American business loves quick and
easy answers. In fact, the best way to
get people to pick up a book or read an article (and I admit, I’ve done it
myself) is to provide an easy-to-follow formula that solves a difficult business
problem. While this approach can help sell magazines,
it really doesn’t do much to help drive actual improvement. Organizations are too complex to assume there
is a quick answer to any of the significant problems they face. Although formulas do appear to provide easy
steps to follow, they do not provide the knowledge necessary to effectively address
the big issues.
Fortune Magazine recently published a
one-page article entitled 5 Ways to Stay Ahead of Rising Costs.
The article presents five easy
steps to address out-of-control costs in an organization, including a two or
three sentence description of how to apply the step. Although each step appears to make sense on
the surface, accepting and blindly following recommendations like this can
easily backfire and result in causing more harm than good.
The article’s focus is on imposing
accountability for spending in order to drive responsible management of
costs. Although it’s hard to argue with
the need for accountability, it is very easy to misapply this type of effort
and distract people from their main responsibilities – including serving customers.
Below are the five ideas presented in
the article, along with my thoughts about each.
- Share the Responsibility: This involves making
someone in the company accountable for every line in the financial
statements. By the time the numbers make
it to the financial statements, however, it is too late to do anything about
them. While I have no problem with
making people accountable for understanding and monitoring spending within
their areas of responsibility, it needs to be done real-time, and through a
process of comparing actual costs against expected costs. Also, it is unrealistic to think that one
person can be responsible for an item – like a line on a financial statement –
that is comprised of so many elements. This
type of approach often clouds the idea that cost is an element of a target
condition, which includes safety, quality, and delivery of product or service,
rather than an isolated objective.
- Reveal the Price: Making sure people know what
actions cost is important and can lead to improvements as long as the focus
does not become solely on reducing the price.
As presented above, the target condition of applying this practice needs
to be something like reducing cost while maintaining or improving quality. I agree with the article, however, that most
organizations really have poor cost information systems. In far too many companies, information on
costs is often inaccurate and provided far too late to drive any real
improvement.
- Monitor the Use of Items: Of all the ideas
presented in the article, this is the one that’s probably applied the most and
resulted in the least amount of improvement in organizations. Although it’s the easiest step to take,
shifting into a counting paperclip
mode of operation is one of the most frustrating and distracting actions
companies take when costs are out-of-control.
In my first job out of college, I asked for a set of folders to organize
the projects I was working on. A couple
days later, the office manager came to my office with an expandable folder that
was taped, written on, and worn, explaining that the company was focusing on
reducing the costs of office supplies.
After she left, I threw it in the garbage and bought my own
folders. Although that was many years
ago, I still remember how demotivating that was, and how it made me feel about my
decision to join the company.
- Spend Wisely to Win: I completely agree with focusing
spending on the efforts that are most likely to result in business for the
company. The problem with this
suggestion is the difficulty of applying it in real situations. This is a perfect example of an idea that
requires significant knowledge to effectively apply. A lot of thought, clarity, and planning is
needed before attempting to blindly implement this type of thinking within the
organization. It’s just not that simple
- Raise Your Prices: As with the idea of spending wisely, raising prices can be very dangerous if not done correctly. Determining what your products or services are worth lies with your customers – not you. If you can’t make money by selling at the price the market is willing to pay, you’ve got to find ways of lowering costs without lowering quality.
I’ve seen many organizations over the
years go through periods where costs became the focus, and each time people
would respond by lowering spending. More
often than not, though, while short-term costs dropped, longer-term problems increased
significantly because of the lack of knowledge and planning behind the approach.
Although controlling costs is
obviously important, companies are not in business to save costs. If your approach
to managing costs is not backed by knowledge, you can wind up saving your way
into oblivion.
Formulas for success – like the one
in the Fortune article – make running a business seem easy, and although the
elements of leadership are simple, they are anything but easy. You still need to be able to communicate the
purpose, develop and deploy an effective strategy, and continually adjust along
the way to be successful, and an overly simple formula will not make it any
easier to do.
