In the extended entry I explore one of the major issues facing businesses today: the conflict between cost efficiencies and productivity. It’s a longish article, so I’ve placed it behind the cut, but would appreciate your comments and your own perspective on the matter.

One of the frustrations I face as a consultant is the tendency of medium – large organisations saying that things just “can’t be done”. Discussions I have with stakeholders over implementation of possible operational improvements to reduce cost and increase speed and efficiency of business processes often reach a sticking point where underlining systems simply can’t cope with the solution being proposed. Back-end systems don’t integrate with front-end systems, arbitrary policies based on outdated principles prevent integration, or a corporation-wide spending-freeze for equipment prevents upgrade of a network to allow for functionality improvements. Ironically, such a spending-freeze doesn’t seem to extend to the huge cost of consultants and service support officers who have to find bandaid solutions to problems caused by legacy systems, poor system integration, or poor policy development and reviewing.

Late last year, an article in strategy+business magazine (may require registration to view) noted that service organisations needed to learn from the experience of the manufacturing sector which had dramatically increased its productivity over the past 30 years. The gap between manufacturing and service industry labour productivity growth is actually widening, and this is attributed to poor implementations of CRM (Customer Relationship Management) and ERP (Enterprise Resource Planning) systems, poor integration of such systems, and massive increases in data collection without regard for the value to be derived from such data across systems. The article maintains that total quality product development, just-in-time manufacturing, and tailored business streams collectively improved productivity and reduced costs dramatically. Specifically, the article says that:

In our experience, savings will vary significantly by company and industry, but it is realistic to expect reductions of 25% in costs and 50% in response time and process errors.

I am concerned about this view; it’s fairly clear to me that the authors are comparing industries that simply can’t be compared. The advice on challenges to be resolved seems fairly obvious and prosaic, and the rhetoric on building product quality to cement customer loyalty is positively archaic. (Product quality isn’t what builds customer loyalty these days; loyalty is based on a composite of value proposition and organisational trustworthiness.) Significantly, the productivity gains achieved by the manufacturing sector have essentially been driven by the demands of the service sector, and the volume of businesses operating in the service sector has grown dramatically in comparison with the fairly static manufacturing sector, so comparing growth rates of productivity across the two sectors seems seriously flawed. Suggesting that savings in costs and response times will range between 25 and 50% is about as valuable as pulling figures out of the air.

However, I do agree that the service sector is generally handicapped by its business processes. The drive to develop cost efficiencies in the 1990s effectively created silos in organisations; separated divisions and areas of responsibility, connected by an hierarchy rather than by a common set of goals. In essence, it was a symptom of financial discipline. By separating divisions and dispersing financial responsibility, management reduced complexity, waste and bureaucracy. But by becoming more departmentalised, organisations may have improved divisional efficiencies, but they reduced the capacity to improve processes and services across the organisation as a whole. Over time, this has meant that organisations have had to spend more and more on internal business process servicing, often at the cost of product and communication improvements. Cost cutting at divisional levels has tethered organisations to policies and processes growing from earlier cost reduction measures. In technological terms, this has often meant that organisations are mired by standard computing environments that are seven or more years old, robbing them of the collaborative business opportunities that could generate the sort of productivity improvements the manufacturing sector is now enjoying.

And it all comes down to “can’t”. Because the organisation has generated a trend of cost cutting, the very idea of spending more on infrastructure to assist collaboration seems like a shift back to the bad old days of bureaucracy and cost inefficiencies. So it’s dismissed without question. The problem is that the only way organisations are going to strengthen productivity and continuously improve is by opening up the channels for communication and removing the old silos that have been established.

Capital costs reductions are important, but they’re only useful where the ratio of cost reduction is inversely proportionate to service improvement. Yes, I know that’s an ambitious statement. In the past we’ve always said that so long as service isn’t affected, costs reductions are worth pursuing. But we’ve moved beyond that now. Cost reductions now so often involve an increased demand on service infrastructure, that the hidden costs of servicing those capital cost reductions effectually cancel out the value of the original cost reduction measure.

Further, service can only be improved where the impediments to improvements are removed. So it’s not merely a matter of integrating front and back end systems, updating policies and automating repetitive processes. It’s also about ensuring that knowledge is always generated from any instance of service engagement, and that these learnings are collected across the organisation for aggregate business improvements.

No longer can businesses afford to say they “can’t” implement a business improvement. Every time they do that, they are actually increasing the cost of servicing a business process. Every time that happens, their labour productivity reduces, and opportunities for competitive advantage slip further and further away.

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