This is the 8th
article in the series “Avoiding the Death Spiral While Reducing
Operating Costs” covering approaches to reduce operating costs
while maintaining customer confidence and increasing customer
satisfaction. Topics in this series include:
- Cease activities that provide
- Implement efficient and
- Focus on existing product
quality instead of new features and functions
- Enabling customers to
- Perform elements of the work
with lower cost labor
- Segment the customer base and
provide “appropriate” levels of support for each
- Make informed, not random,
- Cease big, expensive projects
with long-term ROI
- Renegotiate vendor contracts
In this edition
we will cover: Make informed, not random, cuts
Make no mistake,
cost cutting (including downsizing) is no simple matter. When it
does come time to cut costs, you are encouraged to acknowledge the
fact that not all organizations in your company deliver equal
value to the customer. Ask yourself the question: "Who is paying
my salary, and the salaries of my employees?" There is only one
answer: the customer. In order to retain your existing customers,
and revenue stream, you will want to minimize or eliminate the
impact that cost cutting has on the customer base.
companies take what I call the "peanut butter" approach to cost
cutting, by asking each organization to cut X% from their budget.
That is, the cost cutting is spread equally across each functional
organization. Requiring each organization to cut the same
percentage of expenses from the budget is not getting at the root
cause of the issue. In fact, you will often find that "fat
remains" after taking such cost-cutting approaches. While costs
are reduced, the fact is that there will still be "pet projects"
or activities that continue to occur, consuming the valuable time
of your corporate resources, even when they may not be aligned
with the overall direction of the company.
The root cause of
the issue is that expenses are out of line with revenue. The cost
structure of the organization has grown over time to support new
customers that bring new revenue. The fact remains that you have
an existing customer base that is providing the base revenue that
you enjoy today. Taking anything away from the existing customers,
in the way of service, support, quality and responsiveness, will
give your customers a reason to defect.
To identify the
areas of your business that provide the most value to your
bottom-line, you are encouraged first to quantify the impact that
each organization and activity has on the customer, then to
determine the return-on-investment that each provides. An
effective way to approach this is from the customer’s perspective,
looking at your organization from the outside in. Which
organizations "touch" customers most frequently? Which
organizations do the front-line resources (Sales, Account
Management and Service) depend on most to meet customer
expectations? If cuts in these organizations are too deep or too
random, customer service will be most severely impacted.
Understanding your highest value activities allows you to know
which areas you want to remain very strong in, and which areas can
absorb the deepest cuts.
The final and
most challenging step is that of redesigning the organization
accordingly. To do this you are encouraged to pull your management
team together in an environment of "we are starting a new
business, from scratch." The major ground rule for this exercise
is that no one at the company has a guaranteed job. Throw all the
resources up in the air. In fact, some of these leaders may be
"impacted" as a result of this exercise.
With your highest
value activities identified, you can structure the organization
from the bottom up to manage the business in the most cost
effective way, while continuing to meet or exceed your customers'
expectations. The focus here is on identifying the required
resources and applying the best people to the truly valuable
activities that your firm performs. The positive aspects of this
exercise versus a "true" startup, are two-fold:
- You have an
existing customer-base that is asking you to serve them.
- You have a
pool of people that are ready to "get started NOW"…
cutting may be inevitable, intelligently approaching this will
help to ensure the long-term success of your enterprise.
newsletter editions will cover additional items on the topic of
“Avoiding the Death Spiral While Reducing Operating Costs”.
Previous articles in this series: