changes (positive and negative) as well as with revenue outlook.28 Larger firms (in employees) also

expect to undertake more actions. Results for individual actions show that declining firms are more likely

to change the business configuration (e.g., divesting underperforming assets/divisions or adjusting the

product/customer portfolios) as well as streamlining the organization structure (e.g., modifying reporting

relations). Firms experiencing sales growth or increased future growth prospects instead focus on

outsourcing or offshoring as well as centralization (e.g., integrating business units and functions).29

6. Conclusion

28
Unreported additional analyses show that, controlling for all other model variables, anticipated cost management
actions are also positively and significantly associated with greater use of cost management approaches in the prior
period, the scope of costs considered for cost management, as well as cost management capabilities.
29
We dropped two less concretely stated actions (improve policy compliance and reduce external spend by
leveraging scale) from the analysis. Including them provides comparable results for scope of planned actions. Both
actions relate positively and significantly to firms’ revenue outlook. Firms larger in revenue and private firms are
also more inclined to reduce external spend by leveraging scale.

32
 This paper connects firm-level conditions with manager-level incentives and actions to reveal the

microstructure of “cost management” that accompanies adjustment processes. Several themes emerge

from the large, international survey of cost management practices. First, cost reduction and continuous

improvement are the norm worldwide in larger companies as evidenced by the level and pervasiveness of

cost reduction targets and the prevalence of plans to continue cost reduction for the foreseeable future.

Second, although it is pervasive, cost reduction has its roots in two distinct motivating forces: the drive to

survive difficult times and the impetus to fund innovation and growth. At either extreme of revenue

change, cost reduction targets are more ambitious, a result that is somewhat at odds with studies that

consider the relation between realized cost changes and revenue changes. In particular, the reticence of

managers to cut costs when revenues decline that has been found in the sticky cost literature is not

mirrored by a less ambitious cost reduction target. Perhaps this simply reflects “cheap talk” in the form of

ambitious targets that are not pursued with full effort (per the predictions of agency theory) and thus end

with diminished cost reduction realizations. However, we find no evidence that targets are less likely to

be achieved by firms with declining revenue. Alternatively, the costs of downward adjustment may

include more opportunity costs than out-of-pocket costs as compared with the costs of upward

adjustment, causing a comparison of only the out-of-pocket costs to present an incomplete picture of the

relation between output changes and economic costs of adjustment.

A third theme that emerges is the varied cost management tactics employed for different business

contexts. Firms with different business conditions focus on different categories of cost for reduction,

employ different cost management approaches, and invest in different cost management capabilities.

Among the interesting relations with control variables, governance, in particular the location of cost

management responsibility with top management, has a strong positive relation with the extent of use of

all of the cost management tactics. In short, firms that are serious about cost management bring a full

arsenal of capability and approaches to the task and charge senior executives with responsibility for

effective execution. Firms with dispersed international operations set more ambitious cost reduction

targets and use a greater array of cost management tactics. Whether this reflects the role of dispersed

33
operations in creating a greater need for coordinating and controlling dispersed operations to obtain cost

reduction is unclear. Do these firms need cost management more or are they simply more efficient at cost

management?

The well-executed, large international survey of cost management practices of large firms on which

this paper is based provides a unique managerial view of cost management practices and their covariates.

With a mix of public and private firms from many industries and countries, and data on a broad range of

cost management practices, the paper addresses gaps in our understanding of how managers reduce costs.

This knowledge complements archival studies that rely on public firms’ accounting data to study

covariates of aggregate costs as well as experimental studies that isolate individual manager effects on

cost management decisions. Nonetheless, we acknowledge limitations of using a survey that was not

designed for research purposes. Specifically, with earlier involvement in survey design we would have

urged measurement of price changes in input and output markets to distinguish price and volume effects

on revenues and costs, as well as target difficulty, and we would have clearly distinguished any effects on

cost targets of output volume from those of productivity improvement. Notwithstanding these unavailable

data, the results offer evidence that corroborates some prior studies and challenges others, suggesting that

there is still much to be learned about the managerial activity that is cost management.

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Figure 1: Research Map

Question Frame of Survey: 24 Months Prior to Survey 24 Months After Survey

Cost Management (CM)

CM Tactics CM Outcomes
Antecedents

- Recent revenue - Cost reduction target - New cost improvement

change - Focal costs - Target achievement
initiative
- Revenue outlook - CM approaches - Time to realization
- Planned CM approaches
- Cost reduction - CM capabilities
motivations

Firm Control Variables

₋ CM responsibility
₋ Sales dispersion
- Size: Revenue
- Size: Number of employees
- Public firm
- Industry (7 categories)
- Country (20 countries of origin)

37
Figure 2: Estimated U-shape relation between revenue change and cost reduction targets

The figure below depicts the estimated relation of Table 6, Model 5 in which cost reduction targets are
shown to vary nonlinearly with recent revenue change. The test of the U-shape indicates that both sides of
the curve are significantly nonlinear (p < 0.01). The minimum occurs at revenue change -9.60 percent and
the slopes of lower and higher bound are respectively: -0.65 and 0.95, both differing significantly from
zero (p < 0.01).
40
30
Cost reduction target

20
10

-50 0 50
% Revenue change over past 24 months

38
Table 1: Survey Respondent and Cost Management Responsibility

Panel A: Survey respondent role and cost management decision authority (N=1023)
Role: C-suite Executive Senior Total
Cost management authority: management management
Sole decision maker 57 86 159 302
Make final decision with input 132 90 96 318
from staff/management
Help reach final decision as 240 99 64 403
part of group/committee
Total 429 275 319 1,023
Note: C-suite involves C-level functions such as CEO, CFO, COO, CIO, Board of Directors. Executive
Management involves management functions such as Divisional/BU/Regional president, controller,
treasurer, and other company officers. Senior Management involves management functions such as SVP
/VP of a business group or an enabling function such as Finance, HR and IT.

Panel B: Locus of cost management responsibility within the firm (N=1023)

Responsibility level for CM # obs % obs

Board of directors 158 15.44
President 91 8.90
CEO 284 27.76
CXO (CFO, COO, CIO, CAO) 291 28.45
Corporate controller 55 5.38
Department heads 111 10.85
Cost management role 24 2.35
Other 9 0.88

39
Table 2: Sample firm characteristics (N=1023)

Panel A: Firm size and governance

Sales in millions # obs % obs # Employees # obs % obs
50 12 1.17 1 - 1,000 120 11.73
150 160 15.64 1,000 - 5,000 260 25.42
300 170 16.62 5,000 – 15,000 245 23.95
500 486 18.18 15,000 – 30,000 151 14.76
1,000 149 14.57 30,000 – 50,000 100 9.78
1,500 73 7.14 50,000 – 70,000 93 9.09
3,000 138 13.49 70,000 – 100,000 25 2.44
5,000 63 6.16 100,000 and more 29 2.83
10,000 34 3.32
25,000 38 3.71
Principal industry
Consumer goods 161 15.74 Life sciences & health care 54 5.28
Industrial 202 19.75 Public sector 53 5.18
Energy & resources 115 11.24 Technology, media, communication 168 16.42
Financial services 183 17.89 Other 87 8.50
Public firm
Yes 597 58.36
No 426 41.64
Note: Sales in millions is set to the left side of the sales interval

Panel B: Country of origin of sample firms (N=1023)

% of % revenue % of % revenue
Country # obs sample in region Country # obs sample in region
Australia 36 3.52 61.19 Japan 38 3.71 58.67
Belgium 15 1.47 53.33 Mexico 78 7.62 43.53
Brazil 75 7.33 45.37 Netherlands 15 1.47 32.14
China 81 7.92 52.28 Norway 7 0.68 39.71
Denmark 5 0.49 46.90 Poland 7 0.68 95.14
France 48 4.69 63.65 Singapore 30 2.93 54.33
Germany 59 5.77 58.25 South Africa 22 2.15 50.09
Hong Kong 30 2.93 43.77 Spain 41 4.01 48.24
India 80 7.82 33.39 UK 105 10.26 50.21
Italy 43 4.20 55.72 USA 208 20.33 63.30
Note: Sample mean % revenue in own region = 52.75%.

Panel C: Geographic presence of operations of sample firms (N=1023)

Region Firms with % of % revenue Regions with # obs % obs
revenue > 0 sample in region revenue > 0
US 828 80.85 32.97 1 184 17.99
EU 807 78.89 34.41 2 125 12.22
Middle East / Africa 574 56.11 13.86 3 133 13.00
Latin America 616 60.22 20.23 4 100 9.78
Asia Pacific 702 68.62 28.76 5 168 16.42
Other 424 41.45 15.62 6 313 30.60
Note: “% revenue in region” is calculated as the mean percentage of firm revenues earned in the region
for only those firms that report revenues in the region.

40
Table 3: Descriptive Data on Dependent and Independent Variables (N=1023 unless noted)

Panel A: Cost Management Antecedents: Recent revenue change and future business outlook
Revenue change prior 24 # obs % obs Business outlook next 24 # obs % obs
mos. mos.
Decreased more than 50% 4 0.39
Decreased 31-50% 16 1.56 Decline greater than 20% 6 0.59
Decreased 11-30% 40 3.91 Decline 11% - 20% 12 1.18
Decreased 6-10% 53 5.18 Decline 6% to 10% 29 2.86
Decreased 1-5% 69 6.74 Decline 1% to 5% 35 3.45
Remained the same 81 7.92 Anticipate flat top line 98 9.66
Increased 1-5% 214 20.92 Growth 1% to 5% 271 26.70
Increased 6-10% 305 29.81 Growth 6% to 10% 294 28.97
Increased 11-30% 170 16.62 Growth 11% to 20% 201 19.80
Increased 31-50% 47 4.59 Growth greater than 20% 69 6.80
Increased more than 50% 24 2.35

Panel B: Cost Management Motivations: Item-level descriptive statistics and item correlations
CM motivations # obs % obs 1 2 3 4 5
Reduced customer demand 271 26.49 1.00
Decreased liquidity/credit 230 22.48 0.30*** 1.00
Unfavorable cost position 270 26.39 0.19*** 0.18*** 1.00
Changed regulatory structure 306 29.91 0.13*** 0.10*** 0.07** 1.00
Investment in growth areas 473 46.24 0.00 -0.04 -0.09*** 0.05 1.00
Gain comp. adv. over peers 547 53.47 -0.21*** -0.01 -0.13*** 0.02 0.11***
The right five column are the tetrachoric correlations between dichotomous items. ***,**, * indicate significance at
p< 0.01, 0.05 and 0.10, respectively (two-tailed).

Panel C: Cost reduction targets as percentage of prior year total cost

Cost reduction target (%) # obs % obs
<5% 83 8.34
5-10% 353 35.48
10-20% 326 32.76
20-30% 150 15.08
30-50% 59 5.93
50% or more 24 2.41
No specific target established 28 2.74

Panel D: Focal costs targeted for cost reduction

Cost category # obs % obs
Operational costs 562 54.94
Administrative costs 597 58.36
Sales/marketing costs 354 34.60
Purchased products and services costs 454 44.38
Working capital 324 31.67

41
Table 3: Descriptive Data on Dependent and Independent Variables (N=1023 unless noted) (cont.)

Panel E: Cost management approaches used

Cost management approach # obs % obs # obs % obs correlation
planned planned current use
vs. planned
Targeted actions in few divisions, BUs,
functions, areas 600 58.65 572 55.14 0.60***
Intensifying existing productivity programs 538 52.59 574 56.11 0.57***
Reduce fixed percent across divisions 429 41.94 423 41.35 0.51***
Enterprise-wide analysis of cost structure
and program to restructure / manage costs 511 49.95 402 39.30 0.56***
Zero-based budgeting efforts 142 13.88 114 11.14 0.75***
*** indicates significance of the tetrachoric correlation coefficient (r) at p<0.01 (two-tailed).

Panel F: Cost management capabilities

Capability # obs % obs
New executive position and/or full time positions to drive cost management 315 30.79
Set-up IT infrastructure, IT systems and business intelligence platform to 506 49.46
refine the collection and reporting of cost data
Implemented new policies and procedures, and strengthened compliance 531 51.91
mechanisms
Improved processes for forecasting, budgeting and reporting to enable 577 56.40
effective cost management
Implemented zero-based budgeting system or process 88 8.60

Panel G: Achievement of cost reduction

Degree of target achievement (N=998) # obs % obs
No savings 4 0.40
Up to a quarter (25%) of savings target 72 7.21
Up to half (50%) of savings target 160 16.03
Up to three quarters (75%) of savings target 385 38.58
Full realization (100%) of savings target 256 25.65
More savings than savings target 121 12.12
Time to realization (N=1023)
Delayed beyond planned timeline 161 15.74
Realized per planned timeline 626 61.19
Realized before planned timeline 213 20.82
No planned deadline 23 2.25

42
Table 3: Descriptive Data on Dependent and Independent Variables (N=1023 unless noted) (cont.)

Panel H: Summed measures: Scope of focal costs targeted and extensiveness of cost management
approaches, and of cost management capabilities
focal cost categories CM approaches CM capabilities
number # obs % obs # obs % obs # obs % obs
0 2 0.20 4 0.39 10 0.98
1 324 31.67 395 38.61 411 40.18
2 330 32.26 250 24.44 319 31.18
3 225 21.99 236 23.07 193 18.87
4 78 7.62 73 7.14 61 5.96
5 64 6.26 65 6.35 29 2.83

43
Table 4: Pearson correlations between model variables

1 2 3 4 5 6 8 7 9 10 11 12 13 14 15 16 17
CM Antecedents
1. Rev. change 1.00
2. Rev. decline -0.52 1.00
3. Rev. outlook 0.38 -0.21 1.00
4. Reactive motiv. 0.07 0.06 0.04 1.00
5. Proactive
motiv. 0.19 -0.18 0.18 -0.07 1.00
CM Tactics
6. CR target 0.43 -0.08 0.25 0.17 0.05 1.00
7. Focal costs 0.12 -0.01 0.14 0.37 0.35 0.08 1.00
8. CM approaches 0.19 -0.11 0.17 0.42 0.38 0.16 0.56 1.00
9. CM capabilities 0.20 -0.06 0.26 0.33 0.40 0.18 0.53 0.59 1.00
CM Outcomes
10. T. achievement 0.07 0.00 0.11 -0.04 0.03 0.05 -0.02 0.01 0.08 1.00
11. Time to savings 0.19 -0.08 0.21 0.11 0.06 0.18 0.05 0.11 0.13 0.30 1.00
CM Future
12. New initiative 0.13 0.02 0.17 0.13 0.18 0.16 0.22 0.16 0.23 0.08 0.09 1.00
13. Planned CM
approaches 0.19 -0.07 0.23 0.34 0.38 0.15 0.53 0.64 0.67 0.02 0.10 0.32 1.00
Control Variables
14. Responsibility 0.09 -0.03 0.09 0.08 0.08 0.07 0.10 0.13 0.13 -0.01 0.08 0.04 0.07 1.00
15. Sales dispersion 0.12 -0.01 0.14 0.15 0.08 0.25 0.10 0.16 0.12 0.00 0.11 0.16 0.16 0.03 1.00
16. Size: revenue 0.11 -0.07 0.05 0.06 0.07 0.11 0.09 0.11 0.05 0.05 0.08 0.09 0.08 -0.01 0.06 1.00
17. Size: Employee 0.12 -0.09 0.06 0.09 0.09 0.19 0.11 0.19 0.08 0.01 0.04 0.08 0.14 -0.01 0.29 0.38 1.00
18. Public -0.04 0.03 -0.04 0.00 -0.02 0.06 -0.04 0.00 -0.05 0.06 0.02 0.06 -0.03 -0.01 0.14 0.14 0.17
N= 1023, except for correlations with Revenue outlook (1017), Cost reduction (CR) target (995) and Cost reduction responsibility (1017). Correlations in bold
are significant at 0.05 level (two-tailed) or better.
Note: variables 4, 5, 7, 8, 9 and 13 are summated scales reflecting the scope or extensiveness of their respective base constructs; variables 2 and 18 are indicator
variables. Variables are grouped in relation to Figure 1 with shaded regions indicating correlations of variables within the same grouping.

44
Table 5: SEM analysis of cost management motivations

The analysis that follows models as a system of equations the association between the motivations for
cost management and the antecedents of cost management, controlling for firm differences and industry
and country fixed effects. The dependent variables are summed from indicator variables for specific
motivations, and a covariance is modeled between the two dependent variables. Cells present the
coefficient estimate of maximum likelihood estimation and z-value with ***,** and * indicating
significance at p < 0.01, 0.05 and 0.10, respectively (two-tailed). Standard errors are clustered by firm
country. N= 1009.

Reactive Proactive
motivations motivations
Revenue change 0.002** 0.002
2.47 1.25
Revenue decline 0.08*** -0.09**
6.28 -2.09
Revenue outlook -0.001 0.004**
-1.06 2.24
CM responsibility 0.04 0.05***
1.46 2.71
Sales dispersion 0.08*** 0.01
2.67 0.25
Annual revenue 0.004 0.03**
0.41 2.18
Total employees 0.003 0.01
1.14 1.62
Public firm -0.003 -0.01
-0.30 -0.34
Covariance estimate -0.01***
Reactive motivations -- -3.61
R2 0.09 0.13
Note: Poisson regressions of the two count variable provides similar results. Unreported industry and country fixed
effects are significant (p<0.01 for both sets of indicators), indicating significant differences in cost management
motivations between firms in different industries and countries.

45
Table 6: Cost reduction targets

The analysis that follows models the association between cost reduction targets and the antecedents of
cost management, controlling for firm differences and industry and country fixed effects. Models are built
up from including control variables only (Model 1) to adding the economic conditions of revenue change
(Model 2), revenue decline (Model 3) and business outlook (Model 4) that follow from the economics and
accounting literatures on cost behavior. Model 5 replaces the indicator of declining revenue with the
squared value of revenue change to test for a non-linear effect. Model 6 includes the cost management
motivation variables in addition to the revenue variables. Cells present the coefficient estimate and t-value
with ***,** and * indicating significance at p < 0.01, 0.05 and 0.10, respectively (two-tailed). Standard
errors are clustered by firm country. N= 985.

Model 1 Model 2 Model 3 Model 4 Model 5 Model 6

Revenue change -- 0.31*** 0.39*** 0.38*** 0.15*** 0.16***
3.48 4.18 3.90 5.35 5.88
Revenue decline -- -- 4.83*** 4.82*** -- --
4.30 4.44
Revenue change -- -- -- -- 0.01*** 0.01***
squared 6.63 6.66
Revenue outlook -- -- -- 0.07 0.02 0.03
0.85 0.29 0.40
Reactive Motivation -- -- -- -- -- 3.48***
3.13
Proactive Motivation -- -- -- -- -- -0.71
-0.95
CM responsibility 1.22 0.52 0.37 0.33 0.40 0.29
1.21 0.83 0.62 0.56 0.65 0.47
Sales dispersion 6.32*** 5.44*** 5.18*** 5.08*** 4.15*** 3.84***
4.90 4.88 5.03 4.56 4.13 4.08
Annual revenue -0.10 -0.28 -0.33 -0.30 -0.43 -0.43
-0.15 -0.71 -0.87 -0.81 -1.39 -1.46
Total employees 0.30** 0.20** 0.24** 0.24** 0.25** 0.25***
2.72 2.40 2.66 2.60 2.52 2.70
Public firm 0.51 0.77 0.78 0.78 0.72 0.73
0.83 1.25 1.23 1.22 1.28 1.32
R2 0.16 0.29 0.32 0.32 0.39 0.40
N 989 989 989 985 985 985
Note: Industry and country fixed effects are significant (p<0.01 for both sets of indicators), indicating significant
differences in cost reduction targets between firms in different industries and countries.

46
Table 7: Structural equation model of cost management practices, including: cost reduction targets,
the scope of focal costs, and extensiveness of cost management approaches and capabilities

The analysis that follows models as a system of equations the association between the set of cost
management practices: cost reduction targets, and the scope of focal costs for cost reduction and the
extent of use of cost management approaches and capabilities; and the revenue-based antecedents of cost
management, controlling for firm differences. The first equation, for CR Target, corresponds to Model 4
in Table 6. The dependent variables are summed from indicator variables for specific types of cost
management and thus reflect the scope or extent of use of the specific practice. Cells present the
coefficient estimate and z-value with ***,** and * indicating significance at p < 0.01, 0.05 and 0.10,
respectively (two-tailed). Standard errors are clustered by firm country. N= 985.

CR target Scope of focal Extent of CM Extent of CM

costs approaches capabilities
Revenue change 0.38*** 0.01 0.01** 0.01**
3.97 1.28 2.25 2.12
Revenue decline 4.82*** 0.24** 0.02 0.22*
4.52 2.41 0.16 1.65
Revenue outlook 0.07 0.01 0.01 0.02***
0.86 1.45 1.13 4.63
CM responsibility 0.33 0.23** 0.25*** 0.21**
0.57 2.44 2.84 2.06
Sales dispersion 5.08*** 0.24** 0.32** 0.20**
4.64 2.20 2.36 2.07
Annual revenue -0.30 0.11** 0.04 0.05
-0.82 2.19 1.46 1.59
Total employees 0.24*** 0.03 0.06*** 0.01
2.65 1.50 5.25 0.55
Public firm 0.78 -0.12 -0.01 -0.07
1.24 -1.39 -0.07 -0.91
Covariance estimates
CR target -- 0.42 0.52 0.61*
Scope of focal costs -- -- 0.54*** 0.45***
Extent of CM approaches -- -- -- 0.49***
R2 0.32 0.20 0.22 0.21
Note: Poisson regressions of the count measures in examined in the last three columns provide comparable results
and inferences. Industry and country fixed effects are significant (p<0.01 for both sets of indicators), indicating
significant differences in cost management practices between firms in different industries and countries.

47
Table 8: Logit regressions of disaggregated modes of cost management

The analyses that follow examine the association between the indicator variables for: A) focal costs for
cost reduction; B) cost management approaches; and C) cost management capabilities; and the
antecedents of cost management, controlling for firm differences and for country and industry fixed
effects. Cells present coefficient estimates and z-values with ***,** and * indicating significance at p <
0.01, 0.05 and 0.10, respectively (two-tailed). Standard errors are clustered by the firm’s country.
Covariance estimates are estimated using seemingly unrelated bivariate probit regressions. N=1,009.

Panel A: Focal costs targeted for cost reduction

Operational Administration Sales & Purchased Working
costs costs marketing products/ capital
costs services costs
Revenue change 0.001 0.001 0.004 0.003 0.02***
0.14 0.12 0.67 0.27 4.17
Revenue decline 0.43** 0.42** 0.16 -0.01 0.14
1.99 2.26 1.04 -0.06 0.54
Revenue outlook 0.02 0.02* 0.02 0.004 0.001
1.57 1.73 1.32 0.29 0.06
CM responsibility 0.25* 0.05 0.31*** 0.15 0.29
1.89 0.30 2.64 0.77 1.62
Sales dispersion 0.16 -0.10 0.26 0.29 0.56
0.57 -0.43 0.93 1.48 1.35
Annual revenue 0.13 0.13** 0.04 -0.04 0.10
1.42 2.16 0.54 -0.41 1.04
Total employees 0.02 0.02 0.05** 0.03* 0.02
0.71 0.72 2.15 1.64 0.74
Public firm -0.07 0.14 -0.14 -0.29* -0.13
-0.40 0.84 -1.09 -1.86 -0.81
Pseudo R2 0.07 0.04 0.08 0.07 0.08
Covariance estimates:
Operational costs -- 0.01 0.00 0.06 -0.10*
Administration costs -- -- 0.02 -0.03 -0.14***
Sales & marketing costs -- -- -- -0.01 0.16***
Purchased products/ -- -- -- -- 0.03
services costs

48
Table 8: Logit regressions of disaggregated modes of cost management (continued)
Panel B: Cost management approaches
Targeted Productivity Fixed % Enterprise- Zero-based
actions improvement divisions wide program budgeting
Revenue change 0.02*** -0.01 0.01 0.01* 0.02
2.85 -0.83 0.93 1.75 1.42
Revenue decline -0.002 -0.49*** 0.48** -0.09 0.27
-0.01 -2.57 2.27 -0.28 0.60
Revenue outlook 0.01 0.01 0.01 0.01 0.02
1.20 0.69 1.05 0.65 1.49
CM responsibility 0.64*** 0.24 -0.14 0.32* 0.21
4.23 1.07 -0.58 1.64 1.07
Sales dispersion 0.25 0.63** 0.25 0.17 0.06
0.99 2.33 0.77 0.58 0.15
Annual revenue 0.11 -0.18*** 0.18** 0.05 0.35***
1.20 -2.88 2.23 0.56 4.61
Total employees 0.03 0.09*** 0.02 0.09*** 0.06
1.12 4.18 1.18 2.72 1.39
Public firm 0.03 -0.20* 0.07 0.03 -0.07
0.27 -1.67 0.63 0.22 -0.30
Pseudo R2 0.08 0.10 0.05 0.08 0.09
Covariance estimates:
Targeted actions -- -0.04 -0.04 0.00 0.22***
Productivity improvement -- -- 0.03 0.07 0.15**
Fixed % divisions -- -- -- -0.09* 0.39***
Enterprise-wide program -- -- -- -- 0.33***

Panel C: Cost management capabilities

New CM IT Policies & Forecasting, Zero-
position procedures budgeting, based
reporting budgeting
Revenue change -0.001 0.01* 0.01 0.02 0.01
-0.12 1.93 1.27 1.55 1.40
Revenue decline -0.19 0.10 0.30 0.53*** 0.05
-1.29 0.54 1.20 2.66 0.12
Revenue outlook 0.03*** 0.02** 0.02 0.03*** 0.05**
3.33 1.99 1.30 3.33 2.56
CM responsibility 0.12 0.55** 0.10 0.12 0.13
0.47 2.34 0.62 0.89 0.61
Sales dispersion 0.003 0.68*** 0.11 -0.08 0.28
0.01 3.03 0.37 -0.24 0.72
Annual revenue 0.02 0.12 0.04 -0.01 0.43***
0.26 1.60 0.80 -0.11 3.60
Total employees 0.04* 0.003 -0.01 0.02 -0.03
1.75 0.15 -0.30 0.72 -0.60
Public firm 0.05 -0.21* -0.26 0.13 -0.03
0.40 -1.75 -1.54 1.14 -0.13
Pseudo R2 0.06 0.08 0.05 0.07 0.11
Covariance estimates:
New CM position -- -0.10*** -0.08 -0.08** 0.20***
IT -- -- -0.11** -0.15** 0.12*
Policies & procedures -- -- -- -0.04 0.25***
Forecasting, budgeting, -- -- -- -- 0.12
reporting

49
Table 9: Analysis of achievement of cost reduction targets and timing of savings
The analyses that follow use OLS regression to examine the association between cost management practices, antecedents and achievements,
controlling for firm differences and for country and industry fixed effects. Cells present coefficient estimates and t-values with ***,** and *
indicating significance at p < 0.01, 0.05 and 0.10, respectively (two-tailed). Standard errors are clustered by the firm’s country. N=985 for the first
model and N=969 for the last model.

Target Timing of
achievement savings
Target level -0.01 0.004
-1.02 1.26
Scope of focal costs -0.10** -0.02
-2.23 -1.25
Extent of CM approaches 0.06 0.02
1.36 1.04
Extent of CM capabilities 0.11** 0.04**
2.70 1.99
Revenue change 0.01 0.004
1.50 1.73
Revenue decline 0.13 -0.001
0.85 -0.03
Revenue outlook 0.01** 0.01***
2.67 3.86
CM responsibility 0.09 0.10
1.09 1.41
Sales dispersion -0.05 0.15*
-0.33 1.79
Annual revenue 0.00 -0.03
0.00 -1.49
Total employees -0.02 -0.003
-1.12 -0.45
Public firm 0.09 0.04
1.60 1.09
R2 0.07 0.14

50
Table 10: Expected new cost reduction initiative and planned cost management approaches

The analyses that follow examine the association between the expectation of a new cost reduction initiative; planned cost management approaches;
and the antecedents of cost management, controlling for firm differences and for country and industry fixed effects. Expected CR initiative and
Planned CM Approaches are estimated as a system of equations using maximum likelihood estimation, while the subsequent five models (specific
planned approaches) are estimated using logit regressions. Cells present coefficient estimates and z-values with ***,** and * indicating
significance at p < 0.01, 0.05 and 0.10, respectively (two-tailed). Standard errors are clustered by the firm’s country. N=1,009.

Joint SEM estimation Logit regressions

CR initiative Planned CM Targeted Productivity Fixed % Enterprise- Zero-based
approaches actions improvement divisions wide program budgeting
Same action undertaken -- 0.51*** 1.65*** 1.57*** 1.33*** 1.59*** 2.81***
15.62 11.69 12.88 8.64 11.30 8.29
Revenue change 0.01*** 0.01** 0.02** 0.01 0.003 -0.01 0.03
2.96 1.98 2.23 0.98 1.02 -0.76 1.28
Revenue decline 0.20*** 0.18** 0.17 0.27 0.10 0.27 0.32
2.69 2.13 0.70 1.51 0.49 1.41 0.59
Revenue outlook 0.01*** 0.02*** 0.02* 0.01 0.02 0.04*** 0.03
3.31 4.60 1.71 0.86 1.60 3.33 1.45
CM responsibility 0.05 -0.08 0.17 -0.21 -0.04 -0.19 0.15
1.07 -1.03 0.98 -1.21 -0.23 -0.85 0.32
Sales dispersion 0.26*** 0.07** -0.33 0.81*** 0.00 -0.16 0.65
3.05 0.82 -1.26 3.56 0.00 -0.58 1.23
Annual revenue 0.08*** 0.11*** 0.16* -0.02 0.14** 0.20*** 0.50***
2.91 4.17 1.72 -0.21 2.29 2.61 4.08
Total employees -0.01 0.002 0.02 0.02 0.01 0.03 -0.06
-0.99 0.34 0.98 1.02 0.70 1.03 -1.18
Public firm 0.08 -0.06 0.08 -0.03 -0.23* -0.13 0.07
1.15 -0.86 0.69 -0.18 -1.72 -0.97 0.21
Covariance with CR -- 0.17*** -- -- -- -- --
initiative 7.48
R2 0.18 0.45 -- -- -- -- --
Pseudo R2 -- -- 0.18 0.15 0.12 0.17 0.31

51
Table 11: Expected changes to organization structure and firm boundaries

The analyses that follow examine the association between expected changes to organizational structure and/or firm boundaries in conjunction with
cost management in the 24 months following the survey administration and the antecedents of cost management, controlling for firm differences
and for (untabulated) country and industry fixed effects. Scope of planned actions, the summated scale of specific planned actions, is estimated
using OLS regression and the subsequent models (specific planned actions) are estimated using logit regression. Cells present coefficient estimates
and z-values with ***,** and * indicating significance at p < 0.01, 0.05 and 0.10, respectively (two-tailed). Standard errors are clustered by the
firm’s country. N=1,009.

Scope of Change business Streamline Increase Streamline Outsource/

actions configuration organization centralization business processes offshore processes
structure
Revenue change 0.01*** 0.01 -0.00 0.01 0.01*** 0.02***
2.87 1.52 -0.02 1.24 2.59 2.75
Revenue decline 0.31** 0.61*** 0.42* 0.15 0.04 0.26
2.21 2.83 1.84 0.59 0.15 1.09
Revenue outlook 0.02*** 0.01 0.02* 0.03*** -0.002 0.03***
3.46 0.81 1.72 3.06 -0.15 4.09
CM responsibility 0.15 0.04 0.05 0.26 0.03 0.42*
1.67 0.27 0.31 1.04 0.17 1.80
Sales dispersion 0.09 0.11 0.16 -0.05 -0.32 0.64*
0.67 0.34 0.70 -0.20 -1.02 1.89
Annual revenue 0.07 0.07 0.06 -0.03 0.10 0.13*
1.40 1.13 0.71 -0.38 0.83 1.82
Total employees 0.02** 0.07** -0.04* 0.08*** -0.03 0.06**
2.54 2.35 -1.80 3.51 -0.98 2.18
Public firm 0.01 0.07 -0.14 -0.18** 0.13 0.14
0.04 0.49 -0.98 -2.16 0.56 0.62
R2 0.14 -- -- -- -- --
Pseudo R2 -- 0.07 0.04 0.05 0.05 0.07

52