Too narrow thinking?
Have you ever been part of, heard of or been the victim of one of these discussions?
“We need to reduce our costs by 15%.”
“Across the board?”
“Yes, but not as a blanket cut, but no area of the firm is sacrosanct.”
“When do you want to achieve this?”
“As soon as possible.”
When organizations have such discussions the next step is to work out:
- What has to be done.
- How the cost cutting will be executed.
- How they’ll decide what costs/people will be cut.
An alternative conversation
Let us put aside how badly cost cutting exercises are usually executed and ask what should be happening at this initiation discussion?
“We need to reduce our costs by 15%.”
“OK, so what does ‘success’ look like?”
‘We’ve reduced our costs 15%!”
‘Even if that stops the business?”
‘No of course not.”
‘So ‘success’ is not just a reduction in costs but something more. Why is reducing costs important?”
“Our profitability is going south fast and the board is impatient for an uptick in profits.”
“So, we want an uptick in profits? Why is that important?”
“The stock price is based on our profitability and especially our profitability in relation to the analysts’ assessments.”
“So, we want to match or beat the analysts’ assessments? Why is that important?”
“To sustain the share price and our credit rating.”
“So, we want to maintain the share price and credit rating? Why is that important?”
“To maintain our low cost of funds.”
“Ah, so what we are really trying to achieve is maintain our low cost of funds.”
“By reducing our costs!!”
“But is ‘cutting costs’ the only option? Reducing costs is a marketing decision as we should only cut costs that are irrelevant to our customers otherwise we’ll be cutting our customer services and profitability. So, first, we need to segment our costs into customer-facing/impacting costs and back-office costs that can be cut without impacting the customers and profits.
“But surely there is more we can do. Aren’t we looking to increase our profits – so can we increase our prices to increase our margins?”
“There is too much competition to increase our prices.”
“In all markets, in all market segments, for all versions? What if, instead of cutting costs, we increased the quality of our service offer and increased our prices accordingly, would that help us increase profits?
“Alternatively, or additionally, can we delete our low-margin products, stop selling them altogether and thereby increase our overall margin?”
And so on.
Once, as in this example, you have established that the desired business outcomes are to increase profitability, sustain the share price and maintain the low funding costs — a lot more options than just cost cutting are possible. A very different conversation can occur leading to different activities and different results.
NB All we have done here is applied a TOP Value Equation™ thinking process to an operational issue to seek out the true desired outcomes which opens up whole new opportunities.
TOP's tools can be used in a wide range of circumstances.
A case example
Now let’s take a regulated organization that had no control over its prices. It was losing money and its owner wanted it to at least breakeven.
Just to complicate matters, it had been under-investing for years and therefore was firefighting on all fronts as systems, assets, networks and processes failed. It was in a mess.
The imprimatur was to cut costs significantly. But to cut costs would reduce its ability to cope with and fix the problems that were enabling it to avoid total failure.
Again, what was the true desired business outcome in this case? — To breakeven.
There are two sides to breaking even – income and expenditure.
Additional income options
New revenue But, you say, it's a regulated firm. True, but only for specific services; what if it can earn monies from new unregulated services?
Cost reduction options
Fix it Fix the problem areas that were being addressed by the firefighting exercises. What if the organization focused on the top six or so problem areas and fixed them once and for all? Then it could reduce the time it was currently taking to do the basics and stop fighting the systems, processes and each other.
Simplify it As the organization is already struggling to operate, cutting staff would just make things worse. So, why not simplify how the organization operates, take out operational waste by redesigning what it does and how it operates? Admittedly this will take time and money that has to be ‘paid’ for by other initiatives but the payback would most likely be within the year.
Remodel it Is the existing operating model appropriate? Does it need to outsource or insource any services to get better results at less cost? What does this organization need to be really capable at and what does it only need to be efficient at? In the areas it only needs to be efficient at, is it operating efficiently? If not, how can it either fix it or get someone else to do it better?
And so we could go on. The key point is that once we identify the true desired business outcomes (as opposed to the pre-determined solution of cost cutting) the options to achieve them become broader. You have more opportunities to achieve your outcomes of which, in our example, cost cutting is just one option.
Asking the right questions at the initiation stage can make the downstream results much easier to achieve—this especially applies to the initiation stage of projects. The wrong questions will lead you to the wrong answers and the wrong project..
It really is that simple.
Learn more about the Power of the Outcomes process