Why "cutting" expenses is impossible. The problem of Baron Munchausen in the swamp

Why "cutting" expenses is impossible. The problem of Baron Munchausen in the swamp

Administrative meetings focused on reducing costs increase them by 5% or more (as a result of Parkinson's law).

A universal approach to dramatically reducing business costs based on the IEM Enterprise paradigm.

1. Most likely every CEO with real-world experience is familiar with the feeling of wrathful helplessness when he looks at an immense Excel spreadsheet of expenses (employees).

Obviously, in the end, something is not necessary (business losses).

And you start to delve into the details, but nothing can be cut: everything is entirely necessary.

It’s like Munchausen's problem when he tries to pull himself from the swamp by his own hair: to evaluate the necessity of one expense or another, the typical CEO depends on the words or opinions of people who have NO motivation to make cuts.

More commonly, it’s the opposite.

The most that a strong-willed and authoritarian CEO can accomplish in this situation has the same effect as shearing a pig.

The savings will be a few cents after many tonnes and weeks of hassle.

The ruined climate in the organization is the additional bonus that stays around ("Who's next?").

Plus, while the all-hands-on-deck saved a few cents, the continued operational degradation brought additional losses of three million.
 

2. The correct approach is NOT to cut expenses and people, but UNnecessary functions.

"But everything we have is functional, you see, needed and necessary," colleagues automatically replay as a rule.

And, as a rule, they are wrong.

A needed function is one which a client is willing to pay for with their own money.

[And not you (the CEO), your employees, or any "experts", you are all spending shareholders' money.]

Everything else, naturally, is on the cutting block.
 

3. Sounds easy, but HOW to actually assess which functions a client is willing to pay for?

The answer is value chains.

Simply speaking, the foundational business processes which connect a supplier and a company's consumer are these "chains".

And additional value is created for the customer at every stage (link) of this chain.

The simplest visualization: an automobile assembly line (chain).

At every step (stage, link) something useful is done for the buyer of the automobile: painting, hanging doors, installing seats, etc.

However, if stages were added to the assembly line where, for example, the car body was blessed, or there were two hour team building activities for employees of the factory, or Bothersome Betty from quality assurance came over during every stage to put a check on papers that "painting is complete", the consumer would not pay for this nonsense (if he had a choice).

And it's NOT worth it for you.
 

4. Learning to distinguish what is excess and what is necessary is not as easy as in the absurd example above.

But it is more the possible.

Moreover, it is wholly possible for almost anyone.

We recommend the excellent book by Jeffrey Laiker, The Toyota Way, to those interested in learning this skill.

(One reading is NOT enough, and the tenth time will open new discoveries.)
 

5. If you do not see wasteful functions in your company, this does not mean that they are not there.

It means that you do NOT see.

Any "analytical department" which has never analyzed anything useful for anyone, any "methodologist", internal coaches and instructors, these are all useless nonsense which can be instantaneously eliminated.

A rule of thumb: take a block of functions and ask yourself, "Is our client, if he had a choice, ready to pay for our fifth floor office in Manhattan?"

For example.

Even the multimillion Walmart has sat in the Arkansas backwater for half a century in a one-storied barn without worrying.

Is our client ready to pay for the whole office going drinking on Saturday under the guise of "teambuilding"?

To pay for two drivers for the general director?

A profitless store that no one goes to?

A new "product line" (a fad of the general director) with 0 movement of inventory in half a year.

Subsidize blatantly profitless "free shipping"?

Et cetera.

Besides that, even many objectively necessary functions can be moved to computers today, and the value of the corresponding stage in the business process immediately falls to zero (sales people, accountants, lawyers, logistics,etc.).
 

6. If, nevertheless, you cannot find excess functions (and it is NOT important if it is because you do not see them or they are not actually there), then simply forget about expenses.

No one became wealthier from shearing a pig.

Focus on increasing sales.

September 29, 2017 by John Galt