CFOs Continue to Flex Their Cost-Cutting Muscles

In the business world, the word “resilient” has over the past 18 months been attached most often to the U.S. economy’s surprisingly strong growth. It might be time to apply the word as steadfastly to CFOs’ attitude about cost-cutting.

Across the economy, finance leaders and the CEOs they report to continue to wield their scalpels—as well as blunter tools on occasion—to push back against inflationary pressures, enable growth investments and safeguard margins. The first-quarter earnings reporting season we’re plowing through has produced plenty of new examples:

• “Capital discipline and efficiency” is helping Ford Motor Co. trim the top end of its 2024 capital expenditures forecast by $500 million. The move is in part a response to slower growth in the sales of electric vehicles.
• Knight-Swift Transportation Holdings Inc., one of the country’s largest trucking companies, is trimming the number of trucks and trailers it has out in a struggling freight market. CEO Adam Miller said “cost is going to be the biggest focus” for his team this year: “If we get the market’s help, then great, we’ll take it. But we’re not going to relinquish anything on the cost side of the business.”
• PG&E Corp., the parent of Pacific Gas & Electric Co., has “unlimited line of sight” to shave its operating costs and keep utility bills in line while it invests billions in infrastructure, CEO Patti Poppe told analysts April 25. In the past few quarters, Poppe and her team highlighted $4 million in annual savings from digitizing or eliminating letters to households. This quarter, Poppe highlighted a revamped inspection process that helps predict equipment failures and thus lowers repair costs.
• Defense contractor L3 Harris Technologies Inc. is cutting its workforce by about 5%—roughly 2,500 people—as it looks to streamline processes and leave some of its real estate. The moves have helped put the company ahead of its target to generate a run rate of $400 million of savings by year’s end. Chair and CEO Chris Kubasik said an upcoming phase will trim L3 Harris’ network of facilities to 200 from 275.
• Also looking to job cuts are utilities Xcel Energy Inc. and American Electric Power Co. Inc. The leaders of each have launched buyout plans this year, Xcel to 400 people after laying off 159 others and AEP with the goal of saving about $100 million in labor costs starting next year.

Whatever the method, cost-cutting remains a priority: A recently published U.S. Bank survey of more than 2,000 finance leaders showed that trimming expenses and driving efficiencies across their organizations was a top priority for 37% of respondents, up four points from last year and eight points from 2022. The only category to score higher as a top priority: Cutting costs and driving efficiencies within the finance function itself.

Lingering inflation, higher-for-longer interest rates and rising global tensions are shaping those intentions, U.S. Bank researchers said, and making many CFOs relatively gloomy about 2024. One in three manufacturing leaders have a negative outlook for what remains of this year. But the cost-cutting focus and plans to invest in technology have made them more chipper about what’s likely to come after that: Only 17% are negative about the U.S. economy over the next three years and 55% are optimistic about their companies’ outlook through 2026.

“Success requires a delicate balance between long-term offensive strategies, such as forecasting and strategizing, and short-term defensive strategies, such as cutting costs,” John Stern, U.S. Bank’s CFO, wrote in the report. “This is essential in an environment where the pace of change accelerates every year.”

A recent Grant Thornton report similar to U.S. Bank’s showed that 50% of finance leaders surveyed by the accounting and advisory firm expect their operations costs to rise in the coming year—a record and 12 points higher than in late 2023. But a greater share of executives are confident their firms can use cost controls to meet their goals.

In other words: More of the same lies ahead—even if the economy strengthens from here, as parts of it are showing signs of doing. Company leaders will look to chip here, shave there and make bigger cuts when they (and investors) deem them necessary.

In some ways, The Timken Co.’s April 30 earnings report and conference call were a prime example: President and CEO Rich Kyle and his team last year cut the bearings and industrial motion products maker’s payroll by 8% and shaved another 2% off its headcount in the first quarter as they continue “to adjust [their] cost levels to the realities of the demand.” There’s a strong muscle memory now in place.

“We’ve been steadily improving operating performance the last two years as we’ve come out of COVID [and its] supply chain and inflation issues,” Kyle told analysts. “We sequentially improved each quarter last year and we continued to improve into the start of 2024. We’re operating much better today than we were a year ago […] We also have great focus on continuing this momentum.”

One big question—maybe the biggest—for the overall economy is whether that momentum begins to include more job cuts like those at Timken, L3 Harris or AEP. If so, Miller and his team at Knight-Swift will be far from alone in getting no help from “the market.”