Cost Control In An Era Of Fast Escalating Expenses

Growing profits today is no longer just a “nice thing to do”.  It is now critical today in an era of escalating expenses e.g. benefits, insurance, energy, cost-of-goods-sold, labor costs, etc.  It is unlikely that even the savviest business executive/entrepreneur can successfully impact these new facts of doing business without a strategy/plan to do so.

Expenses can be chopped but, typically, only over a period of time e.g. you can’t chop fixed costs quickly.  Even “variable” expenses are subject to short or long term commitments e.g. insurance costs, benefit costs, facility costs, etc.

So what does a company need to do today to bring the costs back under control?  There are only a few options:

§  Add profits

§  Cut Costs

§  Enhance Internal Systems/Procedures To Increase Profitable Revenue Production & Bottom Line Profits Without Adding Additional Costs.

Adding profits is a viable option providing that you have the ability to impact the sales areas.  Building sales/profits is usually a long-term exercise – certainly one that is should be included as you do your business plan.  We will address this topic in another article in the near future.

What business people need to do today is to make a commitment to spending enough time to identify where costs can be brought back into proportion to the profitable revenue producing ability of the company to stay profitable and deliver a profit to the stockholders/owners.  This isn’t a once-in-a-blue-moon kind of activity.  It requires a long-term commitment.  And it requires systems/procedures to enable you to monitor/manage and deal with costs out of proportion to the company’s ability to deliver profits.

Few companies can make large cuts in expenses without compromising the company’s viability and ability to continue operations.  So what can I do now to begin to make changes ASAP?  Begin by doing the following

You need to ask yourself the following question: Do I have the systems in place that enable me to closely monitor my costs, efficiencies and profit levels?  If not, why not?  If so and you’re not using them, start to do so soon.  And if you don’t have the systems in place, get them installed and operational soon.  The only one who will lose is the business executive/entrepreneur who continues to believe that “I’ll get better” or I don’t think I need to do anything.  Expense escalation is a fact of life in today’s business and it isn’t going way anytime soon.

Consider the following:  Your company is looking for a way to improve your bottom line. As you evaluate your own performance, you look at sales and financial data; however, operating expenses are one of the biggest contributors to costs in companies.

A cursory look at the revenues of different industry verticals and the portion of money companies like your own spend on operating expenses reveals something startling. Across the board, except for a few information-intensive verticals, operating expenses are a big component of the costs of doing any business.  And, remember, these costs are growing exponentially.

Revenues and Operating Expenses in the U.S.

Operating expenses as a percentage of revenue varies from a low of about 30 percent to as high as 80 percent depending on your business model and how you go to market.   Internal business processes contribute almost all or at least a large part of the operating expenses in any company.

Even a 10 percent reduction in business process costs, reduces operating expenses and increases the bottom line directly. Quite often, it doubles or triples its profits right away!  More efficient and effective business processes delight customers, increasing sales, contributing even more to the bottom line.

Process improvement is no longer a luxury or nice to have. If a company does not do it, its competitors will. Businesses such as Dell Computer Corporation are using the Internet to execute their order-build-deliver models for sales, often completing the whole cycle in 10 days or less. Its competitors have been forced to radically change their own business processes to compete with them on an even footing. The key questions then to ask are:

§  Do you even have a precise list of key business processes in your company?

§  Do you know how well your business processes are doing with respect to quantitative and qualitative measures?

§  How did they do last week, last month, last quarter and last year? Are they improving? Deteriorating? Or in steady state?

Measuring A Company’s Performance:

Here we outline four sets of measures of a company’s performance:

Financial – This relates to the financial performance of the company. What are our financial objectives, measures, targets and initiatives? How did we actually do financially when compared to targets? The financial and accounting systems and the financial data warehouse help assess this perspective.

Customer – This focuses on the customer and how we’re doing with our efforts to serve them. Who are our customers?  How did we do with respect to them?  What are our objectives, measures, targets and initiatives e.g. are we successful in increasing our penetration of a commercial account or adding additional sku’s to an average order, etc.  How did we actually do sales-wise, when compared to predetermined targets? The sales reporting systems should tell us if (?) we spend the time to review them regularly.

Internal Systems – This relates to how we do business and our operating systems. What are our processes? What are our objectives, measures, targets and initiatives in the area of business processes? How did we do with respect to them?  Have we identified areas where change could cut cost or add efficiencies?  If not, why not?

Willingness To Learn And Make Changes - This pertains to the objectives of the company and its employees. Is the organization improving and learning to improve? What are the objectives, measures, targets and initiatives in the area of adapting current systems/procedures to more efficient alternatives?  Have we made efforts to upgrade the skills/knowledge of our management/line staff?  Currently few organizations have formalized and are tracking this area.

Your Scorecard and Process Warehouse

What is a Process Warehouse?

Definition:

Bill Inmon coined the term “data warehouse” in 1990. His definition is: “A (data) warehouse is a subject-oriented, integrated, time-variant and non-volatile collection of data in support of management’s decision making process.”  The system is defined below:

Subject-focused – Data that gives information about a particular subject instead of about a company’s ongoing operations.

Integrated Information – Data that is gathered into the data warehouse from a variety of sources and merged into a coherent whole.

Time-Variable Information – All data in the data warehouse is identified with a particular time period.

Non-Critical Information – Data is stable in a data warehouse. More data is added, but data is never removed. This enables management to gain a consistent picture of the business.

This definition could not be more appropriate in the context of processes in an organization

2).  Process Warehouse – The process warehouse is a process-oriented, integrated, time-variant and non-volatile collection of data that helps management get a handle on its internal processes. Given the enormous amounts of its money it spends on processes, the first step toward improving them is to create and utilize the data that can support it in its efforts.

What would a useful process warehouse contain?

Components of a Process Warehouse

Process Catalog – This is an inventory of the processes that an organization uses in its business. This is a central place where all data about the processes is stored and retrieved as necessary.

In a typical telecom company, in customer service alone, there are hundreds of business processes that are in operation at any time, just for one line of business such as Landline or Mobile services.

Consider additional value – added services and additional businesses, and pretty soon you have many hundreds of business processes that are in operation. Names of processes, who designed them, dates they went into operation, location of the stored process documents, the names of the process owners, their e-mail addresses and phone numbers, the measures used on these processes, the calculations for the measurements are all natural parts of a process catalog.

Typically, for each process you may have a few hundred attributes and values you need to store and retrieve. Many companies formalize their processes with ISO 9000 standards, but the information is scattered throughout the company, quite often on the desktops of individual process owners. A process catalog centralizes all this information and enables anyone to access details of any one process or run reports across processes.

Process Models – In order for measures and targets to be instituted for a process, you need a model of the process and the different process steps involved. You also need a multidimensional cube to be associated with the process model for fine-grained process analysis. If a process does not meet its target measures, you need more information to analyze the problems. If a process does not meet turnaround times (TAT), you may need to see what steps contributed more than others to the TAT not being met.

Most importantly, are there specific kinds of customers, specific kinds of products or services that cause the slips in TAT? The 80-20 rule applies very much to processes. In order to track down the 20 percent of the cases that cause 80 percent of the slip-ups in your process, you need a multidimensional cube to give you insights into where you need to concentrate your process improvement efforts on.

Process models need not capture only quantitative information such as TAT, accuracy and error counts. Qualitative factors such as customer satisfaction also form natural process measures.

Process Execution Information - You may need to collect process execution information to see how a process is doing today, this week, this month, this quarter, etc. Process execution information may be available in real time or, in many cases, in the form of batch reports or spreadsheets. This data needs to find its way back to the process warehouse to be useful. Process execution information could also be sampled instead of being collected in an exhaustive manner as long as the samples are representative.

Process Analysis Information - Once you have process model and process execution information, you are ready to create and use process analysis information. You have actual process execution information of TATs, accuracy and error rates to compare against targets for each process step. Now daily, weekly, monthly reports can be generated for appropriate decision making. Incorporation of multidimensional modeling in the process model can help you drill down targets that have not been met, down to a customer type or product type or service type that you have included as dimensions in your process model. Statistical process control charts generated from the information collected can help you see if the processes are in statistical control; and if not, you can take appropriate action.

Process Capability Information – Once you undertake process improvement efforts, you should be able to go back and compare “before” and “after” snapshots of process performance to see how you have improved. More importantly, you may need to keep monitoring to see if the processes are still under control or not.

This article outlined a set of possible components for a process warehouse. The process warehouse provides the internal process key performance indicators (KPIs) for any organization, the missing link in business performance management.

Escalating operating expenses and competition will force organizations to take a hard look at internal business processes since they are the keys to the company’s survival and competitiveness.

A process warehouse consolidates all information about a company’s processes in an integrated database and makes available valuable information for decision-making. A process warehouse facilitates continuous improvement. The potential payback is increased sales and lowered costs because of more competitive, efficient and effective processes.