Yet more reflections on why corporate cost benchmarking is often evil and destructive
Regular readers will know that I am not a fan of cost benchmarking. The reason is simple. I think it is almost always misused, sometimes producing disastrous results. The primary reason for the misuse is clear: the belief that lower costs are always better.
New examples all the time
Bad implementations are common. I have seen several over the last month or so. The sequence of events is often like this:
- Either an activist investor (such as a private equity firm) arrives on the scene or some of the top consulting firms in the world are paid to give benchmarking and other strategy advice.
- The resulting cost benchmarks are used exclusively to try to match the lowest costs by work area / function for competitors in the industry.
- There is no discussion that goes “Ah, we need to triple the amount the competitors spend in these two areas so we can crush them.” Only reductions are implemented.
- Sometimes the strategy advice means the business is spun off from a larger business. The larger business has sales people who also sell the smaller business’s products to large customers. Once spun off, the small business does not hire additional sales people to make up for the missing sales hours. After all, the benchmark comparison said they were not needed.
- Quite a number of sales people worry about their future in the spinoff and leave for other jobs. They are only partially replaced. After all, the lowest-cost competitor had… lower costs, so they must not have been needed.
- There are no longer enough sales people to show up for all deals available in the market.
- Sales dropped.
- The CEO, who drove the original benchmarking exercise, has to resign.
This story could be about any one of a number of companies.
Successful benchmarking is possible
Effective benchmarking is possible. It is difficult. The critical questions that need to be asked are simple. There are only two of them. Here are examples:
- Given our strategy is to crush the competition in these three areas, how much should we spend compared to those competitors so we can win?
- Since this whole set of other areas is far less important to us, how much can we save there so we can afford to spend more in the areas we need to win?
Strategy is about allocation of resources
Effective business strategy is always, always about effective allocation of resources so that you can win. You don’t have unlimited resources. They have to be concentrated in a few areas. You can get the cash you need to fund that investment by selectively targeting the benchmark cost levels for those areas in other highly-successful companies that use a similar sales model to yours. Bear in mind that benchmarking looks at the past costs. Your competitors could be deciding they are not spending enough in that area.
Don’t forget to use your own customer research
Finally, a great source of guidance for where you can cut without damaging customers is your own customer research. If your customers often suggest that you need to improve in particular areas, they should not be targeted for cuts. The ideal cost reduction areas are those that (1) are unimportant for your top three strategic initiatives and (2) things your customers don’t care about. There are lots of the latter. For example, your customers don’t usually care where your headquarters building is, or whether you outsource your company cafeteria or invoicing services.
We cover this topic and a lot more in Customer-Centric Cost Reduction, available from Amazon. Customer-centric business strategy is at the heart of Customer Experience Strategy – Design and Implementation, and also Net Promoter – Implement the System. We take the drawings and the learnings to humorous / absurd extremes in “So Happy Here” : The Absurdist But Essential Guide To Better Business. As always, your feedback is welcome below.