Cutting Costs by Cutting Waste
Given today’s economic uncertainties, many companies are focused on ways to reduce—or at least control—their costs. Their approaches are often based on the traditional idea of controlling costs through the mechanism of budgets. “Let’s find places to cut a budget and force the manager working with that budget to find savings.” Often, the easiest areas to reduce spending are things we like to call “discretionary,” like travel, training, and research and development (R&D). Or the company might issue across-the-board cuts to personnel, assuming that because some employees are “better” or more productive than others, cuts will raise the average productivity of the workforce.
This budget-driven approach is sensible and gives middle managers discretion. It doesn’t dictate which travel or training to cut but rather entrusts the manager, who knows their area best, to make the tough calls. Nevertheless, it gives the finance department predictability; they know how much spending will be cut and can be transparent with investors and the public.
There are also a few downsides to this way of managing costs. Cutting the “least productive” employees makes little sense in knowledge work, where productivity is no longer the best metric. In a world of inclusion, diversity, and belonging, we assume that every employee brings something unique and valuable to the job. Again the manager, who is most familiar with these valued characteristics and their impact on team performance, makes the decision. At least decentralization can take into account the true impact of each employee.
It also raises the question of why the spending was there in the first place. It presumably played an important role in generating business results; it had, we hope, a positive return on its investment. Training isn’t discretionary if you train employees because you think it will bring results. Travel isn’t discretionary if you believe bringing your teams together or having them visit customers brings a positive return on investment. And R&D is certainly not discretionary if your company intends to innovate, introduce new products, or develop better processes. None of this spending should have been allowed in the first place if it wasn’t intended to have a good return.
Nevertheless, we must cut spending and do it quickly. The budget-based approach arguably accomplishes this goal efficiently and predictably. But perhaps there are other mental models available to us for finding cost savings. I think working to achieve leanness by searching for waste in value delivery processes is an often-neglected method that is more consistent with the ideas of the digital age. It may have short-term costs (e.g., automating to reduce repetitive manual steps) but quickly generates permanent and—importantly—scalable savings.
Based on my experience and observations, I can suggest some business areas likely to include waste. Many large organizations accumulate waste in their oversight and risk management practices. As a CIO in the federal government I experienced an extreme example of this. Perhaps it’s not as bad as writing 87 documents, conducting 11 gate reviews, and coordinating 22 approvers for every software initiative, but many companies have relied on slowing things down and planning extensively as their primary way to manage risk. Today, it can often be done even better through rapid iteration, testing, feedback, and learning. A leaner, more nimble approach can cut wasteful overhead and provide better controls. But risk management practices tend to build on one another. Adding more risk management processes often goes unquestioned.
Analysis paralysis is a similarly common source of waste. Decisions should often be made with only a percentage of the necessary information available; there are diminishing returns to gathering and analyzing more data. Meetings are often a source of waste, especially status and check-in meetings, and their goals can be met in other ways. You might not consider these real opportunities for cost cutting, but if there is an opportunity cost of your employees’ time, freeing it up for more productive use can have a real impact on the bottom line.
One exercise I enjoyed at U.S. Citizenship and Immigration Services (USCIS) was dividing all our efforts (and therefore costs) into two categories: those associated with the actual hands-on creation of valuable product and those that “watched” the creation by providing oversight, administration, and risk reduction. I’m not saying those functions aren’t essential, but what is a sane balance between doing and watching? The watching category (be honest, now) includes everything from time in status meetings to project management, contractor management, documentation, compliance enforcement, consultants, and—well, maybe we should include management in general. Again, it’s not that these are inessential functions, but the ratio between doing and watching shouldn’t be lopsided; there may be an opportunity to make these watching functions leaner. We achieved spectacular results at USCIS by automating many compliance enforcement activities, making documentation briefer, and eliminating redundant controls.
Automation is a broader area of opportunity. In IT, we sometimes refer to toil—repetitive manual work no one enjoys doing. Toil should be automated to free employees to do more productive work. Automation can even replace manual bureaucracy (an important topic in my book on bureaucracy) with automated policy enforcement replacing gatekeeping and red tape.
These are just a few areas you may have overlooked as candidates for waste reduction. There are likely plenty more across your organization. Techniques like lean manufacturing, Lean Six Sigma, and so on can be useful in finding and eliminating waste. I like to think of these areas as parallel value streams to your everyday business activities—value streams that manufacture compliance and risk reduction as their products. Even manufacturing companies that have made lean practices a core part of their operations may neglect these other value streams.
There are several reasons reducing costs by making processes leaner is especially important today. First, the need for speed. Lean practices remove waste to reduce lead times. Second, the need for long-term growth. It would be bad to cut costs in a way that makes it hard for the company to scale back up when the current economic climate ends. Leanness is scalable; it can lead to better unit economics and increase the nimbleness and growth potential of the company.
The current economic crisis will pass; as we know, economies have cycles. In a way, our future is filled with crises. As our pace of disruption increases, company leaders are bound to constantly face situations that feel like crises. There are wars, pandemics, supply chain issues, inflation, new technologies, new regulations, and geopolitical challenges. Leaders must respond to the uncertainty—sometimes through cost cutting—but also grow the business. Making sure all processes are lean, including those that involve compliance, oversight, and administration, is a way to have everything—lower costs and the potential to grow.
Sometimes cutting costs through the budget mechanism is effective, quick…and necessary. But we should look more broadly at ways to manage costs that don’t interfere with value delivery and competitive advantage—ways of using frugality to support and drive growth.