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Doug Hudgeon – The Cost Reduction Tip: Fix Core Problems

By Doug Hudgeon

The Cost Reduction Tip

Some problems just need to be fixed, regardless of cost. Last year, near our apartment in South Delhi, maintenance workers spent more than two months resurfacing our road. Every fortnight thereafter (and possible continuing to this day), a sinkhole would appear in the road and a roadwork crew would come and resurface the road.

Shortly before we left Delhi, the wheels of a water truck broke through the road surface into a cavity that everyone aside from the road works department suspected was there.

What did the department of roads do?

They sent another road crew to resurface the road. The problem, of course, is not with the surface of the road but with what’s underneath (or what’s not underneath in this case); and even if they permanently stationed a road crew next to this intersection, they would not fix the problem.

Tackling the core problem – the sinkhole created by leaking water pipes – is simply too frightening to contemplate and so the endless road repair work continues.

One of Delhi’s core problems is the poor quality of its water infrastructure. Many thousands of Delhi residents go without enough water not because of inadequate supply but because of inadequate distribution (more info).

Fixing this problem will be costly and difficult but Delhi must do it before it will be considered a world-class city.

Delaying the repairs will not make the work less expensive or easier to do. In fact, each day’s delay costs the city dearly in more road works, water distribution by trucks, and lost productivity from households spending part of their day securing an adequate water supply. Not spending the money to fix it now is false economy.

Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

Keep Your Passengers Informed

hudgeon12By Doug Hudgeon

The Cost Reduction Tip

Tom Bender from SpendCorp contributed today’s tip: It’s not enough to do good work, your stakeholders must see that you are doing good work: control, track and report.

Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

Assign Clear Personal Responsibility for Each Cost Line to a Single Individual

By Doug Hudgeon The Cost Management Tiphudgeon12 As I’ve planned my upcoming tips, I’ve been pondering which tip will be the most important. I now think this is it. You cannot reduce cost in your organisation unless you assign a single person the task of, and regularly hold them to account for, improving each cost line – and if you have to change your chart of accounts to do so then do it. Who you select as the responsible person for each cost line will depend on what you want to accomplish. If your cost reduction programme is urgent and necessary for your corporate survival, you should assign responsibility to a small group within Finance who are solely focussed on taking cost out of your organisation. However, if you are looking to improve operating efficiency as an ongoing practice within your organisation, you should assign responsibility to front line managers. Building a cost conscious culture requires empowering your managers to impact cost and valuing their success at doing so. Your managers must see themselves as personally responsible for cost reduction. Related web sources The bystander effect is well researched social psychology phenomenon. It was first studied following the killing Kitty Genovese in 1964 where her neighbours failed to intervene in her murder because they thought that someone else would. Whist this interpretation of that incident is probably flawed, you don’t want your company to die because your managers were all bystanders. Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

Cost Management Tip – Simplify Requirements Before Embarking on a Change Program

By Doug Hudgeon

The weekend cost management tiphudgeon12

On the weekends, I’ll give a short cost management tip without web or book references.

Today’s tip is prompted by an article in the Sydney Morning Herald describing the woes and hopes of Sydney’s public transport e-ticketing project.

In 1999, the NSW government signed a contract to put in a single ticketing system across trains, busses and ferries. In 2008, the project was binned.

Documents from the ensuing court case show that the project could not be delivered because of the refusal of successive governments to agree to simplify the fare system.

Whilst this is undoubtedly the fault of the NSW government, in my experience, vendors are almost always complicit in pandering to a client’s desire to change as little as possible from their current practices.

As a case in point, after discussing the key role in the original project’s demise played by the failure simplify the fare system, the Sydney Morning Herald article humorously includes this quote from the CEO of Cubic, the vendor leading the new project (I’ve highlighted my all-time favourite vendor phrase):

Irrespective of how the fare system is structured, Cole believes Cubic will not face a problem. ”Whether it is distance-based or flat fare, zonal, multi zonal or multi modal, all of that stuff we’ve done before,” he says. ”It is all configurable within the system. Really whichever way the government here chooses to go, the system will be capable of doing it.”

Read more: http://www.smh.com.au/nsw/a-hopon-hopoff-journey-to-nowhere-20110805-1ifbq.html#ixzz1UCSObfv5

Perhaps it is. But at what cost?

Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

Change Your Processes Before Implementing New Software

hudgeon12By Doug Hudgeon The Cost Reduction Tip The success rate of software implementations is woefully low. There are lots of reasons for it ranging from overselling by vendors, overspecing by customers, lack of consultation with stakeholders, under-resourcing the implementation team, etc. But in my view, much of the source of failure comes from unnecessarily bundling high risk process change with the software implementation. For example, if you are implementing a new payment system that changes your approval hierarchy then look for a way to implement the new approval hierarchy before you implement the software. If you are implementing a new public transport ticketing system, change the fares before you implement the system. If you can unbundle your high risk process changes from the software implementation then you’ll improve your software implementation success rate – at the very least you’ll discover you have an insurmountable change management program before you spend any money! Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

End “Administrative Incoherence, Blurred Authorities and Reluctance to Accept Managerial Risk”

hudgeon12By Doug Hudgeon

The Cost Reduction Tip

Today’s tip is quote from a yet-to-be released report calling for dramatic cuts to the administrative overhead of the Canadian military. Today’s Globe and Mail has printed key parts of the 80 page report prepared by Lieutenant-General Andrew Leslie, Canadian Forces Chief of Transformation.

The printed excerpts could serve as a blueprint for any organisation undertaking a cost management initiative. The excerpts are striking in how concisely and entertainingly they articulate the key issues and key obstacles. Additionally, the impetus for undertaking these reforms is also succinctly set out: “Canadians deserve better”.

This phrase “__________ [insert stakeholder name here] deserve better” is an appropriate title for any corporate cost management initiative. We owe it to our shareholders, our staff, our suppliers and our customers to be as efficient and as effective as we can possibly be. But enough soapboxing. Onto the key issues and key obstacles as set out in Lt.-Gen. Leslie’s report:

Key cost management issues:

7,000 regular forces personnel and civil servants hold jobs that serve little purpose 4,500 full-time reservists are under-utilised and should be converted to part-time service Decrease by 30% spending on private sector consultants Consolidate overlapping departments

These changes would cut administrative overheads by more than CAD $1B per annum.

Key cost management obstacles: The key obstacles highlighted in the report are the same key obstacles faced by every organisation undertaking such an initiative: entrenched bureaucracy protective of the status quo and lack of leadership. One of my favourite quotes from the article is the General’s comment on the internal resistance his team met whilst conducting their enquiries: “The tendency was to argue for the preservation of the status quo” noting that some internal consultations could be best described as “grimly amusing”. From my time advising on defence force contracts, I can appreciate the challenges in front of Lt-Gen. Leslie. All the best, General!

Other favourite quotes from the article:

Reactions to previous reports urging reform

“If the results were likely to cause institutional angst, a variety of options existed, from waiting until the team disappeared, to conducting lengthy reviews of the recommendations and, finally to classifying the work to an extent that only a few could see it.”

On resistance to this report

“[At] a large meeting in December 2010 involving the generals, admirals and senior DND civil servants … it became apparent the tendency was to argue for the preservation of the status quo. … Though grimly amusing, these interactions proved that consensus has not and probably never will be achieved on any significant change.”

How DND handles funding cuts

“Most subordinate organizations have done their very best to preserve their structures, their internal funding (what they need to take care of themselves) and their process … which usually result in overhead staying much the same while support to the front-line deployable unit is cut far more than originally forecasted.”

On waste and inefficiency

“These are symptomatic of old processes, new overhead layered on old, lots of committees and in certain areas a sometimes bewildering number of steps …to actually achieve a government directed spending outcome.”

Cause of increasing trend to not spend allotted money

The issues of stifling process, blurred authorities and accountabilities, as well as some reluctance at all levels to accept managerial risk … go a long way in explaining a disturbing and increasing trend as to why many hundreds of millions of dollars have remained unspent, starting in fiscal year 2006/07 and growing to this day.”

Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

Create a High Profile Internal Team to Identify Best Practices and Embed a Cost Conscious Culture

By Doug Hudgeonhudgeon12

The Cost Reduction Tip

In this tip I discuss embedding a cost conscious culture where you have a number of comparable operating units. Examples include retail banks or multi-site operations such as a national insurance brokerages, consulting firms, law firms, or logistics providers. Where you have the multiple operating units, you have the opportunity to compare their cost profiles, identify best practice, build relationships between key staff and embed best practice across the organisation. Whilst this sounds somewhat utopian, it is achievable when you meet the following pre-conditions:

  1. The operating units view themselves as somewhat analogous,
  2. The management accounts are comparable across the units,
  3. The cost reduction initiative has CEO/Board support, and
  4. The designated managers are key staff in their units – you will get great value from selecting the heir-apparent for each unit for this role. Not only does this prove to the staff in each unit the importance of the initiative but it provides the heir apparent with the opportunity to build deep relationships with heirs in other units and see the entire range of operating models across the organisation.

Once you have met these pre-conditions, the steps are pretty obvious: get the designated managers together monthly to do a guided review of their cost lines. In these reviews, across each cost line, identify and highlight the practices of the best performers and call out the practices of the worst performers. The job of the person guiding these reviews is to set targets for the worst performers and hold them to it next month.

The key to making this work is unrelenting persistence in assessing performance against targets in subsequent sessions. See also Tip 1 and Tip 5 . Related web sources When creating a cost conscious culture in your organisation, you need to enlist your key staff. Without their support, you will not embed a new culture. Academics studying this areas refer to it as Normative Social Influence.

This area of research has shown that you can use social or peer pressure to influence behaviour when the person highly values the members of the influential group and is regularly updated on their activities. This dynamic is easily created by putting an influential team in place and updating staff regularly on progress. A future tip will focus on why you must not be squeamish about making this a high-profile activity in your organisation if you are going to embed a cost conscious culture. Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.