Organizations experiencing rapid growth eventually plateau where revenue gains begin to subside. The immediate response is cost cutting and salaries are the first target. Consultants are hired and typically recommend offshoring and outsourcing at lower or more flexible labor rates as the silver bullet to cost reduction.
Unfortunately, the outsourcing business cases fail to consider the other impacts on the business. For example, offshoring the billing process from skilled accountants to an assembly line of workers in Asia has its costs. The offshore billing process put an extra burden on the higher paid engineers to get involved in billing and collections and correct errors themselves. Then, there’s a need to hire additional engineers to help manage the extra burden. It’s not always worth it in the end.
What should an organization do when it’s time to get serious about cost cutting? Offshore? Outsource? Across-the-board budget cuts? The traditional methods alone do not work. We recommend a different, three-step approach, resulting in permanent cost reduction.
Set Internal Targets
Every organization is comprised of a basic set of operating units or profit centers where products or services are supplied and direct costs are incurred. Each unit requires a level of operational or administrative support from headquarters or local personnel.
To set the target, evaluate how many administrative personnel are needed to support a single operating unit. For example, a distribution company might estimate the need for two accountants to handle general accounting, reporting, billing, and payables for each distribution center. If the company has 20 distribution centers and 55 accountants, the additional 15 personnel is an opportunity for cost reduction. Valid explanations might include the need to support public company audit requirements, SEC reporting, or international tax requirements. Otherwise, accounting should be challenged to improve how work is shared across the accounting organization.
Gain a Deeper Understanding
Why does the distribution company need 15 more people to support accounting for 20 distribution centers? Most executives often trust their managers to determine the need for additional resources to perform a task. Unfortunately, managers use fear to defend the position of needing more resources: “If we don’t have a tax accountant in every country, you’ll go to jail, CFO.”
Inefficiency exists everywhere and can be revealed with objective investigation into understanding the process and why certain processes exist. Listening to operations first then balancing operational needs with functional support activities always reveals inefficiencies. For example, accountants are laboring over spreadsheets to provide operations with unused detailed reports. Buyers are creating complex purchase orders containing a level of detail irrelevant to operations or vendors. HR has created an elaborate hiring process which operations sees no value in following. Identifying inefficiencies and eliminating waste can be performed with a deeper and objective evaluation of what is really happening.
Rationalize the Executives
Determine the level of executive experience needed to oversee each part of the organization. Are there too many Vice Presidents? Why have a highly compensated vice president over a part of the organization versus a director or manager? A simple way to rationalize executive positions is to consider three points: fiduciary accountability, risk mitigation, and number of people requiring oversight. A mid-sized manufacturing company had fifteen VPs earning $500,000+ per year and was able to rationalize the VPs to nine.
The company used three criteria to decide if a function or a set of operating units justified a dedicated VP:
- Fiduciary Accountability: Is the role accountable for more than 30% of the company’s costs, working capital, or revenue? VP roles overseeing the manufacturing plants, finance, and sales were rationalized using this criterion. The accountability yardstick forced the company to consolidate 5 regional sales VPs into a smaller team of 2 divisional VPs.
- Risk Mitigation: Does the role mitigate risks with the potential to cause operating losses? Justifiable risk mitigation roles typically include General Counsel and Safety Compliance roles. These compliance roles often require a VP level for oversight; however, 2 Divisional Legal Compliance VPs, were consolidated into one VP role.
- People Oversight: Does the position oversee more than 100 people within the organization (after right-sizing, of course)? The role would be an executive running the plants or the sales organization. Several smaller plants in proximity were consolidated under one VP of Manufacturing, reducing the need for three local plant VPs. The company applied a similar criterion with similar hurdles to justify director and manager roles within the company.
The company applied a similar criterion with similar hurdles to justify director and manager roles within the company.
The three-step process will be disruptive, but without disruption, advancement never happens. Anyone who wants to live a disruption-free life should shed their belongings and move into the woods. On the flip side, people within an organization who truly believe they are doing the right thing for the company will jump in head first and be a part of the team leading disruption.
Trenegy is a non-traditional consulting firm helping businesses reduce costs across the organization. With an effective organization structure, business can benefit from efficiencies and improvements. Ask us how at email@example.com.