More for Less
The quest for corporate efficiency during the global financial crisis, by Alan Masterton.
During times of economic upswings, marketing departments and product developers can take advantage of customer confidence to help sell premium products that offer “more for more”, i.e. more features for a greater price. Conversely, during downturns such as the current Global Financial Crisis, CEOs and corporate boards become keen to achieve the virtues of a “more for less” approach, i.e. delivering the same products and services for less cost. Theoretically it should not require an economic crisis to remind companies of the need to operate efficiently. But for most companies, their current success in terms of turnover, growth and acquisitions, often masks the emerging costs of complexity that arise from increased management layers, new coordinating structures and the need to “double-handle” information and activities across operating divisions.
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Common sources of complexity include outdated procedures, incompatible IT systems and conflicting departmental policies. The cost arising from these can be especially severe in multi-product and multi-site companies, where customised and inefficient business practices can exist for a long time, hidden from the attention of the remote head office. Research from the Hackett Group indicates that the gap between average and top performers represents nearly 20 percent of the profit margins of typical global companies.
Even smaller companies can suffer from operational inefficiencies. Most are organized by department and function, e.g. sales, purchasing, accounts, personnel, etc. Whilst such structures can encourage best practice within each function, they lack an enterprise-wide view of performance and customer service. Thus the efforts to achieve best practice with each department can, in aggregate terms, increase the complexity and total cost of business. At the board level such well-intended efforts can result in confusion, where glowing reports on departmental performance are at odds with falling profits and increased customer complaints. In contrast, in top performing companies the quest for corporate efficiency and performance is a rigorous and constant activity, rather than a reaction to adverse economic cycles. As such, it is frequently an ongoing business function, run in parallel with other departments; for example the “performance improvement” teams and “six sigma” teams found in large global corporations. For most companies, achieving or regaining efficiency typically requires a program to better align and link the efforts of staff, business processes and operating systems to the targets and outcomes required by the CEO, the board and the corporate strategy. Targets can be financial or non-financial, including profit margins, market share, new product launches and customer satisfaction.
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Given the inter-connected nature of business activities, the true cause of operational inefficiencies and excess cost is not always clear; despite the many opinions that managers may put forward. Therefore, one of the important first steps of an efficiency program is to identify the major drivers of the company’s performance to provide a framework for performance analysis.
Two performance frameworks which are used often in addition to financial ratios are the Baldrige Criteria and the Balanced Scorecard. These criteria are used to assist strategic thinking and to align process, people and resources to student and stakeholder needs and to management approaches. The performance of the framework and each category can be assessed from both a stakeholder perspective and at an activity and process level.
In addition company-wide efficiency programs can be long and arduous exercises. Therefore it is vital that the expected benefits are great enough to ensure the commitment of leadership and staff. In fact some experts consider that efficiency efforts are almost impossible unless the company’s managers become convinced that change is essential.
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Ensuring commitment can be achieved in a number of ways, for example by highlighting the performance being achieved by competitors, by emphasizing the potential impact of an external event, e.g. the Global Financial Crisis and by involving influential, well regarded staff in the program; all of which should be reinforced via frequent employee communications.
The use of benchmarks is another important element in gaining commitment, as they provide indisputable insights into performance of leading companies, as well as provide an objective assessment of the business practices and processes that are used to achieve high performance.
Once the performance frameworks have been established and the commitment and expectations have been set, there are a variety of formats that companies can deploy to achieve efficiency. Nonetheless most formats typically follow a sequence of tasks that analyse and compare performance, identify the root cause of any underperformance and then plan, implement and sustain the agreed improvements. The analysis can include historic results, forecasts and the resources used; this helps understand which variables have the greatest impact on performance and how operational level activities link to corporate performance. The benchmarking and best practice audits can be used to assess the gaps between current performance, corporate targets and external comparators; this helps identify where performance is being constrained by operational factors such as structures and complexity. Tasks that reduce complexity and achieve optimal efficiency are likely to draw on the techniques of “Lean Production” which seek to eliminate costly, non-value adding tasks and processes.
The concept of lean production, which evolved in the Japanese manufacturing sector, focuses on the reduction or elimination of non-value adding or “wasted” effort such as overly complex processing, double handling, waiting times and errors. This improves quality and reduces production times and costs. Lean “tools” include constant process analysis, “pull” production, and mistake-proofing. The final step of implementation and sustaining new performance levels obviously can be wide ranging, depending on the extent of improvements required. However, efficiency programs will normally include improvements to the factors driving performance, i.e. processes, skills and systems. Sustaining the performance gains can be the most challenging aspect of this step and can involve redesigning the crucial details of performance measures, job descriptions and incentive schemes. Many companies celebrate the completion of their improvement programs too soon, only to find that the omission of these details causes performance to slump back to pre-program levels.
At the University of Sydney we too are seeking greater efficiency in our activities by reducing the complexity and volume of the business processes that support this A$1.3 billion institution. This program follows a series of performance benchmarking exercises that were run with the Hackett Group, which identified a number of significant improvement opportunities. Efficiencies are being sought from complexity reduction, to eliminate, simplify and automate support processes and from shared service structures that balance the consolidation of transactional support services with local, high value client service.
To survive in this environment, many companies will have no choice except to cut key resources and divest core business units and assets, leaving them in a weaker position for the future. Companies that will remain successful already recognise that the ups and downs of economic cycles are part of the business environment. These companies maintain their success by constantly examining and improving the efficiency of their operations, leaving them in a position of strength when the inevitable crises arise. Theirs is a constant quest for efficiency, not a reaction to current events.
Alan Masterton is Director of Operations Performance, University of Sydney.
