Your board and executive team are basking in the glory of the quarterly earnings call. The CEO eloquently discloses the grandeurs of a 9-digit cost reduction turnaround plan. The industry analysts on the call surreptitiously respond in gleeful adulation. The anticipation of a steroidal cost reduction injection bulking the company’s stock valuation is certain.
What could go wrong? Your board hired a renown global strategy firm (fill in the blank: McKinsey, Bain, BCG) to identify opportunities for value-creating cost savings. It’s a safe bet and executives never get fired for hiring a top tier strategy firm.
Fast forward three quarters. Unexpected side effects of the cost savings are rearing their ugly heads. Cash flow shortfalls and margin erosion slowly starts to chip away at the sustainability of promised savings. The fallout is overwhelming operations, sales, and finance teams while talent is lured to the competition. Departing talent is keenly aware of the vulnerable pretenses of the cost savings and sees the inevitable erosion of future incentive compensation. Things are not looking good and preparing for the next quarterly call will be a mess unless quick action is taken.
Sound familiar?
Now, we’re not bashing the big strategy firms. In general, the strategy firms arrive equipped with long standing methodologies, innovative ideas, data to support recommendations, and they effectively challenge executives to think outside the box. Their mastery of data manipulation and new jargon drives executives to consider all the opportunities for value creation through cost savings, and it’s the envy of all consultants. The lurking problem is execution.
We see this all too often with clients when we follow a big strategy firm’s engagement. When considering the root causes, it all comes down to three fault lines: process, project delivery, and performance metrics.
Here’s how to fix the problems before it’s too late:
Process, policy, and procedural changes must be reviewed and addressed as part of new cost reduction strategies. For example, one of our global service clients embraced the strategy firm’s recommendation to centralize, outsource, and offshore their global billing and collection processes to India. The new offshore model promised a substantial reduction of general and administrative costs. The company eagerly eliminated local high-cost staff and moved the billing and collections to the facility in India. Following the move, DSO began to slowly rise due to delays in invoice creation and increased customer billing disputes. High paid engineers were distracted with resolving customer billing issues to stop the bleeding of cash. Each global region seemed to have a different set of issues and the billing challenges impacted collections.
We worked with the client to dive deep into the end-to-end order to cash process to identify tactical solutions to get DSO under control with the new offshore structure already in place. Overall, we found the company did not adequately address or change the underlying end-to-end processes or procedures impacting billing accuracy. We worked with the company to make the right process changes to get control of billing errors and collections and sustain the promised cost savings. The offshore organization change recommended by the strategy firm failed to look beyond the billing process itself and ignored the necessary procedural changes required.
Strategy firms usually assign a hefty list of projects or initiatives to key leaders in the organization for implementation. With many cost reductions already in place, the organization doesn’t have the bandwidth in house to effectively manage, monitor, and keep initiatives on track. The lack of bandwidth tends to impact cross-department communication of initiatives and the recommendations tend to be implemented in silos. The lack of coordination causes misalignment of changes and duplication of effort.
We visited with a global energy company who hired a large strategy firm, and many activities required for implementing costs savings were causing excess costs in other parts of the organization. For example, the company’s implementation project teams were duplicating efforts and two divisions were considering competing software solutions to solve similar challenges. The company was far down the path of purchasing both software solutions while they could have simply put their heads together and implemented a single solution. This had the potential to increase costs in the long run. Our team worked with the energy company to align project teams and look at solutions that solved end-to-end process problems instead of individual silos. We helped develop a project governance model to ensure the right communication protocols, accountability, and expectations were established across all initiatives.
Strategy firms’ recommendations include performance metrics to track the success of value creation initiatives. Unfortunately, they tend to myopically focus on these metrics while other seemingly competing metrics are pushed aside. For example, a multi-national services company’s fleet of assets were critical to serving their customers. One of the opportunities for improvement included reducing cycle time for preparing assets for new customer jobs. The strategy firm’s research and analysis found that reducing change-over time (C/O) would result in a 5% increase in annual revenue. The company’s singular focus on C/O caused them to overlook quality checks when assets were in the yard for inspection. Customers began to experience equipment downtime due to unplanned maintenance and repairs. The 5% revenue increase began to erode quickly while customer perceptions were at risk. To alleviate this challenge, we worked with the company to perform an asset preparation value stream analysis to identify how to reduce C/O without impacting quality issues. Ultimately, the value stream analysis helped the organization reduce C/O and unexpected downtime.
Trenegy specializes in helping companies execute their strategies. Our skilled project managers are well versed in process design to support new efficiency goals and helping companies get the right information to manage performance. To discuss how we can help you implement your strategic initiatives, contact us at info@trenegy.com.
