Saving our way to prosperity… Is this an Oxymoron?

4 08 2010

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Have you noticed for the last few months that the phrase “Efficiency Savings” seems to crop up in whichever newspaper or magazine you read, or on any TV news show that you watch? Governments, Local Authorities, and Private Companies all seem focused on achieving savings, in some case up to 40% in certain areas. Unsurprisingly, reaction from customers and employees is a mixture of doubt and fear about what it means for them.

I guess this is understandable. The economic downturn has forced us all to reconsider what we do, and to make do with less… but sometimes the result isn’t quite what we expect.

In my wide experience as a consultant I have heard “Efficiency Savings” used many, many times, and the phrase is abused time and again. Greater efficiency means either achieving more output with the same resources, or the same output with less resources, and the latter is what is usually inferred when the phrase “Efficiency Savings” is used. But in most cases I have found that output also drops as well as input and this inevitably harms effectiveness. I call this phenomena “Saving our way to prosperity” and it constantly amazes me how many management teams believe it will work. But the reality is that this type of cost-cutting is unsustainable – short term cost saving without re-inventing the way things are done only stores up problems for the future. I’ll give you an example.

A client I worked with needed to make “efficiency savings” to satisfy shareholder demands for greater short-term profitability because they wanted to sell the business – and greater profit means higher shareholder value. So it made an assumption that if field service engineer calls were increased from 4 calls per day to 5 calls per day then this 25% improvement would allow them to make 20% reduction in headcount – simple logic – and after all it was only one extra service call per engineer per day…! So the board instructed the management team to make the savings and crack the whip harder to make sure that service engineers hit their new targets – they then sold the business for an increased price and were very happy. A great result for the exiting shareholders, but for the company the result was disaster – overworked engineers could’nt hit their new call targets without considerable overtime, and service parts stock had not been increased to reflect the additional calls so they found they could’nt fix equipment even when they got to customers sites, so re-calls needed to be added; service-call lead-time increased from 1-2 days to over 2 weeks; when challenged by customers about the delays service engineers blamed management for the issues; dissatisfied customers quickly raised complaints; customer service staff became inundated with complaints and repeat calls from customers and the firm lost key service contracts; and the predicted cost savings never materialised – overtime pay increased dramatically, cash collection took longer, whilst turnover dropped by 10% and staff turnover in the department increased to 200% per annum leading to big unexpected and unbudgeted additional recruitment and training costs. The new business owners soon found they had to re-invent the way things were done, and it took 18 months of hard work to turn around the situation and get employees and customers back on board again.

So when you look at making efficiency savings make sure that you plan for success by engaging employees and customers in co-creating the new processes that will deliver savings whilst simultaneously increasing customer satisfaction; be authentic in staying true to your core purpose; and be creative in using Design Thinking to re-invent how you do things.  The result CAN be lower costs combined with long-term sustainable growth and increased profitability – the true way to future prosperity….

I would love to hear your own examples of companies that got this either right or wrong. Leave a comment below.

If you would like to discuss how I can help you make your efficiency savings sustainable then please get in touch.

James Rock – MD and Chief Business Designer

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