"It was the best of times, it was the worst of times..."
M&E companies could be forgiven for feeling as if they’re living in a Dickens novel. But this famous line from A Tale of Two Cities does reflect the serious dilemma M&E companies face: M&E companies are experiencing some of the greatest demand ever for their content and services, yet sustained profitability growth remains stubbornly elusive.
Many M&E companies have attempted to improve profitability through targeted cost-reduction initiatives - the need for which has only escalated in the wake of COVID-19.
Accenture analyzed the financial performance of major publicly traded M&E companies to identify the profitability impact within two years after the announcement of cost reduction initiatives. Our analysis includes 33 traditional M&E companies that have announced cost reduction initiatives publicly between 2014 and 2019 across multiple segments of the industry.
The results are truly eye opening. We found that, on average, M&E companies’ profit margin rises and peaks within roughly three quarters after a cost reduction initiative is launched—then reverts to below prior profit levels inside of two years.
Source: Company financials, public filings and press releases, Accenture analysis
What’s most interesting is that M&E companies often give up almost all the profit margin gains by the fourth quarter after announcement. This explains the multiple rounds of major cost cutting initiatives we tend to see across select companies within the industry.
Investing in cost transformation—the right way—defines the winners
In a study published in the Harvard Business Review, researchers analyzed 4,700 companies across three global recessions (1980, 1990, and 2000) to determine how actions taken during a downturn influenced companies’ success after it. The analysis revealed that the use of a strategy that optimizes defensive and offensive plays simultaneously yields the highest probability of success—far greater than a pure defensive strategy, i.e., comprehensively cutting costs and investments.
Companies that are optimization-oriented and balance cost reduction with continued investment are twice as likely to come out of a downturn successfully.
These findings illustrate the opportunity that M&E companies have to generate significant additional efficiencies that unlock investable cash, immediately and over the longer term—and position themselves for post-downturn success. A zero-based mindset is the perfect tool for exploiting that opportunity.
A zero-based mindset
By now, most business executives are familiar with zero-basing or zero-based budgeting. The concept has been used for years in numerous industries—most notably, consumer goods—to reduce waste and costs. But the narrowly focused zero-based budgeting of old has evolved and matured.
With a zero-based mindset, a company essentially forgets about the past and reimagines its cost base not on what it was or is today, but what it should be if the company were to start from scratch—and use the resulting savings to fund investments in distinctive capabilities and specific activities that drive growth.
Of executives believe their current cost reduction efforts are durable.
M&E companies are late to the zero-based game for a variety of reasons. They have operated resilient and profitable businesses, their business models have stayed constant until recently and, frankly, many media executives share a perspective that their businesses are unique and that the approaches and lessons learned from other industries do not apply. But those reasons shouldn’t be excuses for not embracing a zero-based mindset today. Hundreds of Fortune 500 companies across all industries are using it for one simple reason: It works, and in many cases, spectacularly well. It’s time M&E companies begin reaping the benefits as well.
Of companies that have implemented a zero-based approach have fully met or exceeded their program targets.
Steps M&E companies need to take to shift their cost curve
We believe M&E companies today have an historic opportunity to dramatically and permanently shift their cost curve, design a new business for the future unencumbered by their legacy operations, and unlock a tremendous amount of money to fuel their growth.
Read the report to learn about opportunities to create competitive agility with a zero-based mindset.