Cost Reduction Alone Is Not Enough To Optimize Operational Efficiency

Efficiency is fundamental to business success, and there are many ways to think about and measure it. From the time-and-motion studies of old to the Six Sigma process improvement of today, the industrial view of efficiency has focused on the intersection between physical output and process speed.

Today’s technologies have given rise to business models that virtualize the creation of value. In such a setting, new benchmarks and metrics must be used to understand efficiency. Old ways of doing things are increasingly being re-evaluated, and the prevailing view of operational efficiency is part of that.

Operational efficiency is now bound up with a cost per output – in other words, time is money.

When modern enterprises measure operational efficiency, they look at the ratio between a business output and the cost of key inputs. Eliminating waste can be much more complex than it first seems, however, and may require a more robust view of the underlying drivers.

According to McKinsey, nearly 80% of all companies recently cut costs as part of their response to global economic upheaval. Among executives surveyed, however, barely more than half believe that their cost-cutting measures have had a direct impact in helping their companies endure uncertain times.

The reason why? To contribute to operational efficiency, cost reduction must be strategic.

As An Operational Efficiency Tactic, Cost-Cutting All Too Easily Goes Astray

There are effective and ineffective ways to do anything in business, and this applies equally to cutting costs.

Look back on the broad trends in cost reduction – and jargon such as “right-sizing” – and it is easy to see this is the case. To cut compensation and benefits costs in the late 1990s, many technology businesses rushed to integrate off-shoring into their personnel strategy.

The historical record tells the tale: CEOs found themselves facing mixed results. Many companies had to make a significant commitment to rebuild their traditional in-house team and absorb the avoidable costs associated with this unwise experiment. By late 2006, a corresponding interest in insourcing was in the ascendant.

On the whole, millions upon millions of dollars were wasted implementing and reversing a cost-cutting strategy.

With the benefit of hindsight, it is easy to say modern executives would not make such a mistake. They would perform their due diligence, ask probing questions of offshore vendors, and demand accountability. But there is one problem with this optimistic view: For many leaders, the emphasis on cutting costs remains unchanged.

In fact, PwC research suggests that less than a third of today’s cost-cutting programs achieve their goals.

Of those that do deliver results, less than a fifth are able to sustain said results and reap consistent benefits over a three-year period. Businesses cutting costs the old-fashioned way effectively set themselves up for “yo-yo dieting.”

Learning from the past is critical. So, what else can decision-makers find in the operational efficiency toolkit?

Do Not Let Hunches Dictate Your Approach To Operational Efficiency

A company’s balance sheet can tell leaders a great deal about what could be cut and where. But, without the proper analysis and context, it can also be misleading. Just as a surgeon would not make an incision based on a patient’s reported symptoms without first reviewing an X-ray, businesses must dig deeper into their data.

Adopt these approaches to raise your operational efficiency in a more effective and sustainable way:

1. Clarify Your Strategic Priorities Before You Cut

In the old days, many businesses launched cost reduction by defining an overall savings target, translating it into personnel costs, then driving across-the-board staffing cuts for all departments and divisions. While this may capture short-term savings, it can also lead to self-inflicted loss of key talent and institutional knowledge.

An enterprise is like a ship. No captain would raise a vessel’s operational efficiency by hacking down the mast, even though it rises the highest. A structured strategic planning process will help you clarify precisely what human and technical resources are central to your goals so you can make deeper cuts in non-priority areas.

2. Dig Deeper Into Root Causes Of Reported Costs

The apparent cause of certain costs is not always the true cause. Leaders are well-served to think like engineers and apply root cause analysis when it is time to address apparent inefficiencies. It can be unhelpful to resort to cutting headcount when restructuring the business could align you with market trends.

Imagine that a function-by-function analysis uncovers the fact that your IT department is duplicating a number of HR tasks because HR is not seen as credible in technical hiring. The solution is to eliminate the duplication of effort, but an initial investment might be necessary to achieve the greatest benefit.

In this situation, you might:

  • Synthesize the wisdom of IT and HR by facilitating more efficient cross-functional collaboration
  • Uplevel HR’s ability to hire for technical roles by sponsoring additional certification and training

Following this approach, time-to-hire in IT would likely go down over time, creating significant long-term ROI.

3. Re-Engineer Workflows To Maximize Efficiency And Clarify Expectations

Unwanted costs can arise from your personnel “working around” their existing circumstances to deliver on the expectations of their role. For example, sales teams that do not have access to a centralized Customer Relationship Management suite are more likely to build up an ad-hoc solution using a variety of software.

This may seem to contribute to operational efficiency in the short run. Some of the software may even be free. But your business processes will lack transparency and your results may differ very significantly from one sales representative to the next. In this scenario, an investment in automation could normalize workflows.

Job roles should also be reviewed and updated on a regular basis as needs change. Accurate and complete job roles combine with clear goals to keep employees informed. In particular, pivoting from task-based to results-based job descriptions will facilitate talent development and encourage employee engagement.

4. Refine Processes And Drive Continuous Improvement

Just as machines can be redesigned to have fewer points of fault, processes can be streamlined to make human error less likely. But while machines need to be retooled completely, and each change reverberates through the whole supply chain, the power of human adaptability means your workforce can adapt to any situation.

This is another area where initial attention and effort can pay compounding dividends. Developing heuristics such as scoring sheets, audit processes, and KPIs may take time, but they create the resources you need to create institutional “muscle memory” and measure progress within the various aspects of your business.

An informed and realistic approach to cutting costs can certainly improve organizational efficiency. However, many businesses would be best served by pursuing opportunities for organizational development and strategic alignment so they can optimize the results and reduce the unintended consequences along that path.

Equal Parts helps you raise organizational efficiency by instituting a results-oriented company culture that fosters your strengths and enables you to leverage new opportunities to the fullest. To learn more, contact us.