Restructuring and other cost savings initiatives

White Collar Productivity program

In September 2015, we announced a two-year program aimed at making ABB leaner, faster and more customer-focused. Productivity improvements include the rapid expansion and use of regional shared service centers as well as the streamlining of global operations and head office functions, with business units moving closer to their respective key markets. In the course of this program, we are implementing and executing various restructuring initiatives across all operating segments and regions.

The program was originally expected to generate cost savings of approximately $1.0 billion and be realized from 2016 and increasing through the end of 2017. During 2016, we re-assessed the expected amount of cost savings and increased the expected total annual rate of cost savings from the program by 30 percent to approximately $1.3 billion. During 2016, cost savings of approximately $0.6 billion were realized. These savings are primarily being realized as reductions in cost of sales, selling, general and administrative expenses and non-order related research and development expenses.

The following table outlines the costs incurred in 2016, the cumulative amount of costs incurred to date and the total amount of costs expected to be incurred under the program.

 

Costs incurred in

Cumulative costs incurred up to December 31, 2016

Total
expected
costs(1)

($ in millions)

2016

2015

(1)

Total expected costs have been recast to reflect the reorganization of the Company’s operating segments as outlined in Note 23.

Electrification Products

14

73

87

89

Discrete Automation and Motion

27

45

72

74

Process Automation

36

96

132

134

Power Grids

33

70

103

105

Corporate and Other

30

86

116

118

Total

140

370

510

520

Total expected program costs were originally estimated to be $852 million. During 2016, the total expected program restructuring costs were reduced by $332 million. This was primarily due to the realization of significantly higher than originally expected attrition and internal re-deployment rates. The reductions were made across all operating divisions as well as for corporate functions. In addition, we reduced the expected average severance costs per person as more precise cost estimates were available after determining the specific country locations of affected employees.

In 2016 and 2015, restructuring costs of $140 million and $370 million, respectively, were recorded based on the anticipated number of personnel to be impacted by the program and a country-specific average severance cost per person. Various functions including marketing and sales, supply chain management, research and development, engineering, service, and certain other support functions were impacted in various phases commencing in 2015 and continuing in 2016.

In 2016, we experienced a significantly higher than expected rate of attrition and re-deployment and a lower than expected severance cost per employee for the employee groups affected by the restructuring programs initiated in 2015 and 2016. As a result, in 2016, we adjusted the amount of our estimated liability for restructuring which was recorded in 2015. This change in estimate of $103 million for the twelve months ended December 31, 2016 resulted in a reduction primarily in cost of sales of $49 million and in selling, general and administrative expenses of $38 million for the twelve months ended December 31, 2016. The expense recorded for the restructuring initiated in 2016 includes the impacts of the attrition and re-deployments realized in 2016. Due to the significant subjectivity of our estimate of future attrition and internal re-deployment rates, the amount reported for restructuring liabilities at December 31, 2016 will change based on actual attrition and re-deployment rates realized in 2017.

To complete the remaining planned restructuring activities, we estimate that additional restructuring costs of approximately $10 million will be recorded in 2017.

The majority of the remaining cash outlays, primarily for employee severance benefits, are expected to occur in 2017. We expect that our cash flow from operating activities will be sufficient to cover any obligations under this restructuring program.

For details of the nature of the costs incurred and their impact on the Consolidated Financial Statements, see ‘‘Note 22 Restructuring and related expenses’’ to our Consolidated Financial Statements.

Other restructuring-related activities and cost savings initiatives

In 2016, 2015 and 2014, we also executed other restructuring-related and cost saving measures to sustainably reduce our costs and protect our profitability. Costs associated with these other measures amounted to $171 million, $256 million and $235 million in 2016, 2015 and 2014, respectively.