“We need to cut back!”
These are the words that no one likes to hear. Chances are if your organization is involved in the hunt for unnecessary expenses, the call for the hunt came after disappointing revenue and profitability results were reported for the past quarter or year. Many organizations are operating lean.
It may seem counterintuitive, but this is frequently exactly what is NOT needed. The real problem is lack of revenue, not so much excessive expense.
Too often people equate running a business with keeping their checkbook balanced. At the end of the month, you review your expenses and see countless dinners out, movies, trips to the mall and perhaps a vacation excursion or two. You add up the damage, and it exceeds your take-home pay for the month. You quite correctly tighten your belt for a month or two. Things will look better in a few months, and you can start having fun again.
It doesn’t work that way in business. You don’t spend money on fun stuff in business, and you don’t engage in a lot of optional activities. In most cases, what you spend money on is meant to increase your ability to make more money. If you are interested in growing your business and increasing your profitability, you may be tempted to engage in some serious—some will say draconian—expense reduction. Forget it. It won’t work. Firing people, spinning off businesses and dropping expensive operational practices may net you one quarter of expense relief, but next time around you will be exactly where you are now.
The mantra of expense reduction should be focused on cutting back on those things that do not deliver value to your customer. That is the defining principle behind lean and operating a lean business. If an activity does not provide some definable value to you customer, chances are it is disposable. The classic example is cotton in the neck of your pill bottle. Whatever the reason was for justifying the use of cotton in the pill bottle, it disappeared long ago. Now cotton in the bottle is an aggravation, possibly even a reason to select another brand.
This is the kind of cutting back that produces real improvement in your customers’ eyes and on your balance sheet.
What’s the difference? Roll some heads or look for waste? Rolling heads not only trims your expense line it also trims your capacity. Expansion should always be a goal. Sacrificing expansion capability for reduced expenses does nothing for profitability.
Obviously, this is a process that can’t be done from the top down. Local operations must have the wherewithal to complete these evaluations and make these decisions at their own levels. This type of lean process needs to involve the people who are most familiar with the market, the operation and the processes in question.
There are numerous programs and organizations around to help companies that are looking at lean programs for the first time, and the Lean Enterprise Institute is one of the best. They can help your company make smart choices in terms of lean programs, metrics, process review and peer advice.
Wall Street may love layoffs, and it may seem like an easy way to open a wide margin between revenue and expense. But if you want real change and an expanding customer base, transformational changes to profitability are achieved through lean process development.
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