Cost

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Tips for communicating the purpose of cost reduction (7-minute read)

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I was talking to a former colleague yesterday. He described a recent meeting where he learned that major cost cutting still continues where we used to work. The discussion made me want to share what follows. I have seen cost cuts communicated well (which is rare) and poorly (which is the rule, rather than the exception). I hope the points below can help you to communicate the purpose and consequences of cost reductions more effectively. All but the smallest startup companies reduce costs, even those that have spectacular growth. Cost reductions are a necessary part of securing the cash you need to invest. Of course they are sometimes necessary for a company to survive too.

What I would like to accomplish here is to help you avoid major disconnects shown in the drawing at the top of the article. I believe the rational, emotional and verbal parts of your communication need to respect these guidelines to avoid project and company failure.

Most managers behave rationally. We believe that if we simply provide a clear and positive vision for the future and explain how cost reductions are on that path, everyone will understand. We set out the vision, and the practical steps required to get there. We then cover the positive and negative consequences individually. Seems rational. Unfortunately, the rational approach is not sufficient if human beings are involved. Our initial reactions to absolutely every new situation are intuitive, and based on emotion. It is a fundamental part of our human nature. It affects your employees and your customers too. What follows are some suggestions about why this happens and how to take it into account in your planning and execution.

Your customers believe they will lose out

As soon as your customers hear that you are going to cut costs and reduce people, they start to believe that they will be the losers. Your competitors will be quick to help this thought process along. It is absolutely critical that your formal external and internal communication covers the impact on customers, and not just as an afterthought. Customers need to be at the center of your message, assuming you are actually going to use the savings to invest in something for them. (If you are reducing cost just to survive, you must accept that some of your customers will jump ship.) News media will not help, as they will focus on the negative. There is some science around the way you need to communicate with your customers, and it is not at all intuitive.

If you only remember one thing

In the HP EMEA leadership team, all but one of the direct reports to the Managing Director were engineers. The one exception was our leader for Iberia (Spain and Portugal), Santiago Cortes, who graduated in mass media communications. The most important thing he taught the rest of us is “Communication is something that happens at the receiving end.” You must be able to put yourself inside the minds of the various types of people who will read what you write or listen to you. The difference between what you are trying to say and what they hear can be radical. At its most basic, avoid saying, or even thinking “I communicated it all to you. Didn’t you read my email?”

A lesson from Mark Hurd

Mark was and still is one of the world’s greatest experts in cost reduction. I was present when he once explained the principal difficulty he faced to the HP EMEA leadership team. (Mark is now CEO of Oracle.)

“When I started to talk about where we would get the money to invest in doubling the size of the sales force, I did my best to spend half my time talking about growth and the other half about cost. Whenever I would speak to a group of employees, I got into the habit of asking people around me what I had just spoken about. With the 50:50 time distribution, everyone told me I had only spoken about cost reduction. I found that I had to spend over 80% of the time on growth before the audiences would accept that I said anything at all about growth.”

A lesson for managers from a Nobel winner

In Thinking, Fast and Slow, Nobel-winner Daniel Kahneman covers loss aversion, part of his work on Prospect Theory. In short, humans care far more about what they could lose in any given situation than what they could gain. This is not at all what classical economic theory predicts. Classical economic theory is simply wrong; humans and Econs behave differently. Kahneman provides many examples of experiments. One of my favorites is about a potential new chemotherapy treatment for cancer. Half the oncologists were told “The first year survival rate is 90%” and close to 80% said they would prescribe the new medicine. The other half were told “The first year mortality rate is 10%.” In this group, only 50% of doctors were willing to use the treatment. The two proposals are identical, but one is phrased in terms of the potential loss.

If your company is obviously in financial difficulty, loss-aversion communication is relatively simple: “We need to save $85 million this year or we will not be in business next year.” If corporate results are fine, the message has to be more externally-focused, ideally on your competition. “Betacorp is out-investing us in sales, marketing and sales support. We need to find an additional $85 million to invest in sales or Betacorp will continue to steal our customers.” What this does is position the enemy as outside the company. The enemy always needs to be outside. If your leaders believe the enemy is inside the company, you will not survive.

Taking responsibility

Taking responsibility for your actions is the key to avoiding revenge, as Dan Ariely and other behavioral economists have discovered. Let’s use a parallel example to illustrate this point. When you ask sales people why they just won a big deal, they will almost always attribute the win to something in their control, such as the great relationship they have with the customer. When you ask them why they just lost a bid, they will attribute it primarily to something outside their direct control, such as price. When it comes to the ups and downs of corporate results, the same tendencies apply. CEOs attribute positive achievements to their creativity, great strategy and wonderful execution. When things go badly, they attribute it primarily to things outside their control, such as a financial crisis, or some change in the market that they say nobody could conceivably have anticipated.

Avoiding revenge

In his book The Upside of Irrationality, Ariely describes studies of litigation when doctors apologize to patients for errors they have made, rather than hiding from the truth. Where they apologize, they are far less likely to face malpractice suits. Where they simply say “I am sorry. I made a mistake. I understand how it happened and I have learned from it,” patients are more likely to forgive them, and give them another chance. In corporate life, employees can find all sorts of big and small ways of taking revenge for leadership errors. To avoid revenge, and to encourage general employee empathy for the situation in which the corporation finds itself, try apologizing. “On behalf of the leadership team, I want to apologize to all our employees, customers and partners for the unpleasant times we are now facing. My team and I made some poor strategic decisions, and let our competitors beat us in the market. We now need to find the money to invest in the following three growth initiatives, to recover our rightful place…” Try it. On top of being truthful, it would be so unusual that it would attract a lot of positive press.

What you have and what you don’t have

In my own words, cost reduction is about what you have, and growth is about what you don’t have, by definition. This means that loss aversion theory applies to cost reduction. Once you talk to the general population of your company about cost reduction, you are talking about potential loss and that will erase all memory of anything you may say about potential gains. In the Mark Hurd example, the customer-facing sales people felt safe, as they had been told their numbers would double. Everyone else felt paranoid, including the pre-sales and sales operations people. In short, nobody except the sales people heard the growth message at all. Most people felt they were walking around with a big target on their backs.

Problem: cost reduction comes before the investments

Communication is further compromised by the fact that you usually need to achieve cost reductions before you can make the additional investments they allow. This means that the only short-term communications and actions tend to be on cost. Again, people understand these discussions really well, because they are all about the people, buildings and supplier contracts they already have. The possible discussions about making growth happen are far more vague. The market and other factors can change too. In one HP case, cost savings were designed to allow an investment of over $100 million in automation of a labor-intensive business. It took so long to achieve the savings that other things had change and almost none of the automation investment was made as planned. Unfortunately, that in turn drove a need for further cost reductions, as competitors made the investments.

Accelerate communication to those who are going to lose out

To limit paralysis, it is critical to communicate as quickly as possible to groups who are going to lose out. Don’t spend much time with teams who can see they are going to gain. In the absence of communication, groups that might lose out will form their own mental images of a reality that is far worse than the worst situation you have in mind for them. Understand that everyone who has not explicitly been told they will gain will believe they lose out. Unfortunately, there are countries, mainly in Europe, where the communication processes are regulated and you will not be allowed to communicate the bad news quickly. You need to build this into your plan, and also to plan on having worse than average business results in those countries until communication is allowed.

Customers too

In the absence of clear positive messages from you, your customers will believe they are losers too. Your brand image will suffer. Local websites will skip any positive messages in your press release and lead with “Acme to cut 50 jobs in Smalltown. Community devastated.” Your CEO needs to speak to the leaders of your larger customers directly. Your website and general messaging needs to talk almost exclusively about where you are investing. Don’t forget to mention complexity reduction, especially if you are shutting down an entire business. The unfortunate source of the investment funding needs to be less than 10% of your content. Even at that level, it will still be the majority of what people at the receiving end remember. Ensure all of your sales people understand and can communicate the messages concisely. They will be at the front line when competitors spread fear, uncertainty and doubt to your customers.

Some behavioral economics tips for your communication

In Thinking, Fast and Slow, Daniel Kahneman provides some research-based tips for credible written communication. These are not at all intuitive:

  • Take the following two statements:
    • Mahatma Ghandi was born in 1865
    • Mahatma Ghandi was born in 1868

The one in bold text is far more likely to be believed. Both statements are in fact false as Ghandi was born in 1869.

  • If you use color, your message is more likely to be believed if you write in bright blue or red, rather than in medium shades of green, yellowor pale blue. (And I think you can tell that yellow is hard to see against a white background on a computer screen.)
  • Kahneman’s colleague Danny Oppenheimer showed something counter-intuitive in his study titled ‘Consequences of Erudite Vernacular Utilized Irrespective of Necessity: Problems with using long words needlessly’. Surprisingly, using complex vocabulary where simpler words could be used turns out to be perceived as a sign of poor intelligence and low credibility. This is, of course on top of the more general consideration that you should write at about an 8th grade level when addressing a multinational audience.
  • If you have to quote or reference someone else to make a point, make sure their name is easy to pronounce. References from people with difficult names are considered to be less credible. This is a tough message for many people.
  • Finally, and more intuitively, if you want your most important short points to be remembered, make them rhyme. People will remember “Woes unite foes” far more easily than “Woes unite enemies.”

Reward systems are quite different for working on cost compared to growth

Now to cover communication to people driving the cost-reduction work. I spent many years working hard on cost reduction. I felt that I was being paid quite well, and was regularly promoted. I must say that I lived a sheltered existence. For the first years of my career, I worked in manufacturing, distribution and logistics locations where cost mattered a lot. They were also locations where I did not come into regular contact with people who worked on growth. Once I moved to Geneva, I found myself surrounded by them. I quickly discovered that people who bring growth are paid far more, and receive higher bonuses than those who work on cost.

I remember an annual salary review discussion with one of my managers. I had a formal cost reduction goal for a European program I was managing. My team had over-achieved by about 20%. I was given a perfectly average salary increase and a small bonus. I was disappointed and asked why. My boss told me “You were just doing your job.” This is all connected to the ‘What you have and what you don’t have’ discussion we have already covered. I was just doing my job. Anyone who brought in a small amount of growth was a genius, and received maximum rewards. This also matched the formal corporate goals of DEC. Growth was listed as the top priority. In Europe, we were a $5 billion company and had a formal plan to get to $10 billion. Cost reduction did not make the priority list.

If you are going to work on cost reduction…

So, if you are going to spend a lot of your career on cost reduction, be sure it is actually in the formal top priorities of your company. If it is not, it is really not worth the pain. If it is not a formal priority, you will be causing pain all around you, without the necessary support from the top. I suppose timing is everything. All companies go through tough times at some point. If you can lead through dark times with support from the top, celebrate the resulting financial performance by working on something more positive for a while.

 

As is usually the case, this is a slightly-edited version of a chapter in one of our books; in this case Customer-Centric Cost Reduction. All of our books are available in paperback and Kindle formats from Amazon stores worldwide.

 

 

piles of money

Contra Revenue: Could it be your easiest way to improve profit margins? (5-minute read)

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On the general subject of ‘customer-centric cost reduction’ I would like to discuss an area that many medium to large companies do not examine at all, and the rest do not cover deeply enough. Contra revenue is not in your P&L or in your Balance Sheet. It therefore receives little attention in most companies. After all, if it is not in your P&L, Balance Sheet or cash flow statements, how can it possibly matter?

What is it?

Contra revenue is the difference between your list price and what you actually charge your customers. It is a cost, and most managers never think about it. Here are some examples:

  • Corporate discount agreements: standardized price reductions you give your largest customers. They are often subject to negotiation, and there are wide cultural differences in how they are positioned. Some countries, such as China, are ‘high list price, high discount’ countries, meaning corporate customers expect to see discount levels of 80% or more, so companies bump up their list prices to facilitate them.
  • Negotiated discounts: most corporate procurement people consider the corporate discount agreement to be a starting point for a further downwards negotiation.
  • Reseller rebates: these are the standard discounts you give to third parties who sell your products. There can be sub-types like ‘deal leader’, ‘deal supporter’ and ‘lead payment’, where a partner brings you business but plays no further part in it.
  • At retail, price reductions during sale periods are contra revenue.
  • Customer returns are also contra revenue, though they tend to attract more scrutiny than other categories.

Contrasting control mechanisms

Taking the retail example, a decision to repaint the walls of a store can take weeks, involve multiple bids from contractors, intense negotiations and have a budget of $20,000. Meanwhile, a department manager can spontaneously decide “We tried 30% off in our sale last summer. Let’s try 40% off this time”, and that difference can be worth far more to you than the paint decision. Yet it undergoes less scrutiny.

Change can be difficult

Once customers have become used to receiving a certain level of discount, it can be really difficult to change it. The least flexibility comes with volume discount structures, where you publish a table that says that purchases of above a particular amount attract a specific price reduction. Such formal structures are particularly problematic in two situations:

  1. When your company merges with another company of approximately similar size, customers will try and often succeed in negotiating the lower of the two discount structures for all of the combined business. Procurement managers love supplier mergers!
  2. When you decide to launch a new product line with lower gross margins, it can be challenging to communicate to both customers and sales people that the discounts they are used to are no longer available. You may even have corporate master discount agreements that mean your new product line will be structurally unprofitable when sold to your largest customers.

Managing contra downward

No matter what forms of contra revenue exist in your company, driving it downward will always be possible if you have never worked on the subject before. Here are some ways to go about it, without excessive pain:

  • Review negotiated discount levels with sales managers as part of your standard sales reviews. Simply inspecting them will have a reduction effect.
  • Compare the discounts given to similar types of customers by different sales teams and approval processes. You will quickly find that some managers give high discounts quite easily, compared to others who are in identical management situations.
  • While it is worth including downward management of average discount levels into sales managers’ goals, it is quite tricky to get right. You can’t punish those who already have the lowest discounts. They should probably be asked to maintain discount levels while others are asked to reduce.
  • There is often a subjective element in partner discounts. Did the partner simply refer the customer to you, which might be worth 5%, rather than assisting you with the sale, which might be worth 15%? Did they simply assist the sale (worth 15%) or actually lead the sale, which might be worth 30%? Ensure the decision criteria do not contain any element of subjectivity. If you have an automated sales system like Salesforce.com, you should be able to tell when you are paying partners and your own sales people for doing exactly the same work. Inspect it.
  • More generally in high-tech, customers try to get higher discounts on software licenses than for hardware, at least for on-premise software. This is because they perceive the incremental cost of a software license as zero. If your sales people sell both hardware and software, you may become a victim of the same mentality. Ensure sales people are trained to understand the R&D and other costs associated with developing and maintaining software. If you sell both hardware and software, and your software discounts are higher, you should consider it an attractive contra improvement opportunity.

Culture

Watch out for cultural differences in contra revenue. There is no universal standard discount rate, and your results will vary. There are countries where customers expect relatively high discounts during the negotiation process. Your own experience is your best guide. The most extreme expectations I have seen have been in China and some Middle-Eastern countries. You will probably need to make your list prices higher in these countries to allow the customer to feel they have had a successful negotiation. While the Dutch and Danish have aggressive negotiation styles, they tend to have realistic expectations of what is possible, and reasonable knowledge of the prices you offer locally and in adjacent countries.

Prices and brand perception

Taking contra revenue to the extreme, where exactly do your prices come from? If yours is mainly a product business, there is at least one way of checking whether your prices are based on sound logic, or whether a single individual has decided what is acceptable based on personal intuition. That way is to look at the last numbers in your list prices. $1,299, and $8,999 are almost certainly examples of prices that have been decided without any testing. Intuition can involve thinking like “Our main competitor has a similar product at $699, so we need to match that.” Well, why do you need to match that? It is not possible that the perception of your brand is exactly the same as that of your competition.

Differences in brand perception mean that you can sell exactly the same product at a different price. This is easy to prove. More than 95% of the bananas sold in the USA are a single cultivar, the Cavendish. Go to Aldi, Safeway, Walmart and Whole Foods, to find four different prices for Cavendish bananas. The reason we are willing to pay more at Safeway than at Aldi or Walmart is all about brand perception. Your corner store in Manhattan can charge still more for the convenience it offers. ‘Pink Lady’ apples are another example. Most people think they are a specific type of apple, but ‘Pink Lady’ is a trademark, and is simply used for some ‘Cripps Pink[1]’ cultivar apples. You can buy identical apples more cheaply, with different branding.

Testing

I don’t pretend to be a pricing expert. I do claim to be a testing expert. If you cannot find sound logical reasoning for your current prices, run small tests of higher prices in some markets. Yes, almost all prices are elastic in some way, meaning higher prices may reduce sales. However, every cent you add to your price is an additional cent of operating profit. If your corporate operating profit is 6%, increasing your average selling prices by 2% means your profits rise by a third at a constant sales volume. Will a 2% price rise cause your sales to drop by 2%? Why not test it, and a variety of other increases? Would moving that $829 price to $845 really cause a sales drop, or just a profit increase? Test it and find out.


[1] See this link for the explanation of Cripps Pink and Pink Lady: https://www.orangepippin.com/apples/pinklady

 

As is usually the case, this is a slightly-edited version of a chapter in one of our books; in this case Customer-Centric Cost Reduction. All of our books are available in paperback and Kindle formats from Amazon stores worldwide.

 

 

#63 – New NPS Benchmarks, don’t work for a cost-reduction company, Temkin Group posts

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New reference source of NPS benchmarks, don’t work for a cost reduction company (part 2). Welcome to the 63rd edition of my customer strategy newsletter. The five topics this week are:

  1. New reference source of NPS benchmarks
  2. More evidence that you should not work for a cost reduction company
  3. Latest blog posts
  4. Notable items from other sites – Both from Temkin Group this time
  5. Looking forward
New reference source of NPS benchmarks

Whether you use the Net Promoter Score or another system, one challenge is to know whether your score is good or bad. The best way to know is to compare your trends to those of your main competitors. (If you believe you don’t have any competitors, well… you have a different problem entirely.) But how can you make such comparisons? There are no comprehensive public databases of NPS benchmarks that have been collected in a consistent way. Yes, there is at least one site that will allow you to look at what companies publish as their own NPS number. But your number and their number will not have been collected in the same way.

The main source of NPS benchmarks up to now has been the Temkin group’s regular NPS benchmark report. This has changed. JD Edwards, ROI Rocket and Bain have teamed up and established ‘Bain Certified NPS Benchmarks’. In principle, and as originators of the Net Promoter System, only Fred Reichheld, Bain, and/or Satmetrix could possibly certify that an NPS benchmarking process is correct.

While the article does not say exactly how Bain certification works, it provides some clues. A minimum of 250 responses was achieved for each company covered. They interviewed between 3,000 and 100,000 consumers for each industry sector covered, far more than I have seen for any other study. They have collected data for “more than a dozen” industries. You will also see that their work with ROI Rocket on retailers proves the considerable spending differences that exist between Promoters and other respondents, as well as a variety of other factors.

OK, I think that is enough of an introduction. Reading the paper in detail will be a good use of your time. And by the way, the leading retailer, in terms of NPS, has a name that begins with the letter A. Read all about it here.

More evidence that you should not work for a cost reduction company

Some months back I wrote a non-customer-experience LinkedIn article suggesting that if you want to be happy, you should not work for any company whose main product/service is cost reduction. The reason I gave is that if you do so, you become the cost reduction. Take outsourcing companies as an example. Their business is offering companies cost reductions of about 20%. Examples include companies that propose to operate your IT infrastructure for 20% less than it currently costs you. These reductions can only come from three sources: capital costs – notably real estate costs, people costs, and paying suppliers less.

An article just appeared in 27/7 Wall St. that provides at least some proof for this. Entitled Worst companies to work for. it uses Glassdoor ratings as its source and excludes small companies. DXC is 12th worst. They have 150,000 employees and are the result of the merger of the former outsourcing division of HP with CSC. The main resulting business is IT outsourcing. Employees complain about absence of pay raises and bonuses, and ongoing layoffs. Alorica is 11th worst, has 176,000 employees and provides outsourced support desks for companies that want to reduce the cost of doing the work themselves. At number 8 (from worst), CompuCom has 11,000 employees and provides IT services.

There are other cost reduction and low-cost companies on the list. My message remains unchanged: If you work for one of these companies, you are a source of cost savings, unless you are at the level of the leadership team. Unless you are desperate, I suggest not working there.

 

Our latest blog posts

Here are the latest posts. Older posts are still available on the blog page.

image Improving response rates to survey requests sent by email

Way back in October last year I blogged about using direct marketing techniques to improve response rates to surveys. This post addresses five additional ideas that are specific to survey requests sent by email.
image How I got my two biggest promotions: True Stories

I was speaking to a business school student recently. She asked me about how I managed to get promoted during my career. That got me thinking… Luck and hard work…
image A legendary Mark Hurd speech to HP employees in Israel

Mark Hurd is CEO of Oracle and was CEO of HP before that. While at HP, he made many speeches about cost. His general philosophy was best illustrated by my favorite event; his speech to all employees in Israel. It was broadcast to the entire company, coming shortly after the company acquired EDS…

 

Notable customer experience items from other sites

Customer Experience Matters Blog: Introducing the Temkin Customer Success Index

Customer Success teams are common in the software industry and exist in some other industries too. For software, their work is to ensure customers actually use the software they have bought. The service is usually provided at no charge. Among other tasks, Customer Success people sit with users to observe them using the software and to determine whether they can achieve the results that were used to justify the purchase in the first place. When I worked at HP’s $4B software division we ran an A/B test where one business had a Customer Success team and another comparable business did not. The improvement in contract renewal rates made it easy to decide to expand Customer Success to all businesses. So… renewal rates were our main metric. Bruce Temkin’s team proposes a Customer Success Index based on a composite of five metrics in their latest blog. Read it here.

Customer Experience Matters Blog: Six Laws of Customer Experience (Infographic)

Two Temkin Group posts this week! (I have no connection with Bruce or his company.) The most-downloaded content on their website is a free eBook called The Six Laws of Customer Experience. It is supported by a simple infographic that I find to be both clear and useful. You can download it in various sizes here.

 

Looking forward

A relatively quiet time as summer starts. You may like to contact me if you would like me to talk to you or your teams, in person or remotely. A LinkedIn video conference or similar might be useful for one of your team meetings or training sessions.

Here are links to all of our books on Amazon.com. Kindle versions are available in all stores. Print versions are available from the major stores only, with the notable exception of Australia, where print versions are not available from amazon.com.au.

Customer Experience Strategy – Design & Implementation

Net Promoter – Implement the System

Customer-centric Cost Reduction

“So Happy Here”: The Absurdist but Essential Guide to Better Business (Color edition)

“So Happy Here”: The Absurdist but Essential Guide to Better Business (Black & White edition)

Please share this newsletter with your friends and colleagues and encourage them to sign up for it here. I have put links to past newsletters on the subscription page. Finally, please feel free to change or cancel your subscription using the link below.

You can also email me, Maurice FitzGerald, at mfg@customerstrategy.net.

To change your subscription, click here.

 

Where do I start?

Yet more reflections on why corporate cost benchmarking is often evil and destructive

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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:

  1. 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?
  2. 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.

Read more

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.

Best process is no process

Sometimes the best process is no process at all

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Continuous improvement is a common catchphrase. It is easy to believe that making every existing process more efficient should be the focus. But what about eliminating the processes altogether?

HP Lean Six Sigma training

My team was responsible for the formal regional Lean Six Sigma process improvement training at HP. Like many large companies, we designated the various training levels by using judo-like ‘belt’ colors. The annual Black Belt training class lasted two weeks and was always held close to Lyon, in France. Twenty to thirty ‘Green Belt’ process improvement experts took their skills to the following level. My job was to provide a motivational speech at the start of each session, emphasizing the importance of the work, and how it fit the corporation’s overall strategy. The part about ‘no process’ sometimes being the best solution went something like this:

“Let’s talk about a specific example of process improvement. I want to talk about a process you have all followed recently: the travel approval process you all used to get here. First, I would like to ask all those who needed four or more people to approve their travel to raise their hands.” About half the class would raise their hands at this point. “I have a question for all those who raised their hands: does HP policy require you to have four levels of approval to travel here?” The unanimous answer was always in the affirmative. “OK, now, how many people needed three levels of approval to travel?” About a quarter of the class would raise their hands. “So, four-level-approval people, did the three-approval people violate a company rule?” Following a short discussion, I would ask for the people who needed two approvals and one approval. There were always some of each.

The discussion usually got quite intense at this point, and it soon became even more interesting. The training host, Paul Maguire, were in my team, as well as the main trainer, John Holland. “Two people have not raised their hands yet. Paul and John, how many approvals did you need?” “None.” “That’s right people. There is no HP policy that requires approval for travel. Your management chains have invented processes that are not actually formal requirements. I trust my team. Now… let’s have a coffee break.” A chaotic and loud coffee break always followed.

Not just theory

When I joined the corporate software leadership team, I was happy to discover that there was no formal travel approval process for the 13,000-strong organization. Trust ruled, and the senior leaders were expected to live within their overall cost budgets. Individual cost line items were strong suggestions. Mike Salfity ran the Exstream software business within the HP Imaging and Printing Group. IPG had a detailed and difficult travel approval process, one I felt was mainly designed to discourage people from even asking. Exstream was transferred to the software division. The head of software asked me to hand-hold the transfer process. Mike phoned me to find out how our travel approval process worked. Here is how it went:

“Maurice, I have a big spreadsheet of travel requests here. What should I do with it? Send it to you?”

“No Mike. Just delete it. We trust you.”

“… … [Lengthy silence] … This is the happiest day of my professional career.”

OK, that example may be entertaining, but does not represent much of a cost-saving.

Eliminating inspection

I learned about process elimination quite early in my career. During the McKinsey Overhead Value Analysis of the Wrangler organization where I worked near Paris, I started to question the value of inspecting completed orders. There were about 20 order pickers in the warehouse. They picked up printed order forms, took garments from shelves and put them into cartons. An automated conveyor system took them to one of three inspectors who checked that the contents did indeed match the orders. I did some random sampling and found that errors still slipped through. After following some order pickers with a stopwatch and noticing a few mistakes being made, I organized a group discussion. I asked whether the pickers noticed the errors. They said they thought they might have made mistakes, but did not check because they knew everything would be checked for them later.

I decided to run a test. First, I put a proper random sampling process in place after the final inspection, just for one week. Then I spoke to the pickers again, saying I wanted to eliminate the final inspection, and trusted them to check their orders if they felt they might have made a mistake. The results were both clear and surprising after just one week. The random sampling process found about half the number of errors, compared to the prior process following 100% inspection. Trusting people, and ensuring they know you trust them, works.

For the sake of completeness, I will mention that I then wanted to better target the random inspection process. Whenever we received a new product line, I had each size weighed and recorded in the product database. The correct weight for each order was then printed on the picking notes. Every carton had to be weighed for shipping in any case. We moved to inspecting only the cartons where the actual and theoretical weights did not match. Overall, we reduced cost and improved delivery accuracy.

A side-note: customers did not care about delivery accuracy

I learned a lesson about this particular cost reduction when I did some customer research. It turned out that none of the store owners I surveyed cared about delivery accuracy in any case. I suppose we were good enough for it not to be a major issue. Their philosophy went like this, “If your delivery arrives on a Thursday, we will try to sell it over the weekend anyway, even if you sent us the wrong things. If we can’t sell it, we will send it back the following Monday.” I certainly won’t go as far as to say that we should just have put random things in the cartons, but this was an area where we could safely cut costs, without taking any significant risk of losing business.

Find out more…

As is often the case, this article is a slightly-modified version of a chapter in one of our books, in this case Customer-centric Cost Reduction, available in print from the main Amazon stores, and in Kindle format from all stores. Feel free to share your comments, experience and suggestions below, or by contacting me at mfg@customerstrategy.net.

#49 – Cost predictability, events customers, employees, partners and communities should worry about

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Welcome to the 49th edition of my customer strategy newsletter. The five topics this week are:

  1. Predictability of costs can me more important to customer than how high they are
  2. Two types of events that should cause customers, employees, partners and communities to worry
  3. Latest blog posts
  4. Notable items from other sites – CX assessments
  5. Looking forward
Predictability of costs can be more important than how high they are

My car is coming up to five years old, and it came with a five-year warranty that included all the regular services, free of charge. The garage approached me with a proposal for an extended service contract that has almost the same attributes as the OEM warranty. I plan to sign it, as soon as the contract arrives in the mail. Yet, my car has been totally reliable, and not one single thing has gone wrong since it was new. So, why do I think it is worth quite a lot of money to me to sign a 24-month contract?

A bit of personal automotive background may be relevant. Every car I have owned before my present one has had some sort of breakdown. My first few cars were extremely unreliable. (A Lancia Fulvia, a Citroen GS, a Matra Bagheera, if you must know.) I have been through Ford and Mercury models in the UK, and a variety of German and Japanese cars, including a Lexus. Perfection has eluded me up to now, but now I seem to have it, at least from a reliability perspective.

I have been accustomed to having substantial unpredictable automotive costs. The part that upsets me is not so much the expense as its unpredictability. With my new contract, my expense will be quite high (about $2800 for two years), but totally predictable.

I believe this rationale applies to a lot of businesses too, and to a much greater extent. Budgets are prepared annually. Unpredictable expenses have to be minimal. This means you can charge customers far more for an annual contract than their average costs would have been without the contract. Sure, you may lose money on one or two contracts that have bad luck and high expenses, but you will win out overall. Predictable costs, even if they are relatively high, are much better than the alternative for both customers and companies.

Here are two nasty events customers, employees, resellers and communities should probably worry about

I live not very far from the corporate headquarters of the Nestlé company. They are going through a period where they have the ‘pleasure’ of a substantial activist investor. The consequences for everyone except shareholders seem pretty negative, and feature frequently in local newspapers and the TV news. This got me thinking…

Companies that do good things for customers, employees, suppliers, partners such as resellers, and for local communities tend to have CEOs that have come from the inside and a business strategy that is quite consistent over time. Consistent can mean constant evolution and adoption of new technologies too, for example. They tend not to have sudden, major change. Sometimes major change happens when a new CEO is appointed from the outside, and sometimes there are other reasons. (In a recent Freakonomics podcast about CEOs, they discussed new research that confirms older research: CEOs from outside, on average, perform significantly worse than insiders, and cost an average of $3 million more annually.) Anyway, CEO changes may cause some major events to occur, and there may be other causes.

I believe there are two types of events that should make alarm bells go off for employees and customers. And I suppose suppliers and the local communities should be worried too. These events are:

  1. The arrival of a substantial activst investor. The underlying message of such investors is simple: ‘You are giving too much to employees, customers, suppliers and the community, and investors should be getting a much greater share.’ Company boards often react to such new investors by saying ‘By amazing coincidence, we were just thinking the same thing. Here are the major initiatives we have to double the share price.’ In the case of Nestlé, the result is a $2 billion savings plan that includes closing two-thirds of their sites here in Switzerland, and cancelling local cultural investments in Vevey, their HQ city. It also includes a number of business disinvestments that I would worry about if I were a customer of those businesses.
  2. Major merger and acquisition activity. Tiny acquisitions don’t matter much. Large ones do. When a company wants to acquire another company, the seller always believes their company is worth more than the buyer wants to pay. This disconnect is resolved by a nasty concept called ‘synergies’. The words used are often about eliminating duplication. The elimination is always one of three things: people, buildings, or payments to suppliers. Each of these has an impact on customers, and of course employees.

I have worked full-time on M&A for a number of years, and have formal training in the area. I am not making this up. Elimination of duplication seems to pass the laugh test, but in practice, I have never seen a deep discussion about the work the people have been doing, and where that work will now happen. The absence of such discussion is partly due to regulatory requirements to discuss layoffs with workers councils in some countries before details can be discussed with employees.

I say the duplication argument seems to pass the ‘laugh test’, but I don’t generally believe it, because of what I have seen when there are substantial divestments. Logically, when two companies are split up, the opposite of what happened when they were joined together should now take place. It never does. When two companies are joined together, the story includes lines like ‘We have two HQ staffs and need only one.’ Seems logical. When companies are split up, you would think the plan would including hiring a lot of people, since work now needs to be duplicated. However, such plans generally have the opposite, meaning major layoffs. ‘We have split our business up into two independent businesses, which will each be run by their current business unit staff. We will lay off all of the HQ staff.’ The laughing stops then.

While activists are active, and while major M&A work is happening, very little that is good for employees, customers, suppliers, resellers and communities is happening. Employees who are not in charge of the change projects should be preparing their CVs /resumes. Customers, suppliers and other stakeholders should be hedging their best. Shareholders can plan on making nice returns, in the short term.

 As always, feel free to disagree…

 

Our latest blog posts

Here are the latest posts. Older posts are still available on the blog page.

image Choosing a benchmark research provider for NPS, CSAT or any other customer experience metrics

I am trying to form my thoughts about what criteria are reasonable when deciding on a benchmark research provider. My current thinking is below. I welcome your additions and corrections.…
image Valentine’s Day classic blog – How to stay married – to your customers of course!

It was Valentine’s Day a few years ago, and I was puzzled by the results of some HP customer experience research. The data source and volume were impeccable. However, the results contradicted a lot of commonly-held beliefs about the behavior of unhappy customers in particular…
image Executive Sponsors and Project Sponsors – Teams you may want to implement

This is the third in a series of three articles on types of teams you may want to implement if you want to. improve customer experience. This time I cover the concept of assigning senior people to customers and projects to create the environment necessary for success.

Notable customer experience items from other sites

Bruce Temkin: The Future of VoC – Insight & Action, Not Feedback

Some of you may have received a request from Temkin Group for feedback on the state of your Voice of the Customer programs. The results are now out on the Customer Experience Matters website, and they are worth a read. His words about insight and action platforms are particularly useful. I note that ‘three-quarters of companies rate their VoC programs as successful’. I remember reading somewhere else that customer views on this are not as optimistic. You can read it here.

Net Promoter System website: NPS program self-assessment

Speaking of assessing the current state of customer experience programs, here is a way to do so on your own if you use the Net Promoter System. You will be taken through a short series of questions that cover the main elements of NPS. The result is a ‘traffic light’ assessment of your progress, meaning a red / amber / green light for each area. Take the free assessment here.

 

Looking forward

I am happy to report that February is already a new record sales month, surpassing January’s record. Thank you. Both months have featured what may be managers making purchases of specific books for their teams, as far as I can tell. I believe having a team read and discuss the same book is particularly important when they have to work together on something new that is included in the book. The reason is that the team gains a common understanding of the words and methodologies described in the book, reducing confusion.

Here are links to all of the books on Amazon.com. Kindle versions are available in all stores. Print versions are available from the major stores only, with the notable exception of Australia, where print versions are not available from amazon.com.au.

Customer Experience Strategy – Design & Implementation

Net Promoter – Implement the System

Customer-centric Cost Reduction

“So Happy Here”: The Absurdist but Essential Guide to Better Business (Color edition)

“So Happy Here”: The Absurdist but Essential Guide to Better Business (Black & White edition)

Please share this newsletter with your friends and colleagues and encourage them to sign up for it here. I have put links to past newsletters on the subscription page. Finally, please feel free to change or cancel your subscription using the link below.

You can also email me, Maurice FitzGerald, at mfg@customerstrategy.net.

To change your subscription, click here.

#36 – Career Advice, and is my new NPS or CSAT metric any good?

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Welcome to the 36th edition of my customer strategy newsletter. The five topics this week are:

  1. Unexpectedly popular career advice post on LinkedIn
  2. So, I have my first NPS or CSAT score. Is it a good score? 
  3. Latest blog posts
  4. Notable items from other sites – Provide Support Infographic and Quora.com
  5. Looking forward

Unexpectedly popular career advice post on LinkedIn

I had someting on my mind after talking to a few former colleagues recently. Since it was not strictly about customer experience, I chose not to write about it on my own blog, but to post it on LinkedIn instead. My own daughters are at university, and I suppose I was thinking of them too. I feel quite strongly about this career advice. About 1400 people have read it on LinkedIn up to now. And some people disagree with me, as can been seen in the comments.

The core advice in the article is as follows: Don’t work for a company whose entire business is cost reduction. Their reduction business model will include reducing you. The working atmosphere is depressing as you are constantly surrounded by people being fired, buildings being closed, and other cost-cutting negativity.

You might think I am talking only about outsourcing, and outsourcing companies are the extreme examples. The advice applies to any type of outsourcing, meaning any business where a client’s work is moved to another company that promises to do that work at lower cost. As I have written in Customer-Centric Cost Reduction, this can be great news for the client companies. They are able to reduce costs in areas that their customers don’t care about, so they can invest more in things that will make a difference. However, it is not great news for the employees of the outsourcing companies. After all, they are the ones that have to do the same work at 20% lower cost. Not fun. You can read more and read about the exception to the general rule on LinkedIn here. 

So I have my first NPS or CSAT score. Is it any good?

I have been busy doing some research for a client this week. It looks like we will get a survey response rate between 30 and 40%, so I am optimistic it will both representative and useful. In any case, there are already lots of improvement suggestions.

Since it is the first time such a survey has been carried out, I am certain the client will want to know whether the resulting Net Promoter Score is good or bad when I present the results next Wednesday. The simple-ish answer is that I don’t know, and that it does not really matter. What matters are the improvement suggestions and what is done with them.

A single NPS number is meaningless in isolation. If you are fortunate enough to have a benchmark study for your type of comany or organization, you are in luck. Otherwise, you just can’t tell, as you have no point of reference. What I will be suggesting is to repeat the research after implementing the first few improvement suggestions. The trend will be useul, and will indicate whether the changes have made a difference. It is a complex subject, so I decided to blog about it. You will find the post at the top of the blog list in the next section.

 

Our latest blog posts

Here are the latest posts, including the one just mentioned above. Older posts are still available on the blog page.

image OK, so I have my NPS or CSAT score. Is it good or bad?

The short answer is… it depends. It is difficult to interpret a first score, but it can be done. Read on for more
image Behavioral Economics and Smoking for 11-year-olds

A story about how an innovative teacher effectively stopped my junior high school class wanting to smoke. I still shudder when I remember it…
image Here is how to avoid getting a ‘Yes’ for your project, but without the people and other resources you need…

It’s probably one of the worst possible situations to be in. You prepare for days, weeks or months. You make a fabulous project proposal to your leadership team. You get approval for the project, but did not quite manage to get approval for the resources you need to be successful. Here are suggestions about how to avoid it.

Notable customer experience items from other sites

Provide Support Blog: Infographic with ‘Top 15 mistakes made by customer service pros’

Beautifully-made infographic with a list of 15 mistakes made by customer service professionals. The focus is on mistakes agents make while interacting with customers on the phone or by other means. It is a good list. I am sure you will be able to think of other items too.

When I think about the subject, I jump straight to what I wrote at the end of Customer Experience Strategy – Design and Implementation. The main thing most customers want is to be remembered. In the call center environment, this includes knowing whether a customer has called before, not asking them to repeat information multiple times when they are passed to different agents, and (probably the most difficult) understanding whether the customer has already tried to resolve the issue by a different means. See what you think of the infographic on the Provide Support Blog site.

Quora.com can be useful

Following the issues with the now-defunct Net Promoter System Forum in LinkedIn, I was looking for other ways to interact with customer experience and Net Promoter System professionals. I found Quora, and it is quite useful. The general rule in Quora is that you have to ask a question. As you might expect, most questions are being asked by people who immediately provide what they believe to be the best answer. However, there are lots of good exceptions and I have found some deep discussions in the Net Promoter System area here and in the Customer Experience area here. Enjoy.

 

Looking forward

On top of thinking about re-doing our website, I am thinking about re-writing the Wikipedia entry on the Net Promoter System. While anyone can edit a Wikipedia entry, I have found it suprisingly difficult to avoid having my changes deleted by others who disagree with them. Have a look at the page, and please let me know if you have improvement suggestions.

Please share this newsletter with your friends and colleagues and encourage them to sign up for it here. I have put links to past newsletters on the subscription page. Finally, please feel free to change or cancel your subscription using the link below.

You can also email me, Maurice FitzGerald, at mfg@customerstrategy.net.

 

Cost-cutting hatchets

Can you cut your way to greatness? Yes, providing you only mean great for shareholders

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As a retired HP person, I have been reflecting on ‘cutting your way to greatness’. There are not too many examples of success. Let’s look at one example, then suggest a more balanced approach.

Yahoo

Consider Marissa Mayer’s term at Yahoo. Consider the various stakeholders and whether it was good for each of them:

  • Customers: No. The number of customers went down. Offers became more complex. And of course every single one of the 3 billion Yahoo accounts got hacked.
  • Partners, whether advertising partners or others: No. The various mergers and splits were difficult to deal with, compared to relatively stable situations at Google and elsewhere.
  • Employees: No. Lots of cuts.
  • Shareholders: Yes, yes, yes! While revenue and EBITDA (Earnings Before Interest Taxes, Depreciation and Amortisation) declined in 2013, 2014 and 2015, the Yahoo share price went up 151% under Mayer’s tenure. That’s quite a performance.

This is what I was taught at INSEAD

Digital Equipment Corporation put me through the International Advanced Management Program. I remember the very first lecture as quite surprising. The professor asked the class, “What is the purpose of a company?” We got to debate the topic for a while. Then he became quite insistent, and his message was clear: “The sole purpose of a company is to provide a return to its shareholders.” I don’t think anyone agreed with him. We were young and innocent. However, if you believe this, Marissa Mayer is a genius. So is Meg Whitman.

Is this what happens when activist investors join your board?

The term ‘activist investor’ refers to people who don’t believe a company is doing enough for its shareholders. Based on what I have seen in various companies, and am observing close to home where an activist has joined the Nestlé board, your reaction to activist investors depends on who you are. If you are a shareholder or potential shareholder, happy days are probably ahead. If you are a customer, partner or employee, you will live in paranoia, and should consider fleeing the company. But at least the shareholders will be happy.

Of course all companies need to cut from time to time

All companies have lots of investment ideas. More than they can fund. In most cases, simply going to shareholders to ask for more money is not a worthwhile option. Companies have to reduce their spending on existing people, buildings or what they pay suppliers so they have enough money to invest in their new ideas. There are no other sources of cash within a company, putting aside one-time accounting changes. Ideally, you need to work out what is important to customers first. Maintain or increase spending in areas they find important. Cut in areas they don’t care about. Just to pick one example; customers could not care less where you put your headquarters building. If it is in an expensive place, consider putting it somewhere else if you need to find money to invest. Similarly, if you have a call center, its location is invisible to customers. They also don’t care about things like your credit card approval process, as long as it works. It should therefore cost as little as possible.

Resist the temptation of trying to appear to be fair by giving all departments the same reduction target. Customers care about some, and not about others.

Clarity for employees

You owe it to your teams to tell them where you are investing and where you will be cutting. Be clear that the attractive career development opportunities are in the investment areas. People will not get the security or rewards they may expect elsewhere. You owe them the clarity, even if you believe that shareholders are all that matters.

Feel free to disagree below, or by writing to me at mfg@customerstrategy.net.

 

Cost-cutting hatchets

Customer-centric cost reduction – there are just 3.5 ways to reduce cost

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This post is about customer-centric cost reduction, an apparent oxymoron. It includes the list of the only 3.5 ways of sustainably cutting costs that exist.

Unfortunately, faced with a profitability crisis or a need to find money to invest, most companies want to sort our their P&L first, and worry about keeping customers onside later. That approach has a tendency to produce a corporate death-spiral. While you sacrifice customer happiness in the short term, your competitors may not. They will make it their business to find out where you are cutting costs and how that affects your customers. They will then go in and empathize, taking share from you. You then wind up with a predictable but unanticipated revenue problem, just as your cost-cutting exercise finishes. So, the next  round of cost reduction starts. And so on. RIP.

There are only 3.5 ways of reducing costs. I will cover various methods of getting there in this and future posts, adding advice on how to avoid losing customers as you go about it.

Good and bad cost reduction

Unless you are in survival mode, where almost any cost reduction is good, a good cost reduction is one that either improves things for your customers, or simply one that they will never notice. Improving things can be as simple as being able to pass on lower costs as lower prices. Reductions that customers don’t notice concern areas with which they have no direct contact, for example your real estate costs, or the costs of regularly changing employees’ PCs. Bad cost reduction makes things worse for customers, whether by making a product or service worse, or putting them in regular contact with demoralized employees.

Ways to reduce costs

While this may seem surprising, there are exactly 3.5 ways of reducing costs. The first three are:

  • Fewer people
  • Lower costs of capital, such as real estate and inventory
  • Pay your suppliers less

More about the 0.5 below.

Seems too simple?

This may seem too simple, but it is not. I have been taught many ways of making things more efficient and put most of them into practice. My bachelor’s degree is in Industrial Engineering, which is all about productivity and effectiveness. Over the years, I have improved hundreds, perhaps thousands of work processes. I started in the clothing industry which is absolutely obsessed with cost. I moved on to logistics and repair centers at Digital Equipment Corporation, before migrating to software, services, alliances and hardware at DEC, Compaq and HP. When Mark Hurd was CEO of HP, he was fanatical about cost reduction. Quite a lot (thankfully, not the majority) of the cost improvements we implemented over the years turned out not to make any real difference to our financial results. Here is why some projects failed: the people were still there, so the people costs did not change; all of the buildings were still there, so those costs did not change either; we continued to pay our suppliers the same amount, so those costs remained the same.

And two common ways cost-reduction initiatives fail

Many companies work out that they need to cut back in some areas to be able to invest in others. The two most common reasons for failure are:

  • Inability to effectively communicate the purpose, scope and timing of the reductions to customers, investors and employees causes delay, customer defection and employee disengagement, durably damaging your business.
  • Incompetent or inexperienced program managers define terms of reference, tasks, deliverables and milestones without involving the people who will have to do the work. All too often, this is driven by a misguided desire for total secrecy before the reductions are announced. If the people who will have to do the work do not also do the planning, there is absolutely no chance whatsoever that the reduction work will be completed as planned.

Change or no change

If you improve a work process, and do not change the number of people you have in a given location, the people costs do not change. They just spend part of their time doing nothing, or find unimportant new work to do. If you reduce the amount of space you need, but keep all the buildings, your real estate costs do not change. If you make fewer demands on your suppliers, but continue to pay them the same amount, those costs don’t change either.

‘Making it real’

I call the process of ensuring savings ideas turn into reality ‘Making it real’. In this process anyone with a reduction project should be able to describe which line of the P&L will be impacted, and exactly how. If less work is needed, what are the names of the people who will be let go, so the Cost of Sales or SG&A lines go down? If less space is needed, who will buy or rent the free space, or which buildings will we vacate? If the savings ideas just produce fractional differences spread across the entire population or all buildings, they are not worth pursuing.

Less is more

If you want to be pedantic, the first three items could be more accurately described as less people cost, less capital cost and paying suppliers less. If you move work offshore, you may reduce the cost, providing you let the onshore people go. If you move from an expensive city-center location to cheaper choices on the outskirts, you will reduce your real estate costs if you close the original building. Bear in mind that in these scenarios you will have both the old and new costs simultaneously for some period of time.

And the 0.5?

The remaining half a way of reducing cost is by making one-time accounting changes. You can change the accounting treatment of certain items. You can move your HQ to a low-tax jurisdiction. You can sell your buildings and lease them back. Since your competitors can do the same, it is debatable whether they produce sustainable competitive advantage.

I object

The objections I have heard to the above are mainly around the definitions. For example, if you make a process more efficient in a growing company, you may avoid hiring new people. That is true, but you have not actually reduced your absolute costs, which is the subject here.

Cost reduction versus cost avoidance

Cost avoidance may feel good, but it is usually not a real thing. We will cover one aspect of cost avoidance, more correctly a high-impact way of avoiding the need to reduce costs, in a future blog post. I learned about the specific method quite late in my career, as it is not intuitive. Cost reduction normally covers things that are mentioned in standard P&L, Balance Sheet and Cash Flow statements. There is one major opportunity to improve bottom-line profit that does not appear in any standard accounting statements.

Behavioral economics principles

Dan Ariely and Nobel-winner Daniel Kahneman are two leaders in the emerging field of behavioral economics. Their research, and that of others in the field, show convincingly that humans do not behave as traditional economists would have us believe. As Ariely puts it, we are “predictably irrational”. Traditional economists would have us believe that people’s reactions to reductions will be equal and opposite to their reactions to gains. This is simply not the case, and future posts will cover the consequences in some detail. Humans’ aversion to losing something they already have is a major reason some cost reduction initiatives fail. Planning for it is essential.

We are talking about people

Reducing costs means taking away people’s space, reducing their benefits and perceived well-being, bringing fear to the workplace and sometimes ruining lives and breaking up families. As people managing cost reduction, our natural human tendency is to avoid dealing with it. Change management is an essential skill and some suggestions on how to do it will will be provided in future posts and in our book on cost reduction.

Customer-centric cost reduction

Even employees who are not at risk of job loss will be upset if they believe the changes put customers at risk. It has to be said that making large-scale reductions damages your brand and will make some customers believe you are not a safe supplier. Your competitors will be busy helping grow that perception. Think about your competitor talking to your customer saying “We are talking about a multi-year contract here. Look at what Acme has just announced. Are you sure they will still be around two years from now?”

If your employees also believe that the changes will have an unfavorable impact on customer perception of your products and services, that feeling will be communicated to your customers. To keep the maximum number of customers and employees on board, you need to understand how to put customers at the center of the reduction exercise, ensuring you make things better for them, or at least no worse, and that your entire team knows it. These are difficult messages to communicate, and even more difficult to put into practice. That is why our book and this blog exists.

As always, feedback is welcome. The drawing, at the top is by Peter FitzGerald. Learn more about his artwork on our illustrations page. If you want to be kept up to date, be sure to subscribe to our newsletter here.

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