Cost-cutting, when focused on the incorrect items, may lead to cost-cutting failure. Cost reduction through operating expense reductions involves not spending fewer dollars overall as an organization, but rather spending fewer dollars on low-value activities and more dollars on higher-value activities within an organization that will result in greater success.
This article outlines methods for lowering operating costs while maintaining a constant level of high-quality service; therefore, it defines methods for utilizing visibility, process enhancements and smart simplification to generate sustainable cost reductions as opposed to temporary savings opportunities.
1. Identify Non-Valued Activities
Determining the value of each activity to customer outcome generation is a vital component of this process. All other items should be compared to this standard.
Many common cost leakages that are present in most organizations include:
- Re-work due to unclear specifications
- Excessive approvals and handoffs
- Unused software license fees
- Overtime generated due to poorly planned schedules
The creation of a “Value Map” enables organizational leaders to identify non-valued activities that can be reduced or eliminated in order to concentrate resources on generating value.
2. Process Improvements Must Precede Elimination of Staff
Reducing staff may mask inefficient business processes. Regardless of whether staff was reduced, if the underlying process remains inefficient, the increased time and energy needed to complete the original task will simply be passed back to the employees in the form of delays and burnout.
Changes to processes that produce the largest effect:
- Establish common task checklists to standardize tasks
- Remove unnecessary steps in a process that do not add value to the product (i.e., they do not increase the risk, or do not increase the quality of the final product)
- Develop clear Service Standards and Ownership
Process improvements enable organizations to reduce costs without reducing capability.
3. Spend Less Money On Tools/Vendors
Most organizations spend too much money on multiple tools that accomplish similar functions and/or too much money on unused services offered by vendors. Cleaning up the number of vendors used by an organization can yield immediate benefits.
Successful actions include:
- Conduct an audit of licenses and remove inactive users
- Merge tools that provide the same functionality
- Negotiate new contracts based on actual usage
- Link vendors to measurable performance goals
Cost savings should be achieved based on actual usage and not on assumption.
4. Measure Performance During Cost-Saving Initiatives
Saving costs does not automatically equate to a decrease in performance. Thus, saving costs must be measured by performance metrics or the quality of the services delivered will decline.
Performance metrics that can be utilized to track the quality of service delivery during the cost-saving initiative include:
- On-Time Delivery Rate
- Error/Defect Rate
- Customer Complaint/Churn Rate
- Employee Workload Indicators
If the performance of an organization remains strong after costs are reduced, then the costs were truly “saved”.
Conclusion
Operational cost reductions can occur in one of two ways – either the organization cuts into the core components that are responsible for fulfilling its mission or the organization cuts into waste. The most effective method of achieving long term operational strength is to create a detailed picture of the value-added activities, repair broken processes, minimize unnecessary spending on vendors and tools, and measure the performance of the organization along the way.
Through implementing these four steps, organizations will be able to enhance the efficiency of their operations while maintaining the quality of the services that they provide. Organizations that make strategic cuts in an appropriate manner will be more productive and efficient than organizations that cut for the purpose of making quick short-term cost reductions. The primary difference between the two approaches to cutting costs is whether the organization is creating long-term operational strength or merely making a temporary cost-reduction.