Organizations are struggling to identify their most important cost-cutting and innovation needs and opportunities. While the exercise itself isn’t new, the lens that organizations use to search for those needs and opportunities must be a new one. The old way of looking at things just doesn’t do it anymore. Readers will learn how to perform this important function in the article below.
So many reports today are about the economic downturn that it appears as though everyone is worse off than they were a year or two ago. However, the U.S. Bureau of Labor and Statistics reported that from December 2007 through June 2009, 16 specific sectors had actually hired more people, while 28 sectors had actually lost jobs. Thus, like many broad phenomena, this sagging economy is literally affecting everyone differently. And while I see that some organizations are recognizing that fact and adapting to this new climate, most seem to be taking a “business as usual” approach, mainly by employing the same tools, methods and mindset that they’ve been using for some time.
I believe that these “business as usual” organizations are going to run into trouble. What we are experiencing now isn’t a storm that’s going to pass. This is literally a new business climate, and organizations need to rethink several basic elements of their operating model if they want to continue to be successful. In this article, I will describe how different ways of looking at certain organizational issues, and understanding and tackling four imperatives, will help managers win in this new business climate
A fundamental climate change
Most industries grew consistently for the past 20 years, some wildly. Sure there were bumps along the way, but many of us developed a set of business muscles all around “keeping up” with the growth. But a “keeping up” mindset means that waste creeps into an organization. Such waste is not only tolerated, it is accepted as a necessary by-product of keeping up. Which it is. At times there may have been cost-cutting efforts, but these were directed mostly at the most obvious waste. In most industries, business muscles around efficiency and cost cutting had, for all practical purposes, atrophied.
These days, very few organizations or industries are in the “keeping up with growth” mode. In fact, they have started to look into ways to cut costs and to innovate. Some organizations are just cutting a specific percentage of spending across the board. However, that is not a strategy. Other organizations are applying the techniques they used in better times, only to find that they are not getting the results they expect.
The fact is that after 20 years of keeping up with growth, most organizations should be able to carve 10-20 percent out of their operating model just from waste and duplication. But the cuts have to be made in the right places, not across the board; and they need to be made fast. In some cases, the most dramatic cost cutting will come through innovation (some people mistakenly think cost cutting and innovation are mutually exclusive). I define innovation as changing an area of work so dramatically — even though it accomplishes the same outcome – that the way the work is done doesn’t resemble how it used to get done. The ATM is a good example of innovative cost cutting (and outsourcing – to the customer). Organizations are struggling to see where the most important cost cutting and innovation needs and opportunities lie. That is why they need a new lens…to see those opportunities clearly.
A new lens
Skitoma is a word that describes something that’s right in front of you that you cannot see. But once someone points it out, you can’t not see it and are probably a little surprised you didn’t see it before. For a lot of people, the arrow in the FedEx logo is a skitoma. I use that example very frequently because about 90 percent of the people I show it to haven’t seen it before, so it’s a very good way of introducing them to a different way of looking at work.
The skitoma in this case is something I call the “how” trap, where people get so close to how they do their day-to-day work, and embed it with so many industry- and company-specific terms, that it ends up masking what they are actually doing. For example, when someone looks for ways to cut costs, innovate, or outsource, or even find a best practice, he or she overlooks many opportunities that are right under their nose. The good news is that the “how” trap is a very human condition. It’s not that people aren’t trying hard or that they are not intelligent. Rather, it’s that they literally can’t see their work in the right way, so that they can’t see the opportunities. Let me use some basic examples to make this a bit more concrete.
If the outcome, or “what” we want to accomplish is getting to a specific restaurant or destination, we often associate taking a specific route or path with that destination, so much so that when someone else takes a different way we say, “Why are we going this way?” The truth is that it rarely matters “how” you get there as long as you get there and get there on time. Most people don’t know that athletes used to do the high jump by running straight at the bar and doing a scissor-like kick, like the hurdles. That’s because high-jumper Dick Fosbury decided to rethink “how” to accomplish the outcome of getting over the bar higher than anyone. He learned that by going over the bar backwards, doing what is now known as The Fosbury Flop. He found that he could jump higher, and it earned him an Olympic gold medal.
To use a more practical example, imagine that you are trying to understand someone’s job function. You walk up to them as they’re standing next to a fax machine and ask them to tell you “what” they are doing. They are likely to look at you a bit surprised and say “I am sending a fax.” You might ask some follow-up questions about whether sending a fax is a necessary step in their job and if it is something that needs to happen for them to be successful. They are most likely to say “Yes,” but they are wrong. The “what” that they are doing is actually something like confirming an order or communicating the status of something, while the “how” of what they are doing it is with a fax machine. Once you have successfully disentangled the “what” from the “how,” you can then examine if it matters “how” it is done (my research has shown that it only matters about 20 percent of the time for any given “what.”) You can also ask how valuable that particular “what” is to the overall work set. For a task that has a low value, you should look across the organization to see if that same “what” is being performed repeatedly, and then force a common “how,” either through process or software. You might even consider outsourcing it. For rare, high-value work, you’ll need to go a step further to understand how it’s currently performing. If it is underperforming, then ask what is causing it to do so, whether it’s who is doing it, the process workflow, or the technology, or some blend of those factors that drive the performance. From there you need to carefully analyze where the change is needed to boost performance. Because it’s high-value work, there’s a high risk in making a “wrong” change. So, be cautious.
As a final example, think what happens when someone comes to you to describe a problem. Say Air Canada was to call up Microsoft and say “We think we can cut costs from that area of our business where passengers check in for flights. Can you help us?” In this case, the typical Microsoft response would probably be “We don’t have a software program called flight check-in. I am sorry, but can you tell me more about it?”
If Air Canada had looked at the work before they called Microsoft, they might have seen that they needed to achieve three outcomes, or “whats” in flight check-in:
- Confirm reservations
- Conduct a survey
- Manage logistics (for luggage).
If Air Canada had come to Microsoft and described the problem that way, the likely response would have been, “We have all sorts of case studies on reservations, surveys, and logistics. Now we need to know more about what specific performance measures you think you can achieve. We should also learn something about the other technology you use (the so-called technical architecture) so that we can see what will be the best fit for you.” If Air Canada had used this approach, two organizations that use very different terminology to describe their own work could have had a much more productive conversation.
Four areas you need to look at right now
Now that you look at and talk about your work differently, there are four things you need to do right now. These are the four imperatives I mentioned earlier:
- Find out whether your industry is strong or weak, and where you fit
- Establish who are your most, and least, valuable customers
- Understand where you need to conserve cash
- Assess the risk you and your industry face in the short and long term.
1. Get a handle on your industry
Since December 2007, 35 percent of jobs have been eliminated in the motor vehicle and parts industry, almost 22 percent of jobs in residential building, and eight percent in broadcasting. By contrast, in that same period, home health-care services increased the number of jobs by eight percent and oil and gas extraction by the same amount. Educational services grew by four percent, slightly ahead of coal mining, at three percent.
While a lot of this makes sense, it’s still important to look past the numbers. Yes, the motor vehicle and parts industry is in bad shape, but this has little or nothing to do with the bank collapses, which occurred mainly because they were poorly managed and failed to innovate and deliver a product customers want. There is one profitable U.S automaker, Tesla, which makes an electric car that is good looking and fast and fun to drive. Tesla’s car is expensive but it has a less pricey model on the horizon. In this context, namely becoming somewhat introspective, like Tesla, managers need to look at their industry and see how it’s doing, while at the same time look at how their own company is doing. If things aren’t going great, perhaps there are some basic issues with management and innovation that are causing customers not to buy your products and services. People are still going to movies and buying cars and iPhones, so it’s not that consumer or business spending is dead. It’s just getting more particular, and in some cases, even mysterious.
It is also important not to make assumptions. Lululemon Athletica is the great success story of a yoga clothing store that got its start in Vancouver. Now it’s a publicly traded company with stores all over North America, at a time when yoga is becoming increasingly popular. Someone might be tempted to assume that Lulemon is a franchise model because its marketing efforts are so local, but it is not. While there are a few franchises, Lululemon owns almost all of its stores, so looking at how it is doing compared with another organization that offers franchises is a very risky and unfair comparison. McDonald’s, by contrast is a franchise model, but it typically owns all of the land the store is on, as well as the entire block, which gives it control over which stores are next to a McDonald’s. That literally makes McDonald’s the largest commercial real estate company in the world, so comparing it to the commercial real estate giant Trammel Crowe is in many ways more practical than comparing it to organizations like Burger King or Tim Horton’s.
2. Identify your most and least valuable customers
While I am more of a rower than a yoga person, I like the men’s clothing Lululemon offers. I shop there, but I’ve notice that when stores are crowded (usually), I am the last person the sales people approach. I mentioned this to a friend of mine who is involved with the company and she said she wasn’t at all surprised, since their primary target market is women in the Baby-Boomer generation, two segments to which I do not belong.
Especially in tough times, it’s vital for an organization to line up its products and services with a very specific target market and a very specific value proposition. Take, for example, ING DIRECT, the online banking leader. It has almost no branches, won’t let you write paper checks (thus no department to handle bounced checks), and doesn’t offer phone support. ING DIRECT offers customers one thing and one thing only – a very high interest rate for people who want to save money. If you want to talk to someone about something, ING wants you to take your business elsewhere. It saves so much money by not having branches and phone support, that it is able to offer a higher interest rate. For now, that puts ING DIRECT in good shape.
Eclipse Aviation is another organization that has had struggles, but made some very smart decisions. It makes small, lightweight private jets for about twenty percent of the cost of the next-cheapest private jet. Founder Vern Rayburn came up with some incredibly innovative ways to make the jets lighter, but he also realized that people who wanted all sorts of customization in the interiors of their jets — such as the kind of seats and the color of the leather — ended up making it far more expensive to make the planes. He realized that there are a lot of people who want a private jet who don’t care what color the interior is (though it still has to be nice.) So he turned his back on all of the people asking for customization, and ended up offering a much cheaper one-size-fits-all jet, for the people who don’t value customization.
So, if you are in a “how” trap in assuming which things you really need to be doing, ask which things – processes or offerings — you can cut out, so you can be more explicit about your value proposition.
3. Understand where cash conservation is needed
In tough times, cash management can be vital. There are many ways for an organization to conserve cash. Moving something from a capital expenditure to an operating expenditure is often a great way to conserve cash in the short term. Do you own the building you are in? Maybe you should sell it and lease office space. Certain information technology, such as “software-as-a-service” and cloud computing can be leased instead of bought, so that they will be considered an expense instead of an asset; moreover, these and other technologies can be managed by contract staff not full-time employees. Cutting jobs is one of the nastiest – though usually inevitable – necessities in a downturn, though instead of cutting staff, some can be moved to different areas. In “how” trap language, try to strip yourself of the assumptions about things on which you have to spend money. ING DIRECT eliminated brick-and-mortar retail branches, something which was thought of as impossible and unthinkable 20 years ago. But the bank is a player today and it has saved a ton of cash.
Another area that’s popular is outsourcing work to customers. Flight check-in and the ATM are both good examples of outsourcing work to customers. Flight check-in is an easier one because it took a commodity — “what” in the airline industry — and put it on the internet with the online check-in, in addition to the kiosks many of us now use in airports. The ATM is a bit of a cautionary tale because up until that point, the location of a bank was one of the biggest differentiators — you knew your bank teller and he or she knew you. But the ATM has become so ubiquitous that retail banks (other than ING DIRECT) are struggling to differentiate themselves.
4. Assess risk
Many markets are volatile and some are more susceptible to big swings than others. It’s important for an organization to try to quantify the risk in their industry and their own organization and determine how much of their destiny they do or do not control. American automakers essentially blew themselves up with bad management. People need cars, but they don’t need one every year, so people were able to stop buying new cars long enough to cripple those who made bad decisions. The newspaper and publishing industries represent a different problem and they face different risks. People are still reading and consuming content, but they are doing it very differently than ten years ago. As book sales decline and sales of e-readers like the Kindle take off, there is a clear change afoot. Seeing books being sold by individual chapters — following the trend in music — shows that the way people think about paying for and consuming content is changing rapidly. As for newspapers, I predict that over the next 15 years, most local newspapers will stop being published and we will be left with a few national papers, such as The Wall Street Journal, The New York Times and a handful of others. Publishing organizations need to understand that risk, and know that they don’t fully control it. They must then make some tough decisions about the future of “how” people will consume content and align their brand and their products and services with that. The great irony in this downturn is that the industries that have some of the most mature risk assessment tools include banking and insurance. Assessing risk is at the heart of what they do, which makes the mortgage debacle so hard to comprehend, let alone excuse.
So then, listen up: Accept the fact that this is a new climate, start to look at your work and your organization through the “what” lens, as you work your way out of the “how” trap. And apply the four principles above — now.