Cutting your costs can:
- Make your company shine
- Kill your bottom line
- Read on...
Companies are locked in on cost cutting like a heat-seeking missile. But are they using precision weapons? And, are they using their troops to get the laser fix on their targets? Tony Dottino presented an eye opener at the Benchmarking Session, proving with facts, figures, logic and common sense, that the cost cutting practiced by many companies today can lead to their own self destruction.
The expenses related to the processes in any company can be classified in four categories: required, preventative, appraisal and failure. Required tasks are the tasks in the activity that are absolutely necessary to produce the output. They would have to be done even in a perfect world where everything was always done right the first time. Preventative tasks are performed to prevent errors from creeping into an activity. Training is an example of a preventative task. Appraisal tasks are tasks performed to find any errors. QA inspection is an example of appraisal tasks. Failure tasks are performed to correct the errors that crept into the activity. Every task performed in a business process falls into one of these categories.
Our experience has shown that the percent of resources the average company typically spends on each type of task is:
Required 45% - 60 % Preventative 1% - 5% Appraisal 5% - 10% Failure 25% - 40%
That’s right! The average company spends 25% - 40% of its resources on dealing with the results of work errors—work that does not conform with requirements / specifications, and thereby causes problems that must be remedied. The additional work it takes to remedy those situations are called Failure tasks.
With this in mind, let’s examine the effect of typical cost cutting efforts intended to raise productivity or improve deficiencies.
Company X has been directed to cut costs by 10%. Where is that cut likely to be made? We can’t cut failure tasks because either we don’t recognize a task is a failure (we’ve done it so routinely we think it is required), we don’t have the resources to prevent them from happening or we don’t know the root cause. Often, believe it or not, the first cuts are preventative tasks. For a short while, Company X is satisfied that they’re on the right track. They’ve cut costs.
Okay, what’s next? The typical Company X then cuts appraisal work—the efforts to check if the work has errors in it, so it can be stopped and corrected. Another short term “victory.” Costs are cut again. Company X is starting to feel good. They’re hot on the cost-cutting trail. But, that heat-seeking missile is turning in mid-air and coming right after Company X. Failures increase. And now, the errors are getting out to their customers. They end up putting more resources on failure tasks. There’s more failure work in customer service as well. Maybe Company X increases preventative tasks. Then again, maybe not - the budget is used up and they don’t want to exceed budget, especially not in the “cost cutting” environment. Failures rise even more. They spend more money on failure work, and maybe more money to restore preventative and appraisal tasks. The net—costs increases. Customers are unhappy (or fleeing) and employees are demoralized.
Is there any place left to cut? The only other cuts would be required tasks. A cut here means the product or service that the activity produced doesn’t get produced. While this is an appropriate choice in a select few cases, it obviously doesn’t have widespread application. The typical cost cutting strategy used by business will almost certainly increase failures and fail to result in any long-term improvements to the business. It is not a growth strategy.
So, can we reduce our costs in a way that produces long-term improvement? YES!!! When you combine senior management’s broader view of the business with the workers’ detailed knowledge of how the work actually gets done, and utilize a structured methodology, you can get meaningful results. Senior management knows what the big picture looks like, where to best focus improvement efforts and what results are needed to move the business forward.
In summary, indiscriminate cost cutting methods have been proven to be ineffective. They can lead a business into a death spiral of cutting costs which increases failures, which leads to more cost cuts that lead to more failure, and so on. A successful alternative to this gloomy prospect was demonstrated several times at this session—an alternative that has been documented by many companies to reduce costs and produce world class results that last.‡
Robert McGarry, President of Sextant Consulting
“The session cut through the malaise of nonsense and got down to the nuts and bolts of where leadership should be!”
George Sanchez, Washington Heights Improvement District Management Association, Inc.
