Business leaders focus on maximizing revenue with the same intensity that surgeons devote toward saving lives. Sometimes, the stakes can feel just as high. The entire company — anywhere from a handful to hundreds of people — are dependent on the success of the business. If the company falls apart, it can no longer support the individuals and families relying on that income.
But when companies develop tunnel vision around cutting costs for the sake of bottom line, they often lose sight of broader practices and fail to prepare for changes in the market.
The Consequences of Operational Extremes
Looking at operational processes when trying to cut costs is natural, but taking them to extremes can be treacherous. Cutting costs too much can cause organizations to lose the flexibility and bandwidth that’s vital for wrestling with customer challenges and developing breakthrough innovations.
Consider the impact of social media on consumer products manufacturers. There is the loud and insistent voice of the customer, who can use social media to broadcast your failures to the world.
Some companies, however, have built flexibility into their systems to respond to their customers in this new medium rapidly — and on their terms. Two airlines have done this exceptionally well. Southwest Airlines has harnessed social media to draw its audience in by using storytelling and engagement. WestJet is also using social media to its advantage, changing its brand profile and crafting its message in the marketplace.
The Processes that Hurt You
If you find your organization struggling with flexibility and innovation, consider whether you have fallen into any of these ruts in your quest to cut costs:
Established specialty areas, like accounting and human resources, serve a range of needs and offer benefits like consistency and stability. But while the expertise is continuously groomed, it’s rarely questioned. Over time, opportunities for growing and evolving are increasingly less common.
There is a great need to challenge the status quo in these areas and seek out newer, better methods of organization. Zappos has recently adopted a flat organizational model steeped in holacracy. This model involves shared authority, rather than standard hierarchies of power and decision-making.
The dominant bottom-line savings mentality is cost reduction. Reducing costs in all areas of the supply chain, much as Walmart has done since its inception, can turn into serious profitability. But the long-term challenge with this approach is to avoid seeing every resource in terms of scarcity. To create new lines of revenue, you must invest in ways that unlock or create new value. An overwhelming need to reduce costs often prevents that kind of investment, especially if the return cannot be readily understood.
Seeing the enterprise as a perfect system and seeking to drive out waste and deviation can also yield significant bottom-line savings. Whole practices of systematic attention to efficiency, such as Six Sigma or Lean, do wonders for refining the effortless production of the same product or services time and time again. However, when a market shifts and the need for that product or service goes away, the organization struggles to reassign resources for developing new and innovative products and services to meet their customers’ needs.
Similar to the desire to systematize everything, the organization that drives stable processes to their extreme also loses the flexibility to be able to accommodate new thinking and practices.
Maintaining process purity in the production of goods and services ensures that operations can be accomplished with as few resources as possible. It eliminates any slack in the system — slack is a vital component in defining and designing new responses to burgeoning customer needs. No slack often means nothing new. Nothing new means a long, slow slide into obscurity or a sharp, sudden termination of profitability.
Cutting Costs without Killing Innovation
Finding balance between improving your bottom line and creating space for innovation can be a challenge. Here are some guidelines to help you walk that line successfully.
- Practice a consistent approach to innovation, and make it part of your operating system by following the 70:20:10 rule of thumb. Focus 70 percent on incremental innovation through programs like Lean and Six Sigma, 20 percent on transformative innovation using design thinking to advance existing elements, and 10 percent on breakthrough innovation using design thinking to develop new solutions.
- Recognize that your employees would prefer to be engaged in helping you creatively look for what’s next. Creative opportunities are good for morale and production.
- Reward people for performance gains, but do so collectively. Emphasize the collaborative nature of performance improvement and innovation, and only reward those efforts that also strive for sustainability.
- Create opportunities to try new things. Accept failure as a necessary practice for learning. Recognize people’s efforts, and ensure that everyone learns from others’ examples. Manage failures by setting expectations that risk levels, at least initially, should be kept minimal so ideas have a chance to grow over time before significant investments are at stake.
- Continue to pursue functional alignment, cost reductions, systemization, and process stabilization and revitalization efforts. Just don’t kill early-stage ideas that could create future revenue streams.
It’s certainly a challenge to see the whole picture, but a successful enterprise will rise to the occasion and make changes where necessary. If you don’t invest in innovation, you may save money in the short term, but your business will die on the table.
About the Author: Andrew (Drew) C. Marshall is the Principal of Primed Associates, an innovation consultancy. He is a co-host of a weekly innovation-focused Twitter chat, #innochat; the founder, host, and producer of Ignite Princeton; and a contributor to the Innovation Excellence blog.
- What is Lean? http://www.lean.org/whatslean/
- What is Six Sigma? http://www.isixsigma.com/new-to-six-sigma/getting-started/what-six-sigma/
- Holocracy – http://holacracy.org/