New Approaches to Cost Savings
June 2, 2012
Small but Scalable
Why Organizations need to Re-Conceptualize their Approach to Cost Savings
In recent years, both public and private organizations have been under immense pressure to reduce capital spending. Scrutiny from shareholders, employees and customers has forced many organizations to look inward for ways of reducing costs. Emphasis has been placed on scaling back items considered to be extravagant and unnecessary by onlookers, such as corporate jets and conferences in exotic locations. While many organizations have been diligent in their efforts to identify and purge unnecessary costs, one could argue that the most costly expenses only appear to be the most significant. Large opportunities for savings are being left on the table by institutions who just don’t know where to look.
The concept of economies of scale is frequently addressed in management rhetoric. It most commonly refers to the cost advantages that an organization obtains through purchasing en mass, amalgamation, and increased output. The basic premise is that the greater the volume of output, the lower the unit cost. The concept is frequently applied to production, expansion or acquisition but less often thought about when managing the business on a day to day basis. More specifically, managers tend to focus on large savings opportunities but tend to forgo the pursuit of smaller, more scalable avenues of cutting costs. This is likely because these opportunities appear too small, numerous or perhaps too arduous to capitalize on.
Small, if scalable, does not always mean small; in fact, ‘small’ can have a significant impact to the bottom line if it possess certain characteristics. The age old saying of “don’t sweat the small stuff” can be misleading when so much can be gained by getting into the details.
A Case Study
During a recent engagement, I worked with a medium sized call centre in Ontario, Canada. The focus of the engagement was to enhance profitability and improve service levels. The client had a management team comprised of twelve key individuals, one of whom I worked closely with throughout the duration of the project. At the project’s onset, I asked him what measures the company had taken to cut costs. Proudly, he explained that the management team had decided to forgo the annual management retreat at a resort in Northern Ontario. “It’s too bad really, but think about the savings. We’re going to save almost $8000 dollars from that alone,” he exclaimed. While the management team’s efforts to cut costs were admirable, a few thousand dollars to a multi-million dollar operation seemed insignificant. On the contrary, having twelve of the company’s best minds working, uninterrupted, though tough management problems for three days was probably more valuable than the actual cost of the retreat. This made me realize that the client had a long way to come in learning about more efficient ways of scaling back the company’s capital expenditures. While congratulating my client on taking the hit, I felt that point in the conversation was an opportune moment for me to explain the value I would be bringing to the organization.
To illustrate my point, I asked my client to provide me with some general information about the company’s operations so I could perhaps draw some on-the-spot conclusions. The call centre, he explained, had an annual call volume of four million calls. I asked him what his major frustrations with the process were. He explained, “When I walk onto the floors, I just see so much paper handling. I don’t understand why so many papers have to be printed at a call centre.” As our discussion evolved, he explained that a fifth of all calls needed additional information, and for each piece of additional information, an agent had to complete a form noting what information was outstanding. After filling out the form, the agent would have to deliver it to an administrative assistant who would send them out to the client. “What are the main types of information that they have to send out for?” I asked. “Credit rating, payment history, that sort of thing.” Immediately my mind began to put together a solution that, even if not immediately viable, would help illustrate my point.
“Why not automate it,” I said, and began to explain a simple process change. “Create a web-based form with multiple choice options that could be e-mailed instead of delivered by the agent. This would certainly expedite the process.” The client looked skeptical. He responded, “Yes, but that probably would only save a few moments, and not even on every call. It would hardly even make a dent in our operations.
As I wrote out a quick calculation to illustrate my point, I reminded him of the importance of scalability.
|Annual Call Volume||4,000,000|
|% of calls impacted||20%|
|Minutes saved per call||0.08|
|$ cost per minute||$3|
|Annual $ savings (estimated)||$200,000|
As he looked at the estimated annual impact, he was shocked by the result. He was beginning to realize that, at a very micro level, saving a few seconds for even a fraction of all calls could amount to savings far greater than cancelling the management retreat or scaling back the company summer picnic. The point helped illustrate my argument that finding small but scalable changes can result in a significant cost reduction to the organization.
Opulence or Ignorance?
One might argue that the reason organizations have placed greater emphasis on slashing unnecessary business trips or selling off the corporate box seats is because such gestures portray fiscal responsibility. While it is important for organizations to purge unnecessary, and often extravagant costs to shareholders and customers, I might argue that it is management’s sheer inability to scrutinize their own processes that clouds their capability to identify more scalable, lucrative changes. Managers too often focus on managing the day to day operations and fighting fires, seldom leaving any time to devote to process improvement. Without the time or the training to identify opportunities for improvement, managers neglect the most significant opportunities for improvement within the organization.
A healthy operation is one that scrutinizes every action taken to produce an item, deal with a customer or provide a service. Managers should constantly challenge what is deemed to be necessary and encourage their staff to become creative in the way they see processes unfolding. Supervisors and front line staff should constantly be encouraged to ask themselves the following questions
- Why do we do this step?
- Are we documenting to excess?
- If I were a customer, would I be willing to pay for this?
- Could we do this step in a more efficient manner?
- What frustrates staff about this process? Can we fix that part of it?
Engaging staff in the process of improving their own workplace will increase employee engagement, improve morale and reduce the costs of doing business. Additionally, it is a far more sustainable and seamless approach to cost reduction in the long run.