A $6 billion operation, opted to ignore a 20% annual reduction in maintenance costs (about $100 million) and a 16% annual increase in revenues (about $900 million) in order to avoid spending $20m over 3 years. I don’t think the investors would be particularly happy if they knew that, but they didn’t. In fact, their board didn’t even hear about that opportunity.
The equivalent investment of capital to generate the revenue would be about $1 billion spread over roughly 10 years, and it wouldn’t produce those cost savings.
That company consciously decided not to spend the $20 million over 3 years. They avoided increasing costs in the short term. and retained $20 million in profits over those years. But they were foregoing cash savings of some $300 million, and a revenue increase ($2.7 billion) in that same three year period. Even though the first year savings far outweighed the 3 years costs, they still wouldn’t go for it. Of course there was risk associated with making the changes, but it was all well proven changes aided by experienced consultants – that risk was low.
I am no financial wizard, but even I can see that something is drastically wrong with decision making there. So what were they thinking?
In fact, they probably weren’t thinking much, despite already spending nearly $1 million to identify the business case. Their fears of taking risks on something new, far outweighed their comfort level with doing the same thing over and over without changes. Rather than seek $20 million for a low risk improvement, they chose to stop the initiative before even asking for the money. The executive level would probably have made a different decision, but this one got stalled before it even reached that level. As with many change initiatives, the biggest resistance comes from middle and senior level managers.
Managers keep the boat steady. They can’t approve the spending, but they can avoid it. They are naturally risk avoidant, and that is actually part of their jobs. They are not the leaders you need who can chart new courses and tell a risk from an opportunity.
Accountants all know that every dollar saved goes straight to the bottom line – so cost cutting can be profitable. Making improvements that will save money and/or increase revenues will also add to the bottom line, but increase costs in the short term. Accountants are not naturally risk takers and they rarely understand operational risks. It’s just not in their background. With a focus on the short term, and on minimizing risks, they will avoid spending, even at the expense of substantial long term gains. I’m not just making this up either; here are a couple of articles about ill-informed cost cutting.
Forbes: The Good, The Bad, And The Ugly Of Cost Cutting
LInkedIn: Short Term Gain: Long Term Pain
Slowing or stopping improvement efforts sends the wrong message to your employees and your customers. They lose confidence in your ability to meet their needs. They can, and often do, walk away. Can you afford to lose your good employees? Can you afford to see your customers go elsewhere? Of course many operational managers don’t worry about those problems. Finding employees is an HR function, and finding new customers is with sales.
Very recently one consulting colleague was let go from an improvement project that was only a few months old and beginning to show some very positive results. A senior level accounting manager had changed. The company was struggling to compete and costs were important. He wanted to make an impression so focus shifted from improvement to short term savings. The other accountants reporting to him quickly identified all the non-essential / discretionary spending. My colleague’s project was one such spend.
Employees knew the company was struggling, and they were not impressed with what they saw as a dramatic and ill informed shift in focus. They interpreted it as a big step backwards, lost interest in sustaining the improvements already made, and performance gains were quickly lost. Customers were beginning to experience delivery delays and some opted for other suppliers.
Some of the better employees realized that performance was now going the wrong way, that the company was losing customers, and resigned to go elsewhere before the ship sinks. In the tight skilled labor market, they quickly found new employers that were focusing on improvements in these slower times and picking up on those customers who were changing suppliers. They chose new employers that were demonstrating they cared about the long term.
One of the best times to make improvements is when operations are running a bit slow. Although markets and revenues are down, there’s a good opportunity to right some operational wrongs. Markets do eventually rebound and slow times can be leveraged so that business bounces back even stronger when those markets ultimately do improve.
