A major consultancy, Bains, gets down to basics and considers how to improve productivity at organisation, not national or international level, for that’s where most productivity improvement occurs
Simon Henderson, Marco D’Avino, Eric Thompson and Danielle Stekelenburg write that ‘sustained performance improvement requires more than just blunt cost cutting’ – in particular:
- A volatile economic environment and threats of a recession have prompted many companies to cut costs aggressively
- Leadership teams are scrambling to adapt to high inflation, supply chain disruptions, changing customer needs, and a higher cost of capital
- All face uncertain economic growth
- Continual cost and productivity improvements can address those challenges — and they remain fundamental to any firm’s success
- A low-cost position wins in nearly every industry, as it allows a company to out-earn and out-invest its peers for growth.
Apparently, Bain & Company analysis shows that top performers in total shareholder return focus on productivity, not just revenue growth.
Extracts from their article, full of good practical advice, follow
Cost productivity determines winners and losers:
- All too often, urgent cost-cutting programmes are too blunt, limiting a company’s chance for recovery and future growth
- Clumsy cost reductions treat all functions and activities as equal, even if some activities are more critical to the firm’s strategy
- As a result, these programmes inadvertently cut organisational muscle, not just fat
- Companies that slash customer service, for example, risk increasing customer churn
- Leadership teams overlook the chance for productivity gains by getting more out of existing equipment or processes
- Whether prompted by distress or the desire for future growth, companies need more than a blunt cost programme
- An accelerated transformation requires careful planning and a cross-functional approach to balance short and long-term objectives
- The benefits are cost and cash savings, topline growth, and sustained value
- And, above all, top-performing companies make sure managers have the skills to adapt to ongoing change
Efficiency v Effectiveness:
- Most companies seeking to improve their performance apply more rigour to quantifying efficiency than to increasing effectiveness
- Anyone can cut 10% from a department’s budget, but which activities are critical to the business and which add little or no value?
- The most successful transformations focus on productivity improvement and growth, as well as cost reduction.
- That means identifying the costs that contribute to the firm’s competitive advantage so those leading the change effort can prune in the right areas and reinvest for revenue growth in others
Now v Future:
- A detailed assessment of the company’s current state is useful, but it’s far from sufficient
- It tends to promote incremental adjustments, one cautious step at a time, and can overlook bold changes that are more effective
- Successful leadership teams imagine the future state of the market and the company’s desired position in that market, anticipating customer needs and growth three to five years from now
- That approach forces management to consider all the activities and conditions that must change for the company to thrive in the future
- The most agile companies focus on the vital few uncertainties that matter, lay out the possible scenarios that could develop, and identify the critical trigger points or signposts that indicate swings in direction
Process redesign:
- Complexity is at the core of high costs and ineffective decision making
- To permanently reduce costs, managers often need to change what and how work gets done viz:
- Simplify and standardise processes – eliminate unnecessary or ‘nice to have’ services or activities
- Automate and/ or digitise activities – embed new technnologies such as AI in processes
- Streamline processes – reduce service levels – reduce frequency or number of deloiverables – centralise or consolidate processes or activities – increase off-shoring – rationalise procurement, including outsourced labour – increase spans and decrease layers of control – create clear roles and responsibilities
- Instal visible (productivity) measures for all
- Often the greatest opportunities are found in the seams between functions or departments (the work handover points)
- Business units tend to optimise their own operations without considering the impact on other parts of the organisation
- One department’s effort to save costs may trigger higher costs in another, undermining overall efficiency
- The most efficient companies find large sources of potential value by scanning the seams for duplicated work or inefficiencies and taking an end-to-end view of a process or product