barometer cost management 0 (1)

1

Barometer Cost Management

Barometer Cost Management2014

Financing Investments and Growth

2

Imprint

Publisher:Expense Reduction AnalystsSuite 24, 40 Churchill SquareKings HillWest MallingKent, ME19 4YUUnited Kingdom

Strascheg Institute for Innovation and Entrepreneurship (SIIE) – EBS Business SchoolBurgstraße 565375 Oestrich-Winkel

Authors: Ulf DiefenbachThomas LöwerChristoph Schneider

Nominal fee: 390 €

Table of Contents

Management Summary 3

Foreword EBS Business School 4Foreword Expense Reduction Analysts 4

Introduction 5Understanding of a Comprehensive Cost Management 5Procedure and Sample 6

Barometer Cost Management 7

Cost Management in Practice 10Cost Categories with Greatest Potential for Savings 10Processes for Cost Reduction Are Effective 11

Financing Investments and Growth 13Investments 13Financing 17

Bibliography 19List of Graphs 19

3

Management Summary

To a large extent, companies use their own resources to finance investmentsCompanies draw primarily on their internal finances to

fund their investments. 33% of financing needs are gener-

ated from profits and depreciation – 22% from cost sav-

ings. Only 12% of financing needs are covered by bank

loans.

Companies are investing moreSince 2012, the proportion of companies that have in-

creased their volume of investment has risen by around

57%. Companies invest primarily in machinery and equip-

ment (71.4%), research and development (34.4%) and

staff (29.1%). The main objectives for these investments

are to enhance the company’s growth as well as increase

revenue and rationalisation.

Diversification investments have increased sharply whilst founding and start-up investments have greatly declinedIn comparison vs. last year, the diversification investments

have seen a major increase, whilst foundation and start-

up investment decreased substantially. Many companies

have apparently benefited from the economic recovery in

2013 to expand their business, whereas in 2014, there was

evidence of a greater trend towards capital maintenance.

In terms of general turnover, companies generate an average of 5.6% additional financial resources through cost reduction measuresA growing number of companies, especially from the

Automotive and Pharmaceutical/Chemical industries ap-

ply cost reduction measures, which in comparison to last

year are also more successful. Through cost optimisation,

the companies surveyed save an average of 5.6% of their

turnover, which can be used towards reinvestment. For

a company with an annual turnover of 50 Million Euros,

this represents 2.8 Million Euros. The highest savings are

achieved in Logistics, whereas the lowest are in the Phar-

maceutical/Chemical industry.

Cost Management is a CEO and CFO's responsibility Cost management is a high priority for most companies. It

is the CEO’s responsibility in 42% of companies surveyed,

and that of the CFO for a further 28%..

The index of the Barometer Cost Management is stagnating In spite of this preferential treatment, cost management

has, in many companies, seen less focus since the survey

conducted last year. The Barometer Cost Management in-

dex has fallen from 66.0 to 65.4 points, and only one of

the key fields, Culture, has seen a slight improvement. In

contrast, the key fields of Organisation and Strategy have

reduced.

Companies see the greatest savings potential in Energy, IT and Logistics Companies see the greatest savings potential in the cost

categories of Energy, IT and Logistics, and specifically in

the Automotive as well as in the Pharmaceutical/Chemi-

cal industries where large savings potentials are expected

in Energy.

Environmental analysis and corrective measures of budget variances are important factors of success in cost managementCost leaders are established in the context of cost man-

agement based on an ongoing environmental analysis, to

identify risks and opportunities early, and to be able to

take the appropriate measures in a dynamic and some-

times volatile competitive environment. The direct coun-

teractions for budget variances by developing corrective

measures has proven to be a success factor.

33 22 12

ProfitsDepreciation

Cost savings Bank loans

42CEO

28CFO

71,4 34,4

MachineryEquipment

ResearchDevelopment

Staff

29,1

4

Foreword EBS Business School

Cost Management is often seen by companies as a neces-

sary chore, as efficiency efforts in organisations carry po-

tential for high conflict. However, a functioning cost man-

agement with a view to the company’s success is essential

if not crucial.

On the one hand, cost management strategy with its core

function – the efficient use of the company’s resources –

can help strengthen the competitive posi-

tion of a company in price-sensitive mar-

kets. On another hand, the funds saved

through cost optimisation processes can

go into investments, which in turn can

contribute to the organic growth of the

company.

The results of this study demonstrate this clearly: 22%

of investments planned by companies in 2014 will be fi-

nanced by cost reduction programmes. This study is part

of a series dealing since 2011 with issues related to cost

management, and called since 2012 “Barometer Cost Man-

agement”, also showing time-related evolutions.

According to the Barometer Cost Management, a slight

decrease can be found in 2014 after last year’s increase,

which is probably due to the economic recovery and to the

resulting reduced pressure for action with cost efficiency

measures.

In addition to general insight in operational cost manage-

ment, the key topic of this year’s Barometer Cost Manage-

ment is the relationship between the financing of invest-

ments and cost management.

The underlying concept of the Barometer is that cost man-

agement can only operate optimally when it is implement-

ed systematically and comprehensively. The results in cost

reduction processes show what effects a comprehensive

cost management has. Companies with a stronger cost

management culture are increasingly successful in their

process of cost reduction and expand the scope of action

to their respective companies.

We hope you will enjoy an inspiring read with valuable in-

sights for your activity in cost management.

On behalf of the whole SIIE team,

Prof. Dr. Ronald Gleich

Foreword Expense Reduction Analysts

Healthy growth is the objective of every company. In order

to achieve this growth, investments are crucial – whether

in people, equipment or knowledge.

In this third edition of the Barometer Cost Management,

we investigate how European companies invest and how

these investments are financed. The results show that al-

most all companies invest in their future – in staff, new

equipment, R&D, to name but the most

important investment fields. Only one

out of ten companies is not planning any

investment. The objective is quite clear.

Increasing revenues is the top priority.

It is interesting to note that only 12% of

investment needs are covered by bank

loans. There are many reasons for this, and the restrictive

contractual practices of banks after the financial crises and

in the context of the ECB stress tests in particular play an

important role.

Businesses cover a third of their needs with their profits

– 22% are generated through cost reductions. With over

1/5th of funding obtained through cost reduction pro-

grammes, it is not surprising that cost management is

viewed as a priority for top management. This is where it

should be anchored.

The results of the Barometer Cost Management also show

that companies must hold the reins tighter. While in the

past years the efforts to manage the cost structure in the

most optimal manner had risen sharply, the index value

has this year decreased slightly. Companies should always

keep in mind that cost management should always be ac-

tively conducted, and not used as a response to external

circumstances such as loss of revenue or sales, or missed

targets. The present results show that cost management

can be an important driver of growth and investment for

businesses. This is how companies should measure their

approach.

I hope you will enjoy reading the results of the study and

trust you can draw some valuable conclusions for your

business.

Best regards,

Fred Marfleet

5

Introduction

Despite record levels of profits and turnover in 2013 and

of brilliant quarterly figures at the beginning of 2014, the

automotive manufacturer BMW has announced recently

rigorous cost reduction measures. The same applies to

competitors Mercedes and VW, who have announced sig-

nificant measures to increase efficiency in spite of the pre-

vious year’s good figures.

Reasons are almost the same for all manufacturers: it is

about securing sustainable business competitiveness in an

international environment with additional strains caused

by environmental policies or particular challenges through

alternative power units such as electric mobility. Finally,

there are necessary investments to make in order to mod-

ernise and expand the production facilities which in turn

should lead to a reduction of production costs and there-

fore an increase of profitability. This is ultimately the core

mission of cost management, which ideally anticipates

instead of reacting: the sustained guarantee of efficient

and effective use of financial and material resources in the

company.

The present study “Barometer Cost Management 2014” –

which addresses the topic of “Financing Investment and

Growth” – is part of a series of studies that since 2011 and

deals with the development of cost management. The first

report focused on the analysis of overhead costs (“Sustain-

ability of Reduction Processes on Overheads”), the 2012

study was extended to the broader topic of cost manage-

ment, whereby every year, there is a focus on a specific

current topic. In 2012, the focus was on energy and energy

efficiency (“Barometer Cost Management 2013: Cost ef-

ficiency in Companies and Success Factors”) and in 2013

the effects of the financial and euro crisis on cost man-

agement were highlighted (“Barometer Cost Management

2013 – Cost Management in times of crisis”). This year, the

study investigates the investment projects of companies,

the way they are financed and how cost management can

contribute.

Understanding of a comprehensive cost manage-ment

Our understanding of a comprehensive, systematic cost

management consists of five related key fields: Strategy,

Organisation, Information, Tools and Culture1: The key

field “Strategy” comprises the planning of company-spe-

cific cost targets and cost targets based on internal and

external business analysis. These determine, in accordance

with the company’s strategy, which cost categories will be

primarily analysed and the extent of cost reductions to

achieve. The key field “Organisation” means the way the

company formally anchors cost management. Structural

and organisational rules (institutions, responsibilities) and

the coordination between all the company’s functions are

allocated to this key field. “Information” includes the spe-

cific configuration of reporting within cost management

as well as the business indicators used here. The key field

“Tools” refers to the methods and means used by the com-

pany to collect and analyse the cost situation. It is possible

to gather a broad range of tools. "Culture" includes topics

such as the motivation of all parties involved in or affected

by cost management, the company’s attitude with regards

to internal communications, the level of participation from

the company’s management in cost management, employ-

ees’ individual responsibility with regard to a cost-oriented

behaviour, staff competency in cost management as well

as their individual training opportunities.

1 Cf similar concepts in Himme (2008), p. 7ff., Himme (2009), p. 1055 ff. and Kajüter (2005), p. 80 ff.

Fig. 1 | © Expense Reduction Analysts

The Key Fields of the Barometer Cost Management

Organisation

Culture

Strategy Cost Efficiency

Operationalisation of Cost Management

ToolsInformation „har

d” fa

ctor

s„s

oft”

fa

ctor

s

6

Cost Management is a topic for the top decision-makers

Amongst the companies surveyed, most participants were

people from senior management levels such as: Manag-

ing Directors, Board of Directors, Head of Department/

Division (a total of 84.4%). A further 3.8% had held a line

manager’s position, 1.7% were assistants to management

and 8 responded as an employee of a department.

The CEO has predominantly the responsibility for Cost Management

A further result also illustrates how prominently the topic

of cost management is treated in companies. When asked

who is in charge of cost management within the com-

pany, results show that the issue is primarily the respon-

sibility of CEOs (41.8%), then of CFOs (27.9%). Only in

24.7% of companies cost management is the responsibil-

ity of heads of department such as controlling (see fig. 3).

With the increasing size of companies, the responsibility

is shifted from the CEO to the CFO (no figure).

Procedure and sampleMethodological ApproachSimilarly to the 2012 and 2013 surveys, a standardised

online survey was designed for the Barometer Cost Man-

agement 2014. Significant parts of the questionnaire were

carried out from the previous year, in order to track devel-

opments over time.

The survey was conducted over a period from April 7th

to July 6th, 2014. Companies from Germany, Finland, the

Netherlands, Austria, Denmark and Switzerland were in-

cluded. Overall, 251 companies were interviewed2. The

previous year, 215 companies were interviewed, which

represents an increase of almost 17%, and an increase of

almost 36% (n = 185) in comparison vs. 2012.

Structural Features of the SampleThe underlying sample for the present study includes

companies of all sizes and from various industry sectors.

As shown in Figure 2, the Financial services sector is the

largest group with 23.5% followed by companies in the

Manufacturing sector with 22.3% (excluding Automotive

industry, Mechanical/Plant Engineering and Pharmaceu-

tical/Chemical industries), Mechanical/Plant Engineering

with 18.7%, and Retail at 13.5%. Other industries such as

the Transport and Logistics sector (6.8%), Pharmaceuti-

cal/Chemical (4.4%) and other businesses are proportion-

ally represented in the sample with less than 10%.

2 To make the current Barometer Cost Management data comparable with the previous year, the records were equally weighted based on the previous year’s distribution. The variables company size and industry sector and country were used as weighting criteria.


Sample distribution of respondents and companies


Responsibility in Cost Management

N = 251, information in %

45,1 32,1 13,1 7,2 2,5Management Controlling Procurement Others Finance

55,3

41,8

29,1

27,9

8,0

5,6

3,8

7,2

1,7

17,5

2,1

Management Board of Directors

CEO CFO CPOHead of

Purchasing

Head of Controlling

Senior Department Employee

Head of Department/

Division

Employees Line Management

Assistants to Manage-

ment

Others

Departments (in %)

Position (in %)

Area (in %)

23,5

6,8

22,5

6,0

18,7

4,8

13,5

4,4

Financial services

Logistics

Manufacturing sector

Others

Mechanical/Plant

Engineering

Automotive industrie

Retail

Pharmaceutical Chemical

Sectors (in %)

41,8

7


The index of the Barometer Cost Management re-mains static

The Barometer Cost Management, which captures the

level of activity and implementation of a holistic and com-

prehensive cost management in practice3, has increased

by 3 points from 2012 to 2013. This year however, a slight

decrease of 0.6 can be seen (see fig. 4). If we follow the

hypothesis that in times of crisis, the activities in cost

management increase due to the external pressure and

in periods of relative stability the sensitivity to cost meas-

ures decreases, the decrease of the barometer can be re-

garded as an indication that the effects of the Financial

and Euro crisis have lost some of their force. However, it

can also be an indication that companies apply their cost

management in a reactive rather than pro-active manner,

which can be dangerous in the event of a new crisis.

Large companies are better placed than small ones with regards to cost management

The significance of cost management increases alongside

the size of the companies, with the exception of middle-

sized companies with 500–1,000 staff who achieve the

highest value. These companies operate on the threshold

between small and large companies. On the one hand,

they have enough resources to professionalise their man-

agement system, but on the other hand, they have no bu-

reaucratic structures.

3 For details of the methodological construction of the Barometers Cost Management: Expense Reduction Analysts / EBS Business School (2012).

63,0 66,0 65,4

Max. 100

2012 2013 2014



73,2 74,0

71,0

67,8 69,0

65,7

64,2 64,6

61,1

64,9 64,2

67,6

58,8 59,4

55,2

Strategy

Organisation

Information

Culture

Tools

70

Barometer Cost ManagementIndexpoints

Size of companies by number of employees

60

50

62,562,5

64,8

70,268,9

67,9

<100 >5.000100-250 251-500 500-1.000 1.001-5.000


Barometer Cost Management by company size

N = 251

Greater need for optimisation in the Pharmaceutical /Chemical sector

A differentiated analysis by sector reveals that, as in the

previous year, companies from the Manufacturing sector

and Automotive industry have on average the most devel-

oped cost management. The Pharmaceutical & Chemical

sector, as well the Machinery and Equipment sector have

the greatest need for optimisation (see fig. 6). The Phar-

maceutical industry is in spite of turnovers currently ris-

ing worldwide, faced with significantly declining margins,

which can be attributed to enormous price and cost pres-

sures, regulatory changes (e.g. government price restric-

tions), higher R&D costs and expiring patents.

The same applies to the Chemical industry, which is above

all struggling with sustainability issues, ever shorter prod-

uct life cycles and with problems regarding the supply

of raw materials. Many companies from these industries

react with the relocation of production, in particular in

8

Concrete examples for the activities of companies in the

five individual key fields of a comprehensive cost manage-

ment are illustrated in the graph below, in which various

aspects are shown according to their average score in the

companies and in relation to the cost efficiency (fig. 7).

An environment analysis and corrective measures carried out on an ongoing basis against plan vari-ances provide cost advantages for companies

An environment analysis carried out on an ongoing basis

has in the key field Strategy the strongest relation with

cost efficiency of all aspects considered to identify risks

and opportunities (2). Thereby anticipated or potential

changes can be detected early in a competitive environ-

ment and give companies valuable time to promptly take

the relevant alternative measures. Similarly, a strong ef-

fect can be observed in the preparation of corrective

measures for plan deviations (8) in the key field Tools.

Both processes are taken into account in the majority of

companies surveyed.

the emerging Asian countries; however an alternative ap-

proach could be in an efficient and ongoing cost manage-

ment.



Barometer Cost Management per sector


Activity of companies in the five key fields in relation with cost efficiency

Low specificity Strong action

Com

pani

es’ c

hara

cter

istic

s

Relation to cost efficiency*

2

1

0,0 0,1 0,2

High specificityLow action

High specificityStrong action

Low specificityLow action

1 External benchmarks taken into account2 Ongoing environmental analysis for the

detection of risks and opportunities

3 All relevant operational areas are included in cost management

4 The staff levels for cost management are sufficient

5 There are clear objectives/values planned for the KPIs in cost management

6 Regular adjustment of the KPIs in cost management

7 Use of IT-base MIS8 Elaboration of corrective measures for

plan variations

9 Employee individual incentives to contri-bute to the increase of cost efficiency

10 Staff in controlling benefit from regular training seminars

0,50,40,3

N = 251; *Correlation coefficient , p ≤ 0,01

Stra

tegy

Org

anis

atio

nIn

form

atio

nTo

ols

Cult

ure

67,8

66,9

65,0

67,5

65,4

61,2

67,4

65,1

59,2

Financial services Overall Logistics

Other industrial sectors

Others

Machinery /Equipment

Automotive industry

Retail Pharmaceutical /Chemical

5

3

1

0,0 0,1 0,2 0,50,40,3

4

1

2

3

4 6 8

10

5

7

9

9

Further factors with an influence on cost efficiency are

taken into account in external benchmarks in the key field

Strategy (1).

On the one hand, the existence of clear objectives and

planned values for indicators in cost management from

the key field Information must be mentioned here, with

which the success of products and processes can be con-

trolled, and on the other hand, the periodical adjustment

of indicators to new requirements (6), are for example vis-

ible from the environment analysis. These factors also ap-

ply in most companies. Lastly the inclusion of all relevant

operational areas such as purchasing, production, sales,

marketing, finance, etc. (3) is a critical factor from the key

field Organisation.

Comparatively, companies use IT-based information sys-

tems (7) to monitor cost efficiency and to evaluate (field:

Information). The staffing situation (4) in cost manage-

ment is mainly described as sufficient (field: Organisa-

tion). For both factors however, there is only a moderate

relation to cost efficiency to be seen.

Two aspects from the key field Culture were highlighted,

but these are achieved only in practice by a minority of

companies: the creation of individual incentives for em-

ployees to contribute to the increase of cost efficiency (9)

and regular visits of the employees to training seminars

in the field of controlling (10). Both aspects have only a

relation to cost efficiency moderate to mild, which can

be attributed to the fact that cultural patterns aimed at

people’s behaviour achieve the desired effects not on the

short but on the long term.

104 In 2012 and 2013, questions were asked regarding the most important cost

categories; this year it was decided to ask questions about the cost catego-ries where the biggest savings potential lies.

5 Significant variations from the average are highlighted. Upwards variations are in red, downwards variations are in green.

Cost Management in Practice

Cost categories with the greatest potential for savings

Companies see large potentials for cost savings in Energy, IT and Logistics

The savings potential of different cost categories was ana-

lysed in the survey. Specifically, the question was about

what were the three different cost categories with the

greatest savings potential. Energy, IT, Logistics, Travel and

Marketing were here identified as the categories with the

greatest potential savings (see fig. 8).4

All other cost categories are mentioned at less than 20%

by companies, with Fleet Management (19%) and Main-

tenance (18%) the most likely to have savings potential.

The Automotive and Pharmaceutical/Chemical in-dustries especially see savings potential in Energy

According to their specific characteristics, companies

are confronted to the various cost categories in different

manners. Across all sectors large savings potential are

seen with Energy, in particular for companies in the Auto-

motive, Pharmaceutical/ Chemical and Logistics sectors.

In the Services sector, optimisation options are especially

in IT and Travel costs; in the Machinery/Equipment sec-

tor, in Retail, as well as the Automotive industry Logistics

costs are a special focus. In addition to Energy, the lar-

gest savings potential in the production sector are almost

equal to a group of various cost categories: Maintenance,

Logistics, Travel, Marketing, Fleet and IT.

Automotive industry

Pharmaceutical & Chemical

Services

Logistics

Machinery / Equipment

Retail

Other industries


The cost elements with greatest savings potential

N = 251; information in %, up to 3 entries


Most important indirect cost categories per sector5 En

ergy

IT Logi

stic

s

Trav

el m

anag

emen

t

Mar

ketin

g

Flee

t

Mai

nten

ance

Faci

lity

Man

agem

ent

Equi

pmen

t Fa

ctor

y co

nsum

able

s

Tele

com

mun

icat

ions

32 19 26 23 23 19 28 6 15 6

55 45 18 9 27 0 18 18 45 9

21 39 0 32 29 23 14 21 4 23

41 24 29 18 12 35 18 24 12 12

19 31 53 13 16 34 13 22 9 13

30 26 45 40 19 9 19 2 15 9

67 33 50 8 8 8 25 25 25 0

31 30 30 25 25Energy

0Uniforms

3 2 2 1Waste

ManagementCleaning Security Merchant

cards

7 6 5 4Packaging Insurance Print costs Office supplies

19 18 15 12 11 11Fleet

ManagementMaintenance Facility

ManagementEquipment

Factoryconsumables

Tele-communications

Freight

IT Logistics Travel Managment

Marketing

11

Cost reduction processes becoming more efficient

The success rate of cost reduction processes has in-creased in recent years

In order to increase their productivity, 92% of companies

surveyed have implemented cost reduction processes

over the last three years, 6% more than the previous year.

Only 8% of companies have no activity to that end (see

fig. 10, upper graph). The reduction processes bring the

desired results for over two thirds of companies, and the

success rate has risen continuously over the past three

years. On a scale of 1 to 5, the average satisfaction score

has risen from 3.2 in 2012 to 3.6 in 2013 and currently to

3.8 points (see fig. 10, left scale).

Companies with a comprehensive cost management optimise their cost structure more successfully

The institutionalisation of a comprehensive cost ma-

nagement, thanks to professional structures, significantly

boosts the optimisation efforts in organisations: compa-

nies with increasing levels of activity in terms of a com-

prehensive cost management (index Barometer Cost

Management) are increasingly satisfied with the results of

the cost reduction processes (see fig. 11).

Reduction processes in the last 3 years

Satisfaction with the reduction processes

Not at all satisfied (1)

Average value: 3,8 (2013: 3,6)(2012: 3,2)

Very satisfied (5)

0

5 %

68 %

5

27

52

16


Reduction processes and satisfaction

N=215

Yes 92 %No 8 %


Satisfaction with cost reduction processes and comprehensive cost management

1Not at all satisfied

5Very satisfied

432

46

32

Baro

met

er C

ost M

anag

emen

t

59

70 73

12

Companies generate on average 5.6% additional fi-nancial resources based on their annual turnover through cost reduction measures

On average, companies surveyed were able to reduce

their costs by 5.6% of turnover. Almost a third of compa-

nies generated between 6% and 10% of their turnover,

and sometimes over 10% (see fig. 13). However, it is likely

All companies surveyed in the Automotive and Phar-maceutical/Chemical industries perform cost reduc-tion processes

When cost optimisation is part of day-to-day business in

most companies, there are also differences between in-

dustry sectors. Whilst on the one hand, cost reduction

processes can be seen in all Automotive and Pharmaceu-

tical/Chemical industries, on the other hand, the propor-

tion in Retail is of 88% and in the Services sector 92%.

that savings of over 10% of turnover are due not only to

cost management programmes but also to changes in

staff structure.

The Logistics sector achieves the highest saving rates

The highest saving rates, measured as percentage of

turnover, can be seen in the Logistics sector, where the

average rate is 6.8% (see fig. 14). The Logistics sector is

exposed to huge competition and cost pressure as a result

of globalisation and the dynamics of technological devel-

opment more than almost any other economic sector. In

addition, they will be burdened with the increase in fuel

costs, new and increasing toll costs, or from increased

safety standards in the international supply chain.

The Financial sector and the Automotive industry are,

with 6.6% and 6%, also reducing their cost drastically

through cost reduction programmes. In the Automotive

industry, the savings are mainly offset by innovation pro-

cesses and the reduction in material costs. In comparison,

the lowest savings are found in the Retail industry and in

the Pharmaceutical/Chemical industry6.

6 Cf. ZEW, Statista (2014).


Volume of savings from the reduction processes

>10%6-10%3-5%0-2%

38,8

24,1

7,8

Num

ber

of c

ompa

nies

in %

Savings in percentage of turnover

N = 251

29,3


Reduction processes per sector

N = 251

Savings per sector

Abb. 14 | © Expense Reduction Analysts

N = 251

94Logistics

6,8Logistics

6,6Financial services

100Automotive

industry

6,0Automotive

industry

100Pharmaceutical

& Chemical

4,8Pharmaceutical

& Chemical

94Machinery / Equipment

5,1Machinery / Equipment

93Other industries

5,2Other industries

92Overall

5,6Overall

88Retail

4,4Retail

87Others

5,9Others

137 Cf. Expense Reduction Analysts (2011), p. 21.

Financing Investments and Growth

Business efficiency is a prerequisite for companies in or-

der to survive within a global and dynamic competition. It

is also one of the main goals of cost management, where

activities are directed to use valuable resources such as

materials or staff as efficiently as possible. The company’s

liquidity will increase through savings and the level of

prices of their own range will remain competitive. At the

same time, the scope for the financing of investment incre-

ases. In our 20117 study on overhead costs, we found out

that funds generated through cost reduction programmes

were however less used for investment than to increase

the company’s profit. The topic of financing investment

and growth will form a more extensive analysis in the cur-

rent Barometer Cost Management than in the previous

one, where the purpose, object and goal of investment

projects and the financing methods used are at the centre

of the observations.

Investments

The volume of investments has risen sharply since 2012

The total volume of investments for the companies sur-

veyed has risen sharply since 2012: in 2012, 28% of com-

panies report higher volume of investments, in 2014 there

are 44% already, which represents an increase of 57%.

Then again, 19% of companies have reduced their invest-

ments, when in 2012 it was 17% – which represents an

increase of 12% (see fig. 15).


Variations in investments compared to previous years

N = 251

10

0

20

30

40

5044

39

28

17

13

19

2012 2013 2014(planned)

Num

ber

of c

ompa

nies

in

%

+57%

DecreasedIncreased

14

The bigger share of investments flows into tangible and intangible investments

Types of investments may be categorised according to

various criteria. One of the most common thus most obvi-

ous distinctions is the categorisation by investment tar-

get, i.e. if there was purchase of equipment, investment in

funds, or if intangible investments were made. In the case

of corporate takeovers, investments are made simultane-

ously in all categories8.

The results of this year’s survey show that companies

make most of their investments in the fields of tangible

and intangible assets and primarily in machinery and

equipment (71.4%) and in research and development

(34.3%). Over one in ten companies planned financial

resources for corporate takeover; in big companies with

more than 1,000 employees the proportion is almost one

in five (18.2%). With just under 10%, financial investment

only plays a minor role (see fig. 16).

8 Cf. Ermschel/Möbius/Wengert (2013), p. 29. 9 Cf. Olfert (2012), p. 31.

Strong decline in foundation and start-up invest-ments

A further breakdown of investments is based on the goal

or the action with which it will be followed: Investments

that are necessary for maintenance (replacement invest-

ments), and those which are made to increase the capital

stock (net investments)9. The results of the survey show

that many companies have used the recovery in 2013 to

expand their business, whereas in 2014 the greater trend

towards capital preservation is evident. Whilst the share

of the net investments in the previous year was 26%, only

21% of investments in this area are planned in 2014, which

represent a decline by 19% (see fig. 17). These changes are

almost entirely due to the reduction of 56% in foundation

and start-up investments.


Proposed investment projects in 2014

N = 251, multiple entries

Machinery / Equipment

Property

Shares

Stocks

Research & Development

Personnel

Patents

Licences

Investment in tangible assets

Financial investments

Intangible investments

71,4

16,4

8,9

0,9

34,4

29,1

3,3

1,4

Acquisitions 11,3

15

Automotive and Pharmaceutical/Chemical industries invest mainly in measures of rationalisation

Whilst diversification investments are found almost equal-

ly in all industry sectors, the Automotive and Pharma-

ceutical/Chemical industries focus on rationalisation in-

vestment for their machines or systems. In the Service

sector and in other Manufacturing industries replacement

investments are primarily observed. Logistics, Retail and

Machinery/Equipment have planned increased expansion

investments in 2014.

Diversification investments are on the increase

For the current year however, companies are planning a

stronger focus on diversification investments: compared

with 2013, 28% more companies want to invest in this di-

rection. Diversification strategies are frequently pursued

by companies when the markets are saturated with the

current products, when competition has the upper hand

or when there would be better market opportunities for

new products.


Planned investments 2014 per sector



Main purposes of investment projects 2013 und 2014

N = 251

Expansion investments e.g. increase in production capacity, additional retail space

Foundation investments / Start-up investmentse.g. Launch of a new business, a subsidiary or construction of a permanent place of business

Pure replacement investmentse.g. replacement of a defective system

Rationalisation investmentse.g. replacement of a technologically obsolete machine or system

Diversification investmente.g. addition of new product lines – Entry into new markets such as regions

Other investment purposes

No investment projects

17

9

26

16

13

6

13

17

4

24

17

18

6

14

2014 planned

Net

inve

stm

ents

Repl

acem

ent i

nves

tmen

ts

2013

Automotiveindustry


Services Logistics Other industries

Retail Machinery / Equipment

55 42

18

18 18

18

20

20

19

19

11

19

21

21

26

24

29 9

10

12 13

13

13

16

7 7

7 2 4

27 33

33

17

17

25

8 0

0 0 0

0 0

Pure replacement investments

Diversification investments

Expansion investments

Rationalisation investment

Property / Construction investments

No investment projects

16

Rationalisation and increasing the company’s turn-over are the main goals of investments

The investments are primarily targeting the increase of

revenue e.g. the company’s turnover (71%) and rationali-

sation of ongoing processes for cost reduction (48%). Just

under a third of companies focus on technological innova-

tions (32%) or Research & Development (31%). Fulfilment

of compliance standards such as regulatory requirements

(12%) or environmental aspects (8%) play only a minor

role (see fig. 19).



Investment objectives

Investment objectives per sector

The fulfilment of compliance standards, such as regu-

latory requirements, does not affect all companies in

equal measure. With increasing regulatory requirements

passed by legislation, the Finance and the Logistics sec-

tors are confronted, since the financial crisis, to increas-

ing requirements regarding emissions and safety aspects,

something also reflected in the investment objectives per

sector (see fig. 20).

In addition to the common objective of revenue increase,

the investments in the Automotive and Pharmaceutical/

Chemical industries are strongly focused on research &

development; in all other industry sectors, the main focus

of investments is on measures of rationalisation.

N = 251, information in %, max 3 entries

Revenue increase

Rationalisation / Cost reduction

Technical innovation

Innovation / R&D

Fulfilment of compliance standards

Environmental aspects

Other objectives

71

48

32

31

12

8

9

N = 251, information in %, multiple entries

73

36 36 64

36

20

44

33

25 41

7

2

71 71

51

33

43

50 82

21

21

13

13 14 18

14

14

4 4

27

5 16

13

4

100 65

32

67

50

50

58

8 0

9

0

14

0 0

0

Automotiveindustry


Services Logistics Other industries

Retail Machinery / Equipment

Revenue increase

Rationalisation / Cost reduction

Technical innovation

Innovation / R&D

Fulfilment of compliance standards

Environmental aspects

Other objectives

17

Financing

In order to finance their investments, companies have

various options at their disposal, which can be systemised

according to different criteria. Besides the duration of pro-

vision of capital, the sources of capital and the legal status

of the investor are the most common classification criteria

to differentiate the types of financing. As to the sources of

capital, there is a distinction between external financing

i.e. external investors lead the company to financial re-

sources, and internal financing, i.e. the financial resources

generated by the company itself.

A further type of systemisation distinguishes the com-

pany’s perspective from that of the shareholder. This is

where the criterion of the legal status of the investor is

based, i.e. whether the company will have financing from

equity or borrowed capital. Similarly, we speak in this con-

text of self-financing and external financing. A classification

arranged according to these criteria is shown figure 2110.

Companies resort mainly on internal financing tools (profits, depreciation and cost savings) to finance their investments

The results of the survey make it clear that companies

have a strong tendency to use their internal financial re-

sources for investments (see fig. 22). 95% of all compa-

nies use the leeway they have from profits and deprecia-

tion for their investments. It is also worth noting that 87%

of companies actively use their cost savings as financing

tool, of which 27% intensively and 14% very intensively.

When external funding is requested, this usually applies

to financial tools such as leasing (60%) and traditional

bank loans (55%). However contracting, which mostly

applies in relation to energy efficiency, is used by almost

a third of companies (see fig. 22). Equity capital (23%),

the issuing of shares (14%) or the production of bonds

is mostly found in larger companies with over 1,000 em-

ployees. Finally, 39% of companies use public subsidies.11

11 Cf. Gräfer/Schiller/Rösner (2014), p. 176f.10 Cf. Gräfer/Schiller/Rösner (2014), p. 35 and Becker (2013), p. 129.



Types of financing and financing tools

Financing of investments


From

sha

reho

lder

s pe

rspe

ctiv

e

Self-finance

Self- and borrowed finance

Borrowed finance

External financing

Financing through Profits and Depreciations

Finanzing through issues of shares

Financing through rationalisations / savings

Financing through accruals

Equity financing

Public funding

Financing through mezzanine capital

Bank loansLeasingContracting

Internal financing

Self-finance

Internal financing

External financing


Borrowed finance

Venture capital

Issuing of shares

Profit / Depreciation

Cost savings

Public funding

Leasing

Bank loans

Contracting

Issue of bonds

6

5

1 12

14

13

14 19 16

171512

10

3 36

14 6

60

55

32

14

11

11

15 10 391

2

2

32 27 14

33 95

87

49

5 22 14

9 5 3 23

1 (little used) 2 3 4 (very often used)

Increasing intensity of use

Cumulative value for individual categories

18

Cost savings provide a strong basis for the financing of investments

Translated into the proportional volume of the individ-

ual financing tools12 33% of the overall funding is cov-

ered through profits and depreciations; 22% from cost

savings(see fig. 23). These results underline the high im-

portance of internal financing in the provision of capital.

12 The intensity of use of individual financing tools was extrapolated to 100 per company, so that the scope in % of each tool can be determined approximately.

13 Cf. Deutsche Bank Research (2014), p. 3.

Only 12% of funding requirement are covered by traditional bank loans

Borrowed financing makes overall 31% of the financing

mix; the comparatively low significance of the traditional

bank loans is to be noticed. The proportion of this type

of funding is only 12% and almost equivalent to that of

leasing. This relatively low percentage is due to the incre-

asing reluctance of banks to provide loans, which results

from increased requirements in equity ratios as well as

the continuous stress test from the European Central Bank

(ECB)13. Companies are therefore obliged to find alternati-

ves for their funding needs, such as leasing or contracting.

The high proportion of financing from cost savings illus-

trates the value of comprehensive cost management: as

seen above, companies with comprehensive cost ma-

nagement are more successful with their measures of

cost optimisation (see p. 18) which is ultimately reflected

in greater freedom for necessary investments.

N = 251, multiple entries


Distribution of types of funding in percentage

Self-finance


Borrowed finance

Other financing tools

33

22

4

6

5

12

12

∑ = 39 %

∑ = 31 %

∑ = 28 %

2

2

2

Profit / Depreciation

Venture capital

Issuing of shares

Cost savings

Public funding

Leasing

Bank loans

Contracting

Issue of bonds

19

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List of Graphs

Fig. 1: The Key Fields of the Barometer Cost Manage-

ment, p. 5

Fig. 2: Sample distribution of respondents and compa-

nies, p. 6

Fig. 3: Responsibility in Cost Management, p. 6

Fig. 4: Barometer Cost Management, p. 7

Fig. 5: Barometer Cost Management by company size, p. 7

Fig. 6: Barometer Cost Management per sector, p. 8

Fig. 7: Activity of companies in the five key fields in rela-

tion with cost efficiency, p. 8

Fig. 8: the cost elements with greatest savings potential,

p.10

Fig. 9: Most important indirect cost categories per sec-

tor, p. 10

Fig. 10: Reduction processes and satisfaction, p.11

Fig. 11: Satisfaction with cost reduction processes and

comprehensive cost management, p. 11

Fig. 12: Reduction processes per sector, p. 12

Fig. 13: Volume of savings from the reduction processes,

p. 12

Fig. 14: Savings per sector, p. 12

Fig. 15: Variations in investments compared to previous

years, p. 13

Fig. 16: Proposed investment projects, p. 14

Fig. 17: Main purposes of investment projects in 2013

and 2014, p. 15

Fig. 18: Planned investments 2014 per sector, p. 15

Fig. 19: Investment objectives, p. 16

Fig. 20: Investment per sector, p. 16

Fig. 21: Types of financing and financing tools, p. 17

Fig. 22: Financing of investments, p. 17

Abb. 23: Distribution of types of funding, p. 18

20

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