Cost reductions often don't work. Why? Conflicts of interest get in the way, as do incorrect ideas about how to reduce costs.
Many companies have been frustrated by "cost reductions" that seemed to cause higher costs. How does that occur, and how can it be avoided?
Vendors of all kinds of products and services describe enormous cost benefits . . . but rarely offer guarantees that should cost benefits will occur. Beware of such potential conflicts of interest where selling you more may not help you. Outsourcing has proven to be a new business model for many that eliminates that problem. The outsourced supplier gets paid for pre-agreed-upon results. If the vendor makes a mistake in putting the deal together, the vendor has to solve the problem.
As an example of how conflicts of interest can be a problem, operating executives sometimes report that new computer systems recommended by the corporate financial staffs to allow operating people to get more information about costs and production fail to deliver improved costs but succeed in increasing the overhead in the business. If you could have counted how many deck chairs were on the Titanic even faster, would that have helped matters?
Many such investments in consulting for cost reductions from computing systems were provided by a company's auditing firm, and partially reflected a desire on the part of the company's senior financial management to have more financial clout with the firm's auditors when questionable accounting treatments and issues arose.
Should senior financial management lose their jobs, the accounting firm will also help them find a new one. Conflicts of interest can arise in many different areas related to cost reductions. Watch out!
Even when such conflicts of interest are not involved, too narrow a focus can be just as deadly. Many companies retain a mental model of cost reduction that doesn't apply any more, if it ever did. You not only have to learn new ideas to become an effective cost reducer, you also have to eliminate old ideas that are wrong.
What are some of those harmful ideas?
1. Reducing costs in one activity will automatically reduce costs overall. Often what you save in one area is more than eaten up by increased costs in another.
2. Reducing "head counts" will lead to cost savings. If you add more expensive, non-productive heads to replace the wise heads that performed well, you are much worse off.
3. Cutting specifications won't change customer perceptions. Often specifications don't capture customer preferences. Find out what you can change . . . and what you can't by checking out possible changes with customers. Don't assume!
Copyright 2008 Donald W. Mitchell, All Rights Reserved.
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