Don’t Cut Costs. Laser Focus your Investments.
Many companies are working on their 2008 budgets. In many of those cases, economic forecasts point to a need to cut costs. The mandate that we have seen in this circumstances may be that a 4% cost cut is required across the board. So each department sets off to identify 4% cut in spending. This cost cutting activity may result in the financial savings desired, but it probably isn’t the best way to approach this effort. This approach is common for a few reasons. It is fair – because everyone should participate in any cut backs. It achieves the desired result and we lack a more effective way to solve this problem.
The problem is that costs are often cut too deeply in some aspects of the business and not deeply enough in others. The overall equation balances, but it doesn’t optimize investment across the firm in the interests of achieving the business strategy and creating value for the customer.
Rather than cut costs across departments, look at the business as an interdependent network of value creating and enabling capabilities. Value creating capabilities are those that directly contribute to creating value for your customers. All the rest of the capabilities are enabling. Not all capabilities contribute equally to the success of the firm – and investment is not optimized at every capability.
Some capabilities already have over investment either due to inefficiencies or an excess of capacity. Some capabilities may actually already be constraining the performance of the business and actually need additional investment.
Change the mindset from where do I cut, to how do I focus my investment to optimize the performance of the business.
1. Articulate the most important outcomes of the business.
2. Identify the capabilities in the business and determine how important they are to the outcomes of the business.
3. Dig deep enough in the enabling capabilities to see where performance will be negatively impacted by cost cutting – for example, make appropriate investments in technology to support the high priority outcomes.
4. Identify the capabilities where you currently have excess performance and inefficient investment.
5. Now focus the overall investment into the business, starting with the most important business outcomes and working down the list until you reach your limits.
Our experience is that by analyzing the level of legacy spending, misalignment between departments, local optimizations, and gross inefficiencies you will find significant savings. In fact, this exercise often results in higher organizational performance at a reduced spend.
March 23rd, 2009 at 4:53 pm
[...] have written about this focused approach to improving project management performance here and here. Invest when it improves the organizations ability to drive value. The goal is not to get better [...]
July 18th, 2009 at 12:27 am
Very interesting article, but I can absolutely see why companies tend to cut across the board – because it is fair, and because it is quick. Another balance to be struck is how to cut back between those parts of the business which make money now, and those parts which are essential for the future health and success of the business. This is a very difficult challenge.