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There are exactly 3.5 ways to reduce costs

mtfitzgerald

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While this may surprise many of you, there are exactly 3.5 ways of reducing costs. The first three are:

  • Less people
  • Less buildings
  • Pay your suppliers less

More about the 0.5 below.

This may seem too simple, but it is not. I have been taught many ways of making things more efficient and put most of them into practice. My bachelor’s degree is in Industrial Engineering, which is all about productivity and effectiveness.

Over the years, I have improved hundreds, perhaps thousands of work processes. I started in the clothing industry with Blue Bell Apparel, the parent company of Wrangler clothing at the time. The clothing industry is absolutely obsessed by cost. I moved on to logistics and repair centers at Digital Equipment, before migrating to software, services, alliances and hardware at DEC, Compaq and HP. When Mark Hurd was CEO of HP, he was fanatical about cost reduction. Many (thankfully, not all) of the improvements we implemented over the years turned out not to make any real difference. Here is why some projects failed: the people were still there, so the people costs did not change; All of the buildings were still there, so those costs did not change either; We continued to pay our suppliers the same amount, so those costs remained the same.

If you improve a work process, and do not change the number of people you have, the people costs do not change. They just spend part of their time doing nothing. If you reduce the amount of space you need, but keep all the buildings, your real estate costs do not change. If you make less demands on your suppliers, but continue to pay them the same amount, those costs don’t change either.

I call the process of ensuring savings ideas turn into reality “Making it real.” In this process anyone with a reduction project should be able to describe which line of the P&L will be impacted, and exactly how. If less work is needed, what are the names of the people who will be let go, so the Cost Of Sales or SG&A lines go down? If less space is needed, who will buy or rent the free space, or which buildings will we vacate? If the savings ideas just produce fractional differences, spread across the entire population or all buildings, they are not worth pursuing.

If you want to be pedantic, the first three items could be more accurately described as less people cost, less building cost and paying suppliers less. If you move work offshore, you may reduce the cost, providing you let the onshore people go. If you move from an expensive city-center location to cheaper offices on the outskirts, you will reduce your real estate costs if you close the original building.

The remaining half a way of reducing costs is by making one-time accounting changes. You can change the accounting treatment of certain items. You can move your HQ to a low-tax jurisdiction. You can sell your buildings and lease them back. Since your competitors can do the same, it is debatable whether they produce sustainable competitive advantage.

The objections I have heard to the above are mainly around the definitions. For example, if you make a process more efficient in a growing company, you may avoid hiring new people. That is true, but you have not actually reduced your absolute costs, which is the subject of this blog. Reducing unit costs is a more complex subject.

As always, the opinions expressed here are my own, and do not necessarily reflect those of my employer, Hewlett Packard Enterprise.

And also as always, please feel free to disagree. The simple fact that I have believed the above for the last twenty years or so does not actually make me right.

Maurice FitzGerald - Customer Experience and Strategy consultant
maurice.fitzgerald@hnetplus.ch
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About the Author

mtfitzgerald

Maurice FitzGerald ecently retired from his position as VP of Customer Experience for HPE Software after a career in hardware, software and services at DEC, Compaq and HP.

Comments
Darin Kalashian

It depends on the long term goals of the organization. If the organization has only ONE purpose, then, I could agree with your views. If the cost per unit goes down and there is no other unit(s) to produce, then dormant, vacant resources don't reduce the bottom line. But the goal of an organization with longer term objectives should be to "re-purpose" those resources to continue to bring value to the organization. Possibly increase volume, feature set, etc.. These costs can then be transferred to increased profits (if inserted correctly). Driving an organization by solely looking at "costs" is a dangerous. My view of making improvements is not to reduce costs, but to maximum the return on investment, making the spending more effective.

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