Most businesses struggle to cut cost and remove waste; they discuss it, at length, but they don't act. If your organisation talks endlessly about cutting costs but never quite pulls it off maybe it is suffering from cost saving impotence. Have a look at these symptoms, are they familiar?
The Symptoms
There are 5 common signs that your organisation is suffering from cost saving impotence:
1. Tool Rash
When organisations decide they need to cut costs they focus on tools. Lean, Value Analysis, 6 Sigma and Process Excellence are prevalent everywhere.
But lack of tools isn't the problem. Think of the last time you phoned your mobile phone or electricity supplier; could they have handled it better? Or did they waste your time and their money? A blind man can see that the processes are flawed, saving money should be simple. The issue is not a lack of ideas and tools; it is a lack of desire to implement solutions.
2. Malnourishment
Organisations panic when they realise they are not going to hit their profit targets. Desperation takes hold and they grasp at straws in their efforts to cut costs. Expense account lunches are banned and chocolate biscuits become scarce.
Take the Chrysler Motor Corporation as an example. In 2009 the US government bailed out Chrysler by $7 billion. In efforts to repay the loan Chrysler took drastic actions, including removing half of the light bulbs from their headquarters. This saved them $400,000 a year. That is a lot of light bulbs, and it sounds like a lot of money, but it is a drop in the ocean. It wouldn't even cover the interest.
Is leaving your employees to work in the dark a clever cost saving move or just blind panic?
3. Detail Blindness
Strategic cost programmes are launched, organisations look for silver bullets, the one critical change that will fix everything.
Unfortunately business operations are big, complicated, bespoke machines. And because they are bespoke, they are all different, so there isn't a magic bullet out there. The devil is in the detail of how your business works, demand patterns, labour relations, access routes... The list goes on and on.
The problem with big strategic changes is that they don't (and can't) deal with all that detail, they just change it all. The Devil you know is always better than the Devil you don't.
4. A Sense of Dj Vu
Waste reduction is treated as an initiative. One minute it is a hot topic, the next minute focus has shifted away from it, and when it does all of the costs that have been taken out barge right back in. It was just flavour of the month.
If your business repeatedly launches cost saving initiative after cost saving initiative your employees will roll their eyes to the ceiling, hunker down and wait for it to pass. They have seen it all before. Waste reduction shouldn't be a periodic distraction.
5. Burnt Flesh
Savings targets are allocated to the cost centres. Managers are scrutinised and berated, the pressure is turned up. "Feet are held to the fire".
When your feet are burning it quickly becomes every man for himself. Nobody helps out anybody else. Managers are far more interested in hitting their own targets and getting their own bonus, it is human nature. The result? Most of the really big opportunities are left on the table.
The Cause
Jumping from symptom to cure without understanding the cause is bad medicine. In this case the cause is lack of focus and organisational buy in, pure and simple. If your entire organisation doesn't view ongoing efficiency as important it will prevent, impede and frustrate attempts to drive out waste.
So the cure should address the cause.
The Cure:
The cure is cultural and is a three dose treatment: Sponsorship, Inclusion and Reinforcement.
Dose One: Sponsorship
For all change programmes credible sponsorship is everything.
Sponsorship must be from a very senior member of the organisation. It is all too easy for managers to bounce activity away. Cost management will always be fundamentally important to any business. It needs a commensurate amount of sponsorship. Is somebody actively sponsoring your efforts? Somebody with enough oomph to make things happen? Without that level of help you are wasting your time and effort.
Dose Two: Inclusion
Cost is a business problem; it should be treated like one and not marginalised to the cost centres. Organisations that structure their programme so that everyone has skin in the game are far more successful:
1. Embrace the Decision Makers
It is the Market ing and Sales functions that make the decisions about what Operations spends money on. These decisions are made on the basis of revenue, not cost.
Frank discussions demonstrating how product, business purpose and range drive cost can be really enlightening:
Why do we manage a panel of 73 suppliers?Why do we have a range of 1,071 coffee machines?Why do all our products come in different shaped bottles?Why do we have 102 debt recovery letters?
By putting these issues on the table and explaining how much these decisions really cost, you can radically increase the potential size of your cost saving programme.
2. Create Desire
If staff are incentivised to do other tasks: penetrate new markets, launch new products and improve employee engagement... that is what they will do. They won't worry about waste or cost. This lack of engagement is bad enough, but worse still it will get in the way of your cost saving initiative. If your bonus depends on you sel ling to new customers why would you risk changing the service you give to your existing ones?
If you want your cost saving programme to work you should link it to everybody's incentive programme.
3. Allow Trade Offs
Allowing tradeoffs is crucial to prevent sub-optimisation. Penalising one budget holder if he supports another is counter-productive. Budgets should be looked at on an aggregate level. As my wife says, "You have to spend to save".
Maybe your buyers could save massively on purchase price if your operations were flexible in the materials they used and took a small hit on operating costs. Savings like that won't be achieved unless your look at the cost saving programme from a total perspective not a departmental one.
Dose Three: Reinforce the Activity
Finally waste reduction should be embraced within the organisations culture; it should be "part of the way we do things".
1. Create an Ongoing Programme
The time to focus on efficiency is now. Cost saving activity should be as regular as Monday morning. It should not be an unpleasant surprise like Halloween. It should happen week after week, year after year.
2. Manage the Cycle
Organisations that are on top of their performance apply the same simple rigorous cyclical approach, the Deming cycle or Plan, Do, Check, Act
Plan: Create cost objectives and detail expected performance.Do: Run the business.Check: Measure performance and compare to the plan. Report progress.Act: Take action to improve performance.
Every month they review their performance against plan. The power of this approach is its simplicity and its focus on feedback. It allows no room to hide performance failings. If people know they are going to be asked how much they spent every month, and what they are doing about it, without fail, every month, month after month, they will get the message and they will start implementing chang es.
3. Obsess about the Small Stuff
Whilst there are best practices that can and should be applied they only take you so far, As I said, the devil is in the detail:
The tension of the wrapping materialThe call routing patternThe way customers queue at the serving counter
Saving money is really easy; all you have to do is fix all the things in your organisation that don't work. The better it works, the cheaper you will be and you will also deliver better customer service. If you fix the small things the big things will look after themselves.
The Prognosis
How was your health check? Are you suffering from all the symptoms or taking the medication? Does your organisation believe it should manage its costs? Or will it always be impotent.
James Lawther is a middle aged middle manager. To reach this highly elevated position he has worked for numerous organisations, from supermarkets to tax collectors in multiple operation s roles
He gets upset by operations that don't work and apoplectic about poor customer service. Visit his web site "The Squawk Point" to find more service improvement strategies. To get the free e-course "service improvement for pragmatic people" visit http://www.squawkpoint.com/e-learning/