29515415 driving down costs with lateral thinking (1)

Skanda Kumarasingam

Driving Down Costs with Lateral Thinking

© Skanda Kumarasingam

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To My Girls

Ramita and Sahana as they find their way in this world

&

Anne for making it all possible


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Please Share (UNCOPY RIGHT)

This is my work of art.

It was created with the utmost passion and love.

It is my gift to all the managers and business owners who will take their businesses and their careers to greater heights now and

in the future in a business world that is getting tougher every single day.

Your efforts create hundreds of jobs and I want to see it succeed. You move the engines of our economy and hold our futures,

for without economy and industry there is no future.

In my own little way, I believe this guide will help in the grand scheme of things.

Great monuments are built one brick at a time. Please accept my humble gift.

I'm providing this book free of charge to all, so please feel free to forward it to everyone you know so that they would

be able to benefit out of it. You can cut, copy, paste, change things or do whatever you want with this book.

Skandakumar Kumarasingam

Sydney NSW 07 April 2010


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Driving Down Costs with Lateral Thinking

In this little book I will look at the sneakier ways costs get created and the more creative ways that we can use to cut

costs. We need to understand and accept the fact that when costs gets cunning, we need to get smart to control or

reduce it. The way of doing this is by using lateral thinking or more creative ways to reduce them.

Excess costs can be created by indirect factors that are not immediately apparent to those who run the day-to-day

business operations. You can only attack these costs by getting to the real heart of the problem rather than just

bashing away at a cost itself. Remember the difference between treating a symptom versus the real problem? My

experience shows that there are three biggest indirect cost generators which are time, complexity and poor quality.

So here, I will consider some clever ways you can turn cost on its head, get rid of it altogether or turn it into a new

profit stream. There may be activities in your business operations costing you a lot of money that you could get your

customers to do for you, for free. They might even prefer that. And there may be some cost lines on your profit and

loss statement that you can actually turn into revenue. That's the best possible outcome: cost into revenue.

The possibilities are endless with Lateral Thinking. Let’s dive in, shall we?


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Indirect Cost Generators

Time

Doing things faster reduces cost. Say for instance, in the fashion retailing a big cost is the markdown or write-off of

stock that was not sold during the particular season. This cost can blow up to 30% of full price across that season’s

range. The shorter you make the order- to- delivery- to- sales cycle, the lower the risk of getting stuck with stock that

you cannot sell. You may be able to reduce the time of the cycle by knowing immediately what is selling in the stores,

using that information to place reorders with your suppliers- quickly and frequently in small batches, minimising

shipment time from suppliers to the stores, and being able to reprice quickly at point of sale.

If you can shorten this cycle you can reduce some other costs such warehousing. However you need to also consider

the extra costs that may come into play due to quick shipping by air rather than sea. Well you know how to do simple

cost benefit analysis, right? If not get your finance professional or accounting functions to do that!

Another example would be the product development cycle in software. Software developers always want as much

time as possible to build the product. More time reduces their stress and lets them get closer to the perfect code.

However time has much more impact on cost and the product itself may be less relevant to its market by the time it

finally arrives. I think a better way would be to get a product released faster and then fix customer issues and release

a quick fire new version. If you can reduce cycle time you will dramatically reduce overall cost. The well known

example here is the fact that Microsoft releases all its products with 10-15% bugs and gets a reasonably perfect

version only the third time around!


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Shortening the product development cycle is not only critical for cost reasons but also, when you lose time, your

competitors will be able to grasp these market opportunities and beat you in your own game.

You can apply the short cycle approach to almost anything as I show you below.

Annual budgets-they take too long and take up too much valuable management time. In fact the bigger and

more complex they get the more time and more revisions are required. The best approach is to start them

later, finish them faster. Do not putting so many loops and layers. Multi-nationals and across the border

reporting businesses have made this a time consuming and entertaining exercise with huge cost implications,

where a huge beast is fed by teams of accountants rushing to develop, revise, re-revise and print stacks of

budgets. Then all so often these budgets are way out of projections! Budgeting will work better if it’s done by

astrologers than accountants I guess!

Meetings-in one of my later articles I will calculate and show you the enormous cost of meetings even when

they are well run. But the point I wish to make here is that most meetings are badly organised and last too long

for the simple reason. Too many people get invited; they could be done by phone. Sometimes armies of

business executives’ travel to distant locations (think of entertainment, airfare, hotels, taxi, work undone at

office etc.) to attend boring, nothing meaningfully discussed meetings. The presenters at these meetings

recycle their same old PowerPoint presentations. Most guys don’t even discuss the topic given as they are

unprepared and often recycle an old presentation. It’s a joke, is an understatement.

IT deployments-do not believe the software suppliers when they tell you it takes 18 months to deploy SAP or

any other ERP system. That is going to cost you serious money. Do it in three months, then pull the plug on

external support and let users fend for them. The project in my last company was a 18 month project that is

well on its 3rd year going!


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Consulting projects- you can get a strategy review done in six months six weeks. The consultants will want six

months for the same reasons as software developers want years to write code. Six weeks will be better for you.

Obviously there can be situations where going faster (speed) is not the right choice to make. However these are in

the minority. In general, taking time out of processors and decisions squeezes out cost- and it makes you more

competitive in what you offer to your customers.

Questions that you need to be asking in this area are twofold

Can you make all your business processes as fast as possible?

Are there areas where you could reduce cycle time and save on costs?

Complexity is Expensive

All other things being equal, making things simple and doing them simply will keep costs down.

When management realises that complexity and lack of focus are the main enemies of cost efficiency and reduce

thousands of products and dealing with armies customers who create more problems than improve your bottom line

the company wins.

Too many product lines mean too little attention available for each, subscale production volumes and slow

accumulation of learning. When you have hundreds or thousands of products and customers you start to see a


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tangible extra cost layer being created in over complex businesses: a cost layer whose sole reason is to analyse and

manage this complexity. This might include the highly paid members of a portfolio strategy group spending their

time working out which product lines could get pooled into which strategic business units. Also top management and

technology groups trying to squeeze convergence and synergy out of fairly unrelated businesses are performing

endless pricing and customer profitability analysis from teams of MBAs because they have fallen into the trap of

negotiating individual deals with every major customer.

In each extra case complexity has produced extra costs and reduced profitability, but it has not added any value to

your customers or to your business.

Many consulting projects can themselves be interesting examples of the cost of complexity. Consultants like selling

cross functional projects. Correctly they observed that you are organised around functional departments like sales,

production, service, distribution, accounting, legal, operations, marketing and so on. But what really matters they

point out is that your key activities cross functional boundaries, like fulfilling a customer order and making the

customer happy, delivering quality at Six Sigma levels and so on. These are what really drive cost, they say. This

speech is similar to the reengineering fad of the early 1990s.

If you buy into this, soon you will be stuck in a hell of cross functional brainstorming meetings. Your key staff will be

tied up for days reinventing the blindingly obvious, on process flow diagrams stuck on brown paper covered meeting

room walls. At the end of this process you'll get an interesting analyses saying how much it costs to make a customer

happy or not being a quality organisation costs you X amount of revenue.

Consultants like these projects because they take ages to do. The conclusions are hard to disapprove one way or the

other. And the bottom line is when it is cross functional and many are involved it proves to be impossibly complex to


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budget and track the processes and savings across multiple line functions. So nobody drives the action programme

and no costs are finally cut. By then the consultant has moved on with her cheque.

Cross functional approaches are conceptually appealing. But it breaks down as two of the basic rules of good cost

management, which is establish clear individual accountabilities and avoid complexity are lacking.

There are three important questions you need to ask yourself with regard to complexity in your business

Can you cut costs by simplifying what you do and how you do it?

If the complexity is deliberate does its value exceed its costs?

Can you get most of the value added with less cost?

Quality Cuts Cost

Back in the 1970s and 1980s Japanese manufacturers inspired by Deming, an American consultant realised that they

need not spend more to get higher quality. The opposite was true. The more they focused on quality, the more

efficient and lower the cost became. This unexpected virtuous cycle became known as the Toyota paradox.

It works in several ways.

Eliminating defects before they occur eliminates remedial costs later in the value chain. Textbooks call this as cost of

quality. These remedial costs could be in the factory as goods are checked before being shipped out. Or more


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expensively, they could be after goods have reached the end customer leading to high warranty claims, product

recalls and lawsuits.

Building quality at the front end also eliminates the need for large quality control departments at the back end,

which they are overheads and bureaucracy. Then the legal department to handle expensive lawsuits and warranty

claims!

So adopting a zero tolerance approach to defects tends to squeeze out slack out of the system. For example before

the times of just-in-time inventory and just-in-time manufacturing ,businesses used to build up buffer stock at

several stages of the production process to provide a cushion in case of a supply or machine breakdown.

It was later discovered that most buffer stock actually reinforce the problem they were meant to solve. Since it

(buffer) existed, managers got sloppy and tolerated stoppages, delivery failures and bad scheduling. Of course

holding the buffer stocks was a cost too.

Under the just-in-time system all buffer stock were eliminated. When that slack was taken out of the system not only

was inventory cost cut back but overall production efficiency improved as there is no longer anywhere to hide.

A higher quality process or firm produces a lower cost process.

Consider the following to improve quality in your business

1. The productivity factor- Obviously, one of the ways any manager can accomplish more with existing resources is to improve the productivity of those resources. Improving your staff's productivity and quality consciousness is an ongoing effort and one that's important for the employee, your company, and for you as a manager.


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2. Train and develop your employees—Target specific training opportunities in quality and productivity for each employee that helps him or her do more at a higher level of standard. The training can be internal programs that cost little to nothing other than time from one of your senior people. Or, you can use outside vendor programs that can teach specific skills to the employee that improve his or her production capability.

3. Coach and focus employee efforts—Too often, we allow our employees to "find their own way." Being more proactive in delineating employee responsibilities, focusing their efforts on important tasks, and coaching them for higher quality and productivity is a good thing. Expect higher quality and productivity and you will often get it.

4. Give them tools—our employees want to be productive and to produce quality results. Invest in your employees by giving them the tools that boost their productivity.

5. Incorporate a quality improvement program—Often employee productivity is hampered by poor quality in the delivery of their efforts. More than not, they can't see the problem; it's the "can't see the forest for the trees" issue. For example, if your programming staff has to fix lots of problems that are discovered after software enhancements are put into production, you have both a client service problem and a productivity problem. Every time I have implemented a quality improvement program, I have met resistance from my senior people. Only after showing them the numbers before and after the quality program do they actually believe it improves the team's output.

6. Give extra incentives for more work—in a couple of situations you have an inordinate amount of backlog, need to reduce the backlog level, but don’t want to hire more people. To attack the problem, offer staff incentives to work on extra projects "on their own time," this meant outside of normal hours. This type of program can be very effective, but you have to be careful to avoid creating an impression that you are paying for overtime. Hourly


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people get overtime, not professionals. You also only want to authorize the additional work to those who are doing an acceptable job; in other words, the way to qualify for the incentive work is by doing your normal job well. Use a program like this only in short spurts, say three to five months, versus allowing it to become a normal work program.

7. The perception factor -Improving your staff's productivity can actually be accomplished by changing the perception of the team's productivity and quality output. I'm not advocating any type of deception, but there are things you can do to make the team appear to be more productive.

8. Organize for client service —create a structure and implement processes that help your employees quantify issues, implement change in an orderly manner, escalate appropriate issues, and follow up consistently. Improving client service automatically makes your team appear to be more productive.

9. Manage client expectations to your capacity—if your team is overcommitted to the capacity of what they can deliver, the natural conclusion will be that they're not getting the job done. Manage your client's expectations to your team's actual capacity for quality delivery and it will appear that the team is more productive. We should be managing this way anyway, but it's easy to get overcommitted.

10. Filter the request backlog in your department—Review the requests coming into your department from stakeholders. Quite often, requests are made for items that are not necessary or that do not provide real value to the business. Reducing the backlog and establishing more stringent approval requirements for new requests can create a perception of improved response.


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11. Over communicate —communicate the status of outstanding issues more than you have been. Nothing makes a customer feel more frustrated than not knowing the status of a support problem or outstanding request. Keeping your customers and users "in the light" creates a perception of being more productive and improves client service.

12. Over deliver—Coach your staff to take the extra steps in supporting your stakeholders. Little extras go a long way toward improving service quality, and higher satisfaction creates an image of responsiveness and productivity.

13. Publish your team's accomplishments—you might be surprised at how much we all forget about what we accomplish every month. It's so easy to get caught up in the day-to-day issues and problems that we forget to reflect on the things that were completed in the past. Start tracking your team's accomplishments and publish the highlights monthly. If we forget what we accomplish, I can guarantee that the customers don't know all the things we do. Share this knowledge with them, and you may find that customers really are interested and that their perspective of how busy you are in your department or business unit goes way up.

14. Before you start trying to improve the productivity of your staff, conduct an assessment to determine how productive and quality conscious they already are. If possible, establish a baseline and measure the improvements as you implement specific actions that either improves your team's real productivity or the perception of its productivity. Capturing real data in key areas will help you substantiate what’s really happening.

To get moving in this area ask yourself

Can your business invest more, upfront in quality so that you are able to get an overall reduction in costs?

Can you reduce back in cost like quality control, rework, service recovery, and product recalls?


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Let Customers do the Work

Here are some examples

Compare grocery stores (corner shops where the owner sits behind a counter where you need to queue ask for the

goods and pay to get the goods!) with self-service. You half the shopping time. Prices are much lower. As the

supermarkets got bigger you got more choice and you could buy most things in one visit. This was a win-win for

retailers and consumers. Everybody cut costs and saved time.

On the Internet you can do all the staff that relates to foreign or interstate travel that your travel agent used to do for

you and charge you for it. These include research, book, change and cancel. And in most instances we can be faster

than most agents and often find the best deal.

This goes to internet banking (well ATM’s are good examples too), buying books on Amazon, booking and planning

holidays, meeting friends and partners ( there were marriage brokers in the past),sending flowers, getting funding

for all sorts of purposes, ordering food on a lazy evening, organizing parties, researching information so on. These

are examples of customers doing your work and reducing costs for you.

Then there are the self-service counters in fast food outlets and vending machines.

You can also use the Internet to do technical self-help stuff. I have often found searching an online help data base is a

lot better than being on hold with a customer service phone line speaking to someone in another time-zone on cheap

phone lines whilst they keep yapping on and on, giving assurance every five minute that our problem will be solved-

guess these dudes are paid by the minute!


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So if you can get customers to do the work, get it done immediately. If it speeds things up for them or if they do it

better than your staff would they prefer it-and the cost is off your profit and loss statement.

To make progress in this area ask yourself

Are there certain activities which are not currently done by your company that can be done by your customers

much better and more cheaply?

Would customers actually prefer to do something by themselves?

Cost into Revenue

I will analyse this in 3 areas which are menu pricing, turning cost centres into profit centres and marginal costing.

Menu Pricing

Changing pricing can help cut costs or rather improve your bottom-line. To see how this works you will need to

visualise a spectrum of possible pricing strategies. At one end is ‘bundled pricing solutions’, selling to their

customers for a given total price which comprises many elements. At the other end of the scale is ‘unbundled menu

pricing’, where customers get to see the price of individual components and cherry pick the bits they want.


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Bundled solutions help customers when, what they are buying is complex and risky or in an early stage of

development and so not yet understood. Customers are more concerned about the ease of use and reliability than

about cost.

However as markets mature, customers understand better what they are buying and will take on more risk. At that

stage menu pricing can help both sellers and buyers reduce costs.

The airline industry has moved to menu pricing. When buying a ticket there are two cost options on the same airline.

The high cost menu options could more than double the cost of a given trip. However introducing menu pricing the

airline and its customers are set up to achieve a win-win situation. If a customer eliminates the airlines cost of

agency commissions, credit card fees, paper tickets and call centres, they get tangible benefits in reduced cost .

Customers can choose which airport to travel from and pay different airport charges as well as deciding how much

luggage to take. Think of Virgin airlines as an example. They advertise the basic cheap rates with a tiny print saying,

conditions apply. Believe me there are loads in their menu which will all cost you lots!

However when businesses decide to provide their customers with menu pricing care needs to be taken that

customers are not fooled. Some car rental companies often exploit menu pricing. Whilst they provide a great prepaid

rate for a day's use which will include the usual charges for mileage, insurance and local taxes the final bill can often

cost you up to a double. Creative car rental companies can come up with airport surcharges, franchise fees,

exchange-rate charges, insurance against excess charges on the normal insurance and so on.

Another example well known where customers are fooled is with bank charges and fees.

Check your telephone bills for loads of surprises, in most instances anyways!


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Turning Cost Centres into Profit Centres

Sometimes you can turn costs into full-blown profit centres!

A particular cruise company had as its biggest cost, cleaning and maintenance of cabins. Now self-employed husband

and wife teams bid to get the franchise to clean and maintain a package of 20 or 30 cabins. The tips they get

(customers are strongly encouraged to give) can make this a highly profitable small business. They are motivated to

give very good service. This company has turned a major cost item in its profit and loss statement into a profit

centre.

In a particular company that I worked the human resources department was located within a great high-tech

building with its entire state-of-the-art seminar, lectures and training rooms. The company also hired expensive

speakers and trainers to speak to its limited staff members. In a bid to reduce costs and make this human resources

department self sustaining the management decided to rent out the expensive seminar and lecture halls and training

rooms during nonpeak hours and weekends. The management of the human resources department got even more

creative and tickets were sold to take up the extra space or seats to listen to some other more expensive speakers

and trainers which it hired for its own staff training programs.

This human resources department is now currently running as a profit centre. In fact they now have their own in-

house trainers and dedicated lecturers who provide not only training and learning opportunities to the staff but also

market themselves and their products to outside businesses requiring training and development.

Another creative company that I worked for used its excess capacity in software and free time during nonpeak hours

to provide accounting and bookkeeping services, to other small businesses. This finance function in this company is

now a zero cost department. The finance manager and the accountant are considering developing the department


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into a profit centre by hiring a few more accountants (on a part-time basis to balance its costs and revenue flows)

and paying for a few extra licences to use the accounting software. This will enable them to market their accounting

and finance services to smaller businesses close to their office thus turning this, once cost centre into a profit centre.

Another example is in technical publishing where scientific or management journals are involved. Many years ago

you had to pay scientists and management writers to write content for such journals and magazines. Later on it was

found that scientists and management writers were willing to give you content for free. They needed to publish to

build their academic reputation and to meet publication targets in order to keep their university jobs. Similarly

management academics and management consultants need to market themselves and their ideas in management

and trade journals to reach potential executive clients. They will willingly give high-quality content free.

So professional publishing can come pretty close to the ideal business, where customers pay you to read the stuff

and writers pay you (in their time) to let them write it.

Another example is where a software company had to cope with growing requests from its installed customer base

for upgrades and custom features. The company was continually expanding its expensive professional services team

whose time was not charged to customers, but was failing to keep up with customer demand. To control the

ballooning cost and the unhappiness of customers the company used a unique system whereby they charged for

professional services by auctioning their time to the highest bidder. If the problem was really material and urgent

customers did mind paying to get a rapid response. Introducing a market mechanism(using the simple demand and

supply curves in economics) the company was able to turn costs into revenue and produce happier customers.


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Marginal Cost and Revenue

This is a fairly interesting concept that originally comes from economics and has been taken on enthusiastically by

management accounting and financial management.

Simply stated this concept says that in most circumstances certain costs would be fixed. Costs are fixed in most

situations to build and maintain certain types of infrastructure that helps to produce products and services which

will be sold at a profit. Certain costs vary with each unit that you produce which can be called as marginal cost in

economics or variable cost in management accounting. This concept simply tells us as long as marginal cost or

variable cost is over and above the selling price (which is called marginal revenue in economics) the company will be

able to brake-even or generate more profits. However this simple concept is often not well understood or used to

generate profits.

Here are some examples that I had seen and used in real-life situations.

Do you know why many universities and teaching institutions provide scholarships? The simple reason is, it does not

cost anything extra to provide free education to a few and generate goodwill. As we know the buildings, utility costs

and the lecturers’ time (and salaries) are all fixed. Just because an additional student sits in class (on a vacant unsold

place) it does not increase building rent, utility costs or the lecturers salary since they are all fixed. Whilst giving a

full scholarship may not be beneficial part scholarships are very attractive indeed.

Airlines also use this concept. When an airline flies without passengers in its seats (bums-on-seats) that revenue is

lost forever. So rather than having a fixed price for all seats for a particular flight it will vary its pricing based on how

urgent the passenger wants to make the flight and how many seats are available. If the flight is only partly booked it

will reduce its ticket prices in the last minute. This will enable it to bring in more passengers even at extremely low


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prices. Flying an extra passenger only costs the airline the cost of an extra sandwich. As long as the ticket price is

over and about this extra sandwich cost it will make a profit.

However if the flight is fully booked or nearly full and certain passengers are desperate to make the flight the airline

will substantially increase its prices to accommodate that passenger.

I have seen this concept even applied in city rail and bus transport. There are nonpeak rates after 9 AM and before 3

PM before the office crowd rush.

This concept can also be applied to cinema halls, opera performances and seminars. During weekdays many seats

are not taken which can be sold at marginal rates to attract certain types of customers. Senior citizens, mums with

little kids not in school, performances to the aged or specially gifted folks, low income earners, part-time workers

and those who work on night shifts are all examples falling into this category. We often see that when the demand is

extremely high during weekends and holidays these businesses actually increase their prices or tickets are sold at a

premium.

Even hairdressers use this concept. Many hairdressers have cheap rates and low prices during nonpeak hours and

high rates at weekends when their customer flow is very high.

If your business has facilities located over a multi-geographical area you may be able to rent antenna space to

cellular phone companies. Typically these companies will pay for the use of rooftops as a place to erect their

antennas.

Another option is for billboards as advertising if you occupy a central location with a high visibility building. This

enhances your revenue without any additional cost you.


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The point here is to explore alternative uses for your facilities. Remember they are assets that can be used 24 hours a

day, seven days a week. There are numerous opportunities available for increased revenue if you look for them.

Training room and function room facilities can be rented out in the evening or weekends.

How about spare land or excess slots you own for public car parking?

Establish a 45 to 60 hour per week work environment among the managers. Cost structures among your competitors are basically similar to your cost structure so you will obtain an advantage because your managers are working more hours. This assumes that your managers are productive. Managers who have responsibility for a workforce of hourly employees are usually at the facility, a retail outlet, restaurant or office at least this amount of time. Sometimes business volume is extremely low at early or closing hours. During the slow hours managers can save substantially by scheduling fewer employees and filling it themselves. In addition to the Labour savings, managers will become more knowledgeable about operations and will find ways to improve customer service, training and operations. I have put this procedure in place in several places. At the beginning there will always be resistance, but once managers get beyond the initial hump things will run smoothly. I also find that certain incentive programmes work well here. Get the manager's incentives based on Labour dollar saved and they come to understand the process.

Turning cost into revenue involves asking these important questions and seeking the answers to them

Are there some cost lines that you could turn into revenue?

Could menu pricing lower net cost to you and for your customers?

Could you get for free things that you pay for or even better get people to pay you?

Can some of your cost centres become profitable third-party businesses?

Can you use the slack in your capacity to earn more marginal revenue?

29515415 driving down costs with lateral thinking (1)

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