FIRMS are guilty of taking a short-term, quick fix approach to cost-cutting, according to a study commissioned by accounting firm PricewaterhouseCoopers. It said wrong cuts covered investment, recruitment freezes and staff layoffs.

Two-thirds of finance chiefs admitted that the costs they are now cutting from their businesses would creep back within two to three years. Many firms were likely to adopt a copy-cat culture of short-term cost cutting that is overriding the drive for long-term prosperity. Two thirds of company chiefs admitted that cost cuts are driven more by a keenness to impress analysts and shareholders than to improve their own businesses.

Jon Wright, senior partner at PricewaterhouseCoopers in Maidstone said: "Cost is not the root of all evil. Too much cost cutting can be fatal, leaving companies under-resourced for the future. But our survey shows that UK firms in particular have yet to understand this - quick fix cost reduction dominates the corporate agenda. UK companies are also failing to differentiate between good and bad costs and shareholder appeasement is winning out over long-term strategic management. Mr Wright said: "It is essential for companies to understand which costs add value to a business, and which do not and to introduce effective cost containment programmes addressing good, bad and neutral costs."

Good costs - such as targeted sales and marketing, research and development, and training - drove growth. Neutral costs - such as IT and customer-facing support staff - were ripe for the chop, and bad costs neither supported growth nor supported the firm's infrastructure. Bad costs included duplicated processes, uncontrolled procurement, unnecessary IT spend, non-strategic projects and capital investments, as well as bloated back-office support functions.