When You've Got to Cut Costs—Now

Getting to 10%: Incremental Ideas · Consolidate incidentals. · Take overdue personnel actions. · Reduce spending on department management. · Gain control of “ ... Youhave1freearticlesleftthismonth. Youarereadingyourlastfreearticleforthismonth. Subscribeforunlimitedaccess. Createanaccounttoread2more. Costing WhenYou’veGottoCutCosts—Now Apracticalguidetoreducingoverheadby10%,20%,or(wince)30%. by KevinCoyne, ShawnT.Coyne, and EdwardJ.Coyne,Sr. by KevinCoyne, ShawnT.Coyne, and EdwardJ.Coyne,Sr. FromtheMagazine(May2010) Tweet Post Share Save Print Tweet Post Share Save Print TheIdeainBrief You’vebeenorderedtoreduceyourdepartment’scostsby10%,20%,or30%.Howdoyoudoit? First,don’texpecttoreachyourtargetwithasinglebigidea.You’llneedacombinationof10ormoreactions.Second,matchthekindsofopportunitiesyouexamineandimplementtothedegreeofcostreductionrequired. Togetto10%,gowithincrementalideasthatdonotsignificantlydisruptyourorganization’sordepartment’sinteractionswithothers. Toreach20%,exploreredesignideasthatreorganizeactivities.Thisofteneliminatesthelowest-valueones,withmoderateimpactonotherdepartments. Tocut30%ormore,pursuecross-departmentandprogram-eliminationideas.Butrememberthattheyhavethegreatestpotentialtobeorganizationallydisruptive. Leerenespañol Leremportuguês You’vebeenagoodmanagerofalargedepartmentforsometimenow.You’verunatightship.Whenpossible,you’vecutcosts.Butnowanorderhascomedown(fromhighenoughabovethatyoudon’thavethelibertyofdebatingitswisdomorfeasibility)decreeingthatyoumustfindanadditional10%,20%,oreven30%inadministrativecostreductions,severanceaside.Youjustdon’tseehowitcanbedone. What’stheRightLevelofOverhead? Companiesundertakeadministrativecostreductionsforanumberofreasons—toprotectearnings,togainsynergiesfromanacquisition,tostaveoffbankruptcy.Nomatterwhatthereason,though,animportantquestionhangsovereverycost-cuttingeffort:“Arewecuttingenough—ortoomuch?”Expressedmorefundamentally:“What’stherightlevelofoverhead?” Thereisnouniversalanswer.Butthereisarightwaytoapproachthequestion.Overheadshouldbeincurredforonlythreepurposes—toenableyourdirectactivities,increasetheireffectiveness,orlaythegroundworkforgrowth.Andeachkindofoverheadshouldbeheldtoadifferentstandard. EnablesDirectActivities 1.Whenitcomestooverheadthatenablesyourdirectactivities—expensesassociatedwithbeingapubliccompany,basicpayrollfunctions,financialcontrol,andsoon—youshoulddeterminehowmuchcostyourproductmustbearasaresultofthoseactivities(twodollarsperpizza,or40%ofnetsales,or110%ofdirectproductcosts).Next,comparethiswiththeburdenthatyourleanestcompetitor’sproductbears.Ifyourproduct’sburdenisgreater,you’vemadeanimplicitdecisiontoreduceitscompetitiveness.Isthetrade-offintentional? IncreasesEffectiveness 2.Overheadthatincreasestheeffectivenessofyourdirectactivitiesshouldbeevaluatedagainstastrictcost/benefitstandard.Simplyaskwhetherthemeasurableimprovementineffectivenesspaysforitself.Youcanalsorankeachoverheaditemfrommosteffectivetoleastanddrawthecutoffatthepointyouconsideracceptable.Thissamestandardshouldbeappliedtomanyactivitiesnottraditionallyrecognizedasoverhead.LinesupervisorsandseniorexecutivesmaynotlikebeingclassifiedwithfinanceandHRstaffers,butforthispurpose,theyshouldbe. LaysGroundworkforGrowth 3.Finally,overheadthatconstitutesaninvestmentingrowthshouldbelookedatonanet-present-valuebasis—justasotherinvestmentsare.Iftheanticipatedprofitishighenoughtojustifythebetyou’replacingtoday,theoverheadgambleisworthwhile. Furthercomplicatingyourlifearethelimitationsonyourchoices.Becauseyoudon’treportdirectlytotheCEO,you’renotinapositiontoadvocatestrategychangesorpursuewholesaleshiftslikeoffshoring.Nordoyourinstructionsallowyoutopushforlargeinvestments—innewtechnology,forexample—thatwouldenableyoutoreplaceotherdepartments.No,youhavetodothisthehardway:oneitematatimeandinshortorder. Youarenotalone.Overthepast30years,wehaveworkedin,led,orprovidedconsultingassistancetonumerousorganizationsinthissituation—includingmanufacturingcompanies,financialinstitutions,professional-servicesfirms,high-techstart-ups,utilities,anduniversities.Ourexperienceshowsthatadministrativecost-reductionopportunitiesfollowsimilarpatternsvirtuallyeverywhere.Thelessonswe’vegleanedmaynotsolveyourentireproblem,buttheyshouldgiveyouasubstantialjumponit. Asyoubeginyourquestforadministrativecostsavings,keeptwokeypointsinmind: First,forgetaboutfindingasingleideathatwouldradicallychangethecoststructureofyourorganizationordepartment,therebysolvingyourprobleminonego.(Ifsuchanideaexisted,itwouldmostlikelyentailsomuchriskthattheorganizationwouldneverbewillingtoimplementit.)Instead,youshouldplantoreachyourgoalwithacombinationof10ormoreactions. Second,thedegreeoforganizationaldisruptioncausedbyyourreductionswillusuallybeproportionaltothedegreeofcuttingyoudo.Therefore,youshouldtailorthereductionsyoupursuetoyoursavingsgoal.Incrementalideaswithminimalimpactonotherdepartmentscanallowyoutotrimupto10%ofcosts.Redesignorreorganizationideasofteneliminatethelowest-valueactivities,withmoderateimpactonotherdepartments,andcanhelpcutexpensesbyupto20%.Cross-departmentandprogram-eliminationideasareusuallynecessarywhenyou’reaimingfor30%ormore,buttheyhavethegreatestpotentialtobeorganizationallydisruptive. Gettingto10%:IncrementalIdeas Mostdepartmentscancutupto10%ofcostswithoutchangingtheirinteractionswiththerestoftheorganization.Thefollowingkindsofreductionsaremostcommon: Gettingto10% IncrementalIdeas 1.Consolidateincidentals. 2.Takeoverduepersonnelactions. 3.Reducespendingondepartmentmanagement. 4.Gaincontrolof“miscellaneous”spending. 5.Holddownpayincreases. 6.Reproposerejectedcost-savingideas. Consolidateincidentals. Unlesscostcuttingisnewtothecompany,you’vealreadydoneawaywithmostdiscretionary,comfort,andnon-mission-criticalperksandactivities,suchasholidayparties,eventtickets,andtuitionreimbursement.Ifthat’sthecase,don’ttrytoeliminatemore—youprobablycan’t.Instead,seeifyoucanconsolidatewhat’sleft.Combineactivitiesliketrainingdaysandcelebrationsintosingleevents.Combineeventsacrossmultipledepartments.Cross-scheduletheuseofoutsideresources,suchasfacilitiesortrainers.You’llbesurprisedattheopportunities.Forexample,oneuniversitydeterminedthatParents’WeekendandHomecomingwerebothfartoovaluabletoeliminate—butfoundthatitcouldsavecloseto40%ofthecombinedcostbyholdingthetwoeventsonthesameweekend. Combineactivitiesliketrainingdaysandcelebrationsintosingleevents,andcross-scheduletheuseofoutsideresources. Takeoverduepersonnelactions. Alladministrativedepartments,efficientonesincluded,haveunresolvedpersonnelissues.That’strueevenforthosethathavebeenthroughpreviousroundsofcostreduction.Afteryouhaveexhaustedthecommonployofclaimingcostsavingsbyleavingvacantpositionsunfilled,youshouldrestructurethejobsofanyless-than-fully-busypeopleandconfronttheproblemofunderperformers. You’llfindtwotypesofless-than-fully-busypeople.Thefirstisusuallyeasytospot:Theseworkersspendthemosttimeinthehalls.Theyorganizetheofficebirthdayparties.PerhapstheirjobsweremadesimplerbythenewonlineHRorfinancesystemayearago,andnewdutieswereneverassigned.Thesecondtypeincludesemployeeswhodobothunpleasantbutvaluabletasksandpleasantbutlessvaluableones.Anyefficiencygainsintheformerpartoftheirjobtendtogetoffsetbyexcessivefocusonthelatter.Suchwasthecaseforbranchofficersatabankweworkedwithafewyearsago.Thecompanyhadspentmillionsofdollarsmakingthesalesprocessmoreefficient,yetsalesdidnotgrow.Wediscoveredthattheofficersdevotedtheirfreed-uptimetobetterservingexistingcustomersandreadinguponnewproducts—butnottophoningcustomersandselling(whichtheyenjoyedleast).Wetaughtthebanktoofferbranchmanagersachoiceeachtimeitimplementedalabor-savinginnovation:eithercombinejobsandreduceheadcountorraisethebranch’ssalesgoalsbyacommensurateamount. Afterdealingwithyourless-than-busyemployees,you’llneedtotakethepersonnelactionyouhavemostlikelybeenavoidingforawhile:terminatingtheunderperformers.Everydepartmentseemstohaveoneortwoofthem.Themanagerknowstheirworkhasn’tbeensatisfactorybutfeelsuncomfortableaboutfiringthem—usuallyforentirelyunderstandablereasons,suchaskindness(“Mary’spersonalsituationissodifficultrightnow”)orunpleasantness(“TherestofthedepartmentwillbeupsetifweletBillgo”).Admitit:Youalreadyknowwhothesepeopleare.Intwomoreyears,youmaynotbeabletoprotectthemanylonger.Theywillbetwoyearsolder,whichmaymakeitharderforthemtogetcomparablepositionselsewhere.Is“saving”themtodayreallydoingthemafavor? Somemanagersfailtoaddresstheseproblemsbecauseofperceivedproceduralbarriers(“HRsayswehavetodocumentFred’sunderperformanceandgothroughaprobationaryperiod—it’sjusttoomuchhassle”).Butyoucanfindwaysaroundthosebarriers.Weonceworkedwithacompanythathadgiven94%ofallmidlevelmanagersthehighestratingonitsscaleduringitsmostrecentevaluationperiod.Atfirst,theHRdepartmentsaidthatthegradeinflationmadeitimpossibletoaddressunderperformers,sothedivisionpresidenttookadifferenttackandre-examinedhisorganization’sstructure.Heredefinedallthemidlevelmanagers’jobs,eliminatingtheneedforabout25%ofthem.Becausethejobrequirementswerenew,pastHRratingsdidnotmatter.Hecreatedaprocesstoensurethatthepeoplebestqualifiedforthenewjobsgotthem;theotherswerereleased. Reducespendingondepartmentmanagement. Mostadministrativedepartments(particularlythosewithmorethan20employees)useasmuchas20%oftheirbudgetstosuperviseandcoordinatetheirownactivities.Determinewhichpartsofyourdepartmentareperformingessentiallythesametaskstheywereayearago.Thosepartsprobablydon’tneedthelevelofsupervisiontheyoncedid.Atonebank,wefoundthatoversupervisingthetellersactuallycosttheorganizationdoubly:Ithadtocompensatethemanagersandpayforthelosttimethattellersspentdiscussingwiththeirbossesmattersthatcouldhavebeenhandledindependently.Thesupervisors’trulyvaluableroles—encouragingemployeesanddealingwithexceptionstothenorm—couldbeperformedinlessthanaquarterofthetimepeoplespent“supervising.”Asaruleofthumb,youshouldbeabletoreducethenumberofhoursdevotedtosupervisionbyabout10%ineachyearthatthedepartment’sdutiesremainlargelyunchanged,aslongastherehasbeenlittleturnover.Buttogainvaluefromthisreduction,youmustincreasetheindividualcontributionsrequiredofthesupervisors. How(andWhen)toReviewManagement Organizationsanddepartmentstryingtocutadministrativecostsoftenleavemanagementuntouched—missingoutonbigpotentialsavings. Theytendtoconsidersupervisorsandthenumberofpeoplereportingtoeach—spansofcontrol—atthebeginningofthereviewprocess,whenit’seasytoconcludethatbigchangesareimpossible.That’sbecauseheadsofstafffunctionsareviewedasneedingsubject-matterexpertiseintheareastheyoversee.Thismakesfornarrowspansofcontrol,especiallywhensubordinatesaredoingdistinct,specializedtasks. It’smoreeffectivetowaituntilothersourcesofhead-countsavingsareagreeduponbeforeyouexaminemanagement.Onceyou’vecutabout20%ofthefrontlinework(andpersonnel),youwillhaveabetterideaofhowmuchexpertiseeachmanagerreallyneedsand,asaresult,whatthespansofcontrolshouldbe.Afterthat,thesavingspotentialissimplemath: Takeadepartmentwith125frontlineworkers,25first-levelsupervisors,andfivesecond-levelsupervisors.Theall-incostofeachsupervisoris50%higherthanthatoftheindividualsshesupervises,andtheaveragespanofcontrolisfive.Ifyoucutthefrontlinestaffby20%andleftmanagementalone,overallcostsavingswouldbejust14%.Butifyoureducedthesupervisoryranksbythesamepercentage,thuskeepingtheaveragespanofcontrolatfive,yoursavingswouldgoupbynearlyhalf,to20%. Clickhereforalargerimageofthegraphic. Gaincontrolof“miscellaneous”spending. Insomedepartments,it’ssupplies;inothers,it’stelecomorcomputers.Youcanalmostalwaysfind15%to20%ofspendingthathasn’tbeenmanagedclosely.Inoneparticularlyegregiousexample,eachdepartmentatacompanyweworkedwithwasallowedtospendupto$10,000ayearonstationeryandsupplieswithoutseekingdirectapprovalfromsuperiors—yetthemanufacturingdepartmentcouldn’tgetapprovalthroughthenormalcapitalprocesstopurchasethe$8,000overheadcraneitneeded.Soon,anewcraneappearedinthefactorywithitsnamepaintedontheside:Stationery&Supplies.Itsspiritualcousin—aridinglawnmowernamedTypewriter—wasfoundinthemaintenancedepartment. Holddownpayincreases. Thoughthisideaseemsobvious,itisusuallyoverlooked.That’sbecausenearlyeverymanager(inaccurately,inmanycases)believesthemembersofhisorherdepartmentareunderpaid.CheckwithHRtoseewhereyouremployeesstandrelativetothemarketplace.Iftheyarenotbelowmarket,considerholdingtheaveragepayincreaseinyourdepartmentto1%or2%lessthanlastyear’scompanyaverage. Reproposerejectedcost-savingideas. Finally,you’llwanttolookbackthroughthepastthreebudgetcyclestodiscoverwhereyourdepartmentproposedproductivity-enhancingsuggestionsthatrequiredsmallinvestments.Theymayhavebeenrejectedbecauseofconstraintsorotherpriorities(thisoftenhappens,forexample,wheninitiativesrequiresystemsprogrammingandIT’sresourcesaretiedupelsewhere).Nowisthetimetoreproposethoseideas. Gettingto20%:RedesignIdeas Itisrarelypossibletoachievecostreductionsof20%unlessyouremoveasignificantportionoftheworkcontentfromthedepartment.It’sneveragoodideatoattempttodothesameworkwith20%fewerpeople. Strivetoeliminateanyworkforwhichthecostexceedsthevalue—keepinginmindthatitsurelyhassomevalue. Youshouldstrivetoeliminateanyworkforwhichthecostexceedsthevalue(keepinginmindthatitsurelyhassomevalueandthatcuttingitwillcauseacertainamountofdiscomfort).Startbyidentifyingandaggregatingallopportunitiestoreducethedepartment’sworkload—evencutsthatwillsavejustonequarterofonefull-time-equivalent(FTE)position—andthenredistributeyourdepartment’sremainingactivitiesamongthesmallernumberofjobs.Thiswillallowyoutoseparatethedecisiontoeliminatetasksfromtheidentityoftheindividualswhoconductthem.Youcanthendeterminewhichpeoplearebestsuitedforthenewjobs. Gettingto20% RedesignIdeas 1.Talktoyourcounterparties. 2.Changetheprocess. 3.Moveawayfromthebeltand-suspendersmind-set. Toeliminateworkeffectively,rethinktheactivitiesofyourdepartmentinthreeways: Talktoyourcounterparties. Howistheworkloadofyourdepartmentshapedbyothergroupsintheorganization?Isyourroletoprovideinformationtothem,forexample,ortoprocessorstoreinformationgeneratedbythem?Dotheirdeadlinesandrequirementsexacerbateyourworkload? Ifso,costhasareasonablechanceofexceedingvalue(attheconsolidated-organizationlevel),becausethedepartmentrequiringtheworkdoesnotdirectlybearthecost.Youassumethatthecounterpartyvaluestheworkhighlyenoughtojustifyyourefforts,butthatmaynotbethecase.Therefore,youshoulddisaggregateyoureffortsasmuchaspossible—forinstance,bygeographyandproductline—andthenverifythateachpartofyoureffortisjustified.Thisapproachcanrevealseveralkindsofopportunities,suchas: Eliminatingliaisonsandcoordinators. Thesepositionswereestablishedontheassumptionthattwoormoregroupscannotunderstandeachother’sfunctionswellenoughtocommunicateefficiently.Multiplestudieshaveshownthatthisassumptionisoftenwrong.Werecentlyfoundawayforacompanytosavemorethan$600,000ayearjustbyeliminatingcoordinatorsbetweenHRandotherdepartmentsinthesamebuilding.Coordinatorswerevaluabletodepartmentswhoseoperationswerespreadaroundthecountrybutlesssotothosenearby. Reducingexcessiveservicelevels. Doyoupreparelongreportswithcomprehensivedatawhenonlyexceptionsmatterorwhenthetrueconsequencesofvariancesarequitesmall?Doyoupreparereportsthatcovershortperiodsoftimeoraredeliveredinrealtime,whenlongerperiodsorslowerreportingwouldmeettheneedjustaswell?Oneclient,wediscovered,wasstillemployingseveralfull-timeclerkstosiftthroughdailyreportsandmanuallyhighlight“important”varianceslongafterasystemsenhancementhadchangedthecompany’sunderstandingofwhichvarianceswerelargeenoughtomatter—negatingtheneedtoexamine95%ofthem.Whatwasworse,aseniorexecutive’sassistantrecognizedthatthereportswerenolongeruseful,soshehadstoppedgivingthemtoherboss.Andsinceshehadnoknowledgeoftheeffortrequiredtocreatethem,shehadnotnotifiedthereports’originators. Changetheprocess. Often,internaladministrativeprocessesbecomefrozen—despitethefactthat,overtime,theymayceasetobeefficientoreffective.Askingquestionsinfourareascanhelpyouunderstandwhetherthishasoccurredinyourdepartmentandwhetheryoucancutexpensesaccordingly: Reducedbusinessrequirements. Howhavethebusinessrequirementsevolvedsinceyoulastfundamentallyredesignedtheprocess?Perhapstheneedforcertaindatahasdiminishedordisappearedaltogether.Howwouldyoudesigntheprocessdifferentlytoday,tomeettoday’sneeds? Manualprocesses. Wheredoyouusepeopletoprocessformsorinformationrepetitively,ratherthandoitelectronically,withlittleornohumanintervention? Exceptionstothenorm. Dotheroutine90%ofitemscostmuchlesstohandlethantheexceptional10%?Whatwouldittaketodoawaywiththeexceptionalones?Atalargehealthinsurer,wefoundthata“clean”claimcost80%lesstoprocessthanonethatrequiredspecialhandling.Byredesigningitsclaimformsandeliminatingexceptionsthatdidnotmatter,theclientsavedmorethanhalfthecostofexceptions. Timing. Couldyousavemoneybyshiftingthetimeofday,week,ormonththatyouundertakecertaintasks?Forexample,howaboutdoingtheworkwhenactivityinyourdepartmentisotherwiseslow?Coulditbedonemoreefficientlyinbatches?Istherearealpenaltyattachedtobeingavailableonlineforfewerhoursoftheday?Couldtasksbecompletedmoreefficientlyiftheywerenottackledonafirst-in,first-outbasis? Moveawayfromthebelt-and-suspendersmind-set. Historically,managerswereevaluatedagainsttheno-surprisesstandard.The“good”onespreparedforanycontingency.However,byrewardingmanagersforprotectingagainstlow-probability,low-consequenceevents,thisstandardhaspredictablyproducedexcesscosts. Takealookatwhereyouspendresourcesontheoffchancethatcertaineventsmightarise.Havetheeventsactuallynotoccurredinthepastfiveyears?Iftheyweretooccur,wouldtheybeembarrassingbutnotverycostly?Ifyou’veansweredyestoeitherquestion,you’reprobablywastingthoseresources.Examplesofcautionoverkillincludekeepingdetailedrecordswhentheinformationyoumightlaterneedcouldbegatheredfromothersources;stockpilingdatajustincasesomeoneinthefutureshouldwanttoanalyzethesituationdifferently;andkeepingdataavailableonlineforlongperiods(ratherthaninbackupstorage).Werecentlydiscoveredanopportunitytoreduceacompany’sITcostsbymorethan$300,000inthefirstyear,andupto$500,000ayearbythefifthyear,simplybychangingitsdatastoragepoliciestobetterfititsneeds. Manystafffunctionsinvolvereviewingandreconcilinginformationsuppliedfromadecentralizedfieldoperation.Usually,thesepositionsharkbacktoatimewhenthereweremanyerrorsinthedataorwidevariancesfromexpectations.Evenaserrorsdecreaseandexpectationsaremoreroutinelymet,mostcompaniescontinuetodevoteresourcestochecking100%ofthedata100%ofthetime.Considereliminatingthereviewentirely,conductingitlessfrequently,orcheckingjustthoseunitswithahistoryofsupplyingbaddata.Onefast-foodclientrequireddailyreconciliationsofthecashbalancesofeveryoneofits600stores,eventhough99%ofthemhadnothadanerrorinmorethanayear.Thecompanydiscoveredthatonceaweekwasmorethansufficienttocatcherrorsbeforetheydidanyharm. Gettingto30%orMore:Cross-DepartmentandProgram-EliminationIdeas You’reunlikelytofindcostsavingsof30%ormoreofyourexistingbudgetbylookingsolelywithinyourdepartment.However,you’llbesurprisedatwhatyoucanaccomplishbyinvestigatinghowwelltheworkofyourdepartmentfitswiththatoftheothers.(Anorganizationcanbeinefficientintotalevenifeachgroupwithinitisefficient.)Soifyourgoalis30%ormore,youmustthinkmorebroadly. Gettingto30%orMore Cross-DepartmentandProgram-EliminationIdeas 1.Coordinateparallelactivities. 2.Shifttheburdentothemostefficientlocation. 3.Eliminateduplicatedanalysis. 4.Eliminatelow-valuemeetingsandforums. 5.Restructureorcutcross-departmentactivities. 6.Eliminateprograms. 7.Reducetheburdenyouplaceonothers. Coordinateparallelactivities. Manydepartmentsconductsimilaractivitiesorpurchasethesameitemsindependently,onasmallscale.Insuchcases,coordinationcanreapvaluablesavings.Forexample,departmentsoftenbuysupplieswithoutregardtowhatothersareordering.Thispreventstheorganizationfromusingitscombinedpurchasingpowertoreduceprices.Atonecompany,adepartmentorderedtheverysuppliesandequipmentthatothershadinexcess.Fruitfulareastoexamineincludepaper,photocopying,personalcomputers(particularlyifonlysomedepartmentsrequirethenewestmachines),andfurniture. Here’soneexampleofcoordinationthatpromisessurprisinglybigsavings:Manyorganizationsfailtoobtainsubstantialtraveldiscountsfromhotels,becausetheydon’trecognizethattheirvariousdepartmentsseparatelysendpersonneltothesamelocations.SuchdiscountscannotbeachievedthroughTravelocityorOrbitz,orthroughstandardnegotiationswiththehotelchain’snationaloffice(unlessyourcompanyishuge).Theyrequireperson-topersonnegotiationwiththeindividualhotels’managers,whowillusuallyagreetodiscountedratesifyouremployeescollectivelystaythere10or15nightsayear.Often,thediscountsavailabletoanyonedepartmentarenotworththenegotiationeffortrequired—butwhenmultipledepartmentscoordinatetheirefforts,thesavingscanbelargeandrelativelyeasytoobtain.Oneclientrecentlygotmorethan$300,000ayearindiscountsbyhavinganadministrativeassistantdevoteonemonthtonegotiatingwiththelocalmanagersofthehotelswhereemployeesroutinelystayed. Shifttheburdentothemostefficientlocation. Oneofthemostcommonlamentsheardduringbudgetseasonis“WecouldreducecostshereifDepartmentXwouldchangewhatit’sdoing—butithasbudgetconstraints,andsoitcan’t.”Theironyis,budgetseasonisthetimetobringupsuchcross-departmenttrade-offs,becausethat’swhenspendingcanbeshifted.Forexample,oneclienthad10people—spreadacrossthreedepartments—whosesolejobwastochecktheaccuracyofdatasentinbyfieldsalesoffices.Nosingledepartmentcouldpersuadetheheadoffieldsalestoaddresshisunderlings’laxattitudetowardtheirdata.Whenthefullcostwasrecognizedandchargedbacktohisdepartment,standardschanged. Itmayalsobetimetoconsideroutsourcingactivitiesorworkgroups.Thecaseforhandlingactivitiesin-houseusuallyrestsonthejudgmentthatthebusinesshasuniqueneeds.Thatmaybetrue.Butconsideringtheadvancementsinrecentyearsbyadministrativeserviceprovidersofallkinds,youmaywanttoquestionwhetheryourneedsarereallysospecializedthatyoushouldignorethepotentialbenefitsofoutsourcingpayroll,benefitsmanagement,recruiting,mediaplanning,andotherfunctions.Ourclients’experienceshowsthatoutsourcingcanreduceadministrativecostssignificantly—andmayimproveperformanceintheprocess. Recognize,though,thatyourorganizationwillrejectanyisolatedrecommendationaboutoutsourcing.Peoplewillobjecttotheburdenofcreatingacontract,voicefearsaboutconfidentiality,andsoon.Butwhenseveralopportunitiesarepresentedsimultaneously,organizationstendtobemorewillingtofacetheonetimediscomfortandtakeaction. Eliminateduplicatedanalysis. Whenonedepartmentbuysitemsfromanotherdepartmentusingtransferprices,thesame“sale”mayberecorded,analyzed,andreviewedbyasmanyasfiveseparatedepartments(thebuyer,theseller,thetransporter,qualityassurance,andfinance/accounting).Inmostcases,asingleneutraldepartmentcanbeassignedtheentireanalyticaltask. Here’sanotherexample:Manycompanieshavemultipledepartmentsanalyzethesameevent(suchasamajorproductintroductionorapromotionaleventforaconsumerproductscompany)frommultipleangles(marketing,sales,manufacturing),witheachdepartmentworkingindependently.Becauseeachonefeelsresponsibleforprovidingacomprehensiveanalysis,muchofthebase-levelworkisduplicated.Themosteffectiveandefficientcompaniesconductasingle,coordinatedeffortinwhichonedepartmentischargedwithanalyzingtheeventandincorporatinginputfromotherkeydepartments. Eliminatelow-valuemeetingsandforums. Weknowofonecompanywherethetopthreetofourlayersofmanagementarevirtuallyparalyzed20%ofthetime—thatis,onefulldayeachweek,onwhattheemployeesruefullyrefertoas“MeetingMonday.” Ifyoufeelsimilarlyparalyzed,considerorganizingacross-departmentauditofallregularlyscheduledmeetingstofigureoutwhichonescanberepurposed,consolidated,oreliminated.Atoneprofessional-servicesfirm,suchanauditsignificantlyreducedthetimethatitsbusiestandmostvaluableemployees(theaccountexecutives)spentinmeetings,thusincreasingtheirproductivehours(timedevotedtodirectingaccountteamsandpursuingnewclients)by20%. Restructureorcutcross-departmentactivities. Ifyouarehuntingforsavingsof30%ormore,youmayhavetochallengeeventhemostsacredofcows—andyoumaybepleasantlysurprisedattheoutcome.Oneprofessional-servicescompanythatprideditselfonhiringanddevelopingthebesttalentwasreluctanttochangeitsapproachtointerviewing,selecting,andmanagingtheperformanceofitspersonnel.Butthebillablehoursconsumedbysuchactivitiesweresimplytoonumeroustoignore.AnextensivereviewrevealedthatmostoftherelatedHRpaperworkaddedtothetimeburdenbutdidnotimproveresults.Further,inthehiringprocess,threeinterviewsbythebestinterviewersmoreaccuratelypredictedacandidate’seventualsuccesswiththefirmthanuptosixinterviewsbyless-skilledinterviewers.Thecompanyrestructuredtheseactivitiesinlightofwhatithadlearned,bothdecreasingthehoursspentonthemandincreasingemployeesatisfactionandperformance. Eliminateprograms. Ifyoucan’treachyoursavingstargetthroughtheactionsdescribedabove,youwillhavetotakethepainfulstepofrecommendingthatentiretasksorprogramsconductedbyyourdepartmentbecut.(Obviously,youshouldstartwiththeleastvaluableones.)Whilefinaldecisionswillrequiretheinputofotherdepartments,youcandrawupalistofpossibilities.Determinewhichprogramsinvolveanunusualamountofworktosupportaportionofthecompany(forinstance,acertainproductline,region,orcustomersegment)thatisunprofitableorlessprofitablethanthecompanyaverage. Reducetheburdenyouplaceonothers. Finally,youshouldseekoutopportunitiestotellotherdepartmentshowtheyareoverservingyou.You’llneedtochallengeyourassumptions.Justasothergroupsareunlikelytoknowwhentheyareloadingextraworkonyours,youareunlikelytoknowwhenyouaredoingthesametothem.Askthemwherethey’refeelingovertaxed,andtellthemwhereyouwouldbewillingtolivewithless.Afterall,iftheorganization’struegoalistoreduceoverallcostsbyasetdollaramountorpercentage,anylow-painreductioninonedepartmentpreemptsanequivalentlyvaluedbutpotentiallyhigher-painreductionthattheorganizationwouldotherwiseneedtoimpose—perhapsonyourdepartment.   Reducingadministrativecostsby10%,or20%,or30%isadauntingtask,buttakeheart.Ifyoustartnowandstickwithit,youwillfindenoughideas—andtherightones—toreachyourgoal. Bothexperienceandresearchindicatethatideagenerationimprovesthroughmultipleiterations.So,evenifyourrecommendationsarenotdueforamonthormore,youshouldidentifyideastodaythatcouldmeetthefullgoal.Setthemasidefortwoorthreedaysandrepeattheprocess.Youwillfindthattheideasimproveeachtimeyoudothis,becauseyouwillseenewpossibilitiesanddiscoverthelimitationsofyourearlierideas. CurbingCostsinUnstructuredDepartments Everycompanyhasunstructureddepartments—marketing,strategicplanning,financialanalysis,operationsmanagement—wheretheworkloadisnotafunctionofrepetitivelyprocessingcertaintransactionsorinformation.Thesedepartmentsconductanalysestodevelopinsightsthatcanleadtobetterdecisionmaking.Theyusuallyfinditdifficulttosystematicallyreducecosts,becausetheydon’thavestableroutinesdrivingtheiractivities. Aneffectivewaytoclearthathurdleistoadoptasimpleprinciple:Analysisisvaluableonlyifitcouldchangeadecision.Thatis,proceedonlyifthereisanexplicithypothesisaboutwhattheanalysiswillproveandanup-frontagreementaboutwhattochangeifthehypothesisprovescorrect. Makeyourselfmeetthefullgoalwitheachiteration.Thenaturaltendency,giventheunpleasantnessofthetask,willbetosay,“Idon’thaveenoughideastoday,butI’llclosethegapnexttime.”Asaresult,youwon’treachyourfinalgoaluntiljustbeforeyourdeadline—andmanyofyourideaswillnotbeverygood.Theonlythingworsethanbeingforcedtopersonallyimplementadministrativecostcutsisbeingforcedtoimplementonesyouknowyouwillregretinamonth. AversionofthisarticleappearedintheMay2010issueofHarvardBusinessReview. ReadmoreonCosting orrelatedtopics ManagerialaccountingandProcessmanagement KC SC ShawnT.Coyne([email protected])isaconsultantspecializingininnovation,marketing,andorganizationalleadership.HeandKevinCoynearetheauthorsofBrainsteering:ABetterApproachtoBreakthroughIdeas(HarperBusiness,forthcomingin2011). EC EdwardJ.Coyne,Sr.,isaformertop-10executiveofaFortune500company.Hecanbereachedated@thecoynepartnership.com. Tweet Post Share Save Print ReadmoreonCosting orrelatedtopics ManagerialaccountingandProcessmanagement PartnerCenter Diversity Latest Magazine Ascend Topics Podcasts Video Store TheBigIdea Data&Visuals CaseSelections HBRLearning