Becoming a Performance Excellence Organization: Cost Reduction vs. Cost Cutting – Part I

Becoming a Performance Excellence Organization:

Cost Reduction vs. Cost Cutting – Part I

You need to reduce your budget because your operating expenses outstrip your income.  What are you going to do to get your budget under control? 

“CUT COSTS!” you cry out. 

                       

• How much do you have to cut? 
• Where are you going to cut? 
• What will it do to your organization’s ability to meet its objectives? 

 

Let’s start off answering these questions by answering a more important one: what are you trying to do, gain cost reductions or cut costs?  They are not the same thing.

Rather than just cut spending willy-nilly, let’s look at the difference between cost cutting and cost reduction.  When you decide to cut costs, you go looking for places in your budget that you can cut cash outlay.  In most organizations the two biggest cash outlays are people and facilities.  Usually it is easier to get rid of people than it is to get rid of a building.  So you start looking for heads to cut. 

• How do you select those individuals to cut? 
• Do you select those with the highest costs (salary and benefits), the last hired; push some into retirement, etc.? 

 

Here are a few things to think about:

• Examine the impact to your organization that letting individuals who hold key corporate memory (knowledge) go.
• Determine if the workload will be reduced in proportion to the headcount reduction.
• Have a plan to deal with slumping morale for those who remain.

 

There are alternatives to just cutting costs; find waste and variance in the process and remove them, thus reducing your costs but still maintain your core business functions.  You may or may not still have to reduce headcount but if you do, it will be done in a more controlled way.  It will leave your organization intact and functioning.  In a rather common vulgar way, you are getting rid of dead wood.

 

You have identified a process in your organization that needs to be improved.  You need to determine the type of improvement process to use.  Your choices are between two categories variance reduction and waste reduction.  Both variance and waste are destructive to any process.  They rob you of limited resources, increase your costs of operation and annoy or even anger your clients; some to the point of leaving you. 

To identify waste look at each component/step of a process and determine which one of the following it falls into:

• Value Added
  • The customer need it
  • It transforms the product or service to something they need i.e. from initial call – delivery of product/service
  • It is done right first time, every time
  • Non-Value Added
    • Not essential to produce output
    • Does not add value to the output
    • Clients are not willing to pay for it
    • Non-Value Added but required – legally required, financial activities, etc.

 

When looking at a process or a problem, ask “Does it add value to the client?”

By definition, non-value added steps are waste.

 

Since most non-profits do not charge for their services or only charge a minimal fee, the definition of Value Added may look more like this for them.  An activity, service or goods that the organization provides from which a client perceives receiving a benefit.  

 

Here is an example of waste.  The process is laid out in such a way that individuals do a segregated step in the process and then pass their output along to the next step that does their work and so on down the line (akin to an assembly line).  If the steps are not properly balanced for the amount of labor and time required to efficiently complete each one you create a bottleneck that causes people downstream in the process to wait for work while people upstream are overloaded.  In other words while some people don’t have time to breathe others are shooting the breeze waiting for a breathless one to give them work.

 

The other thing to consider in an effort to improve the performance of the process is to identify variances in it.  Variance can best be described as an error or defect.  If the process should be done by inserting A into B, B into C, C into D, D into E but somewhere along the line someone does it by inserting A into B, B into D, D into E, E into C, then you have a variance.  This increases your costs by perhaps requiring rework, additional time and materials. 

 

Though both these examples are simplistic and the definitions provide only 75,000 foot view of waste and variance, I hope you can see that there are ways to look at cost savings without having to just cut costs. 

 

The next few postings will provide more detailed examples.