Taking costs out of a business can be deceptively easy to do — at least initially. Cutting low-hanging fruit such as providing coffee in break rooms, consulting services, laying off temporary employees or removing a layer of management can result in considerable savings. However, these savings are often not sustainable. Slowly but surely, decisions will be made by front line employees and managers alike that add costs back into the business. Within short order, many companies find themselves back in the exact same place they were before the costs were cut; only now employee morale has suffered and there is a general resistance or apathy to cost cutting throughout the organization.
Implementing sustainable cost reductions that “stick” over time requires a different approach. Instead of pursuing cost reductions to satisfy a short term goal, consider adopting a longer term approach that focuses on identifying value within business processes.
Depending on the size and complexity of your company, there may be thousands of complex processes in place to deliver the end product or service to customers. Unfortunately, complex processes often include waste, abuse and fraud. Consider the following approach to improving your internal processes:
- Document the processes. Before changes can be implemented, the existing processes must be fully understood. Many companies view this step as redundant as the current processes will ultimately be replaced. However, the existing elements of a process must be understood before they can be changed. Changing a process that is not understood will likely result in mistakes being made, an increase in costs, as well as a decrease in customer satisfaction.
- Focus on adding value. While reviewing and documenting an existing process, now is the time to identify elements that are value-added. A value-added element of the process includes an activity that the client is willing to pay for or is crucial to preparing the product or service for the marketplace. Conversely, non-value-added elements include steps that have appeared in the process over time, are in place to account for technology deficiencies, or steps that were just badly designed and implemented in the first place. Once the entire process has been divided into value-added and non-value-added elements, the work to design the future state can begin.
- Envision the future. Having identified the value-added steps in the current state will allow your company to build the future state around those elements. Eliminating waste entirely from a process is exceptionally difficult to do. However, focusing on the “must haves” or value-added steps will bring waste to light. Once value is identified, waste in a process can be more readily minimized. In addition, once waste is removed, it will potentially be harder to add back into the process. For example, the process for granting pricing exceptions for large customer contracts will likely include a review by representatives from sales, operations, manufacturing, legal and finance. Creating a streamlined contract pricing exception process means that only the departments that add value are included in the process while the non-value-added steps, such as departments that merely “rubber stamp” the exception, are removed.
- Measuring the financial impact. Before a revised process is implemented, take the time to document the desired financial impact of the new process. For example, the financial benefits could include a reduction in staff needed to perform the process, a reduction in office supplies such as paper or an increase in revenue generated attributable to the process. A dedicated process improvement scorecard can help justify the time and effort expended to revise the process and also provide sufficient information to monitor the process over time to ensure that costs and inefficiency do not creep back in.
- People respond to incentives. Launching sporadic cost reduction exercises results in big costs savings that are often unsustainable. Once the financial goals are achieved, employees and managers tend to resort to their previous behaviors and costs slowly escalate. Engaging employees in the process can help break this vicious cycle. Instead of periodically launching cost cutting efforts, your company should consider adopting a continuous improvement mindset that focuses on baking value into every process, not just removing costs. When employees are able to demonstrate that they increased the percentage of value-added tasks in a process, they should be recognized and rewarded. For example, a front line employee with a golf club manufacturer suggested his department perform the final cleaning of the finished club instead of passing it to a separate department to be cleaned. Removing one step in the process without compromising the end product helped reduce costs and resulted in the finished product being shipped to customers one day after it had been finished versus two days after, under the old process.
When a senior executive launches a one-time cost cutting exercise, the results can be fleeting. Employees “hunker down” and wait for the initiative to falter or fade from the corporate consciousness. When your company and its employees embrace the concept of adding and maintaining value within a process over time, the results may not only be sustainable, they may ultimately provide your company with a competitive advantage.
MKS&H’s professionals are prepared to work with you to meet your business challenges in this area and achieve the best possible outcomes. For more information, please talk with your MKS&H representative or contact us at 410.296.6200.
McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by advising them regarding their financial, technology and human capital management needs.