Commentary -- Three Levels of Costs

Cost reduction efforts in past decades dealt chiefly with capacity adjustments — matching direct labor and plant to cyclical variations in demand. This still occurs today in nearly every industry but supply - demand matching is generally separate from operating cost reduction as currently practiced. Cost reduction now occurs at three primary levels:

1. Waste and Redundancy
As competition intensified, indirect costs came under attack first through the elimination of waste and redundancy. Cost accounting, cost centers, budgets, and similar tools made it possible to identify and cut obvious sources of unnecessary costs. Subsequently, consolidation of back office functions served to dramatically cut redundancy.

2. Process and Practices
In the 1990s, the "easy" targets of waste and redundancy were exhausted and attention turned to costs embedded in weak business processes and practices. Painful, lengthy process reengineering efforts and application of "best practices" helped increase efficiency and often allowed further major reductions in staff.

3. Organizational Obstacles
Many businesses are now approaching the limits of what process reengineering and practice improvements can offer. What remains are non-essential costs created by organizational obstacles:

Obstacles in each of these areas can increase the costs of transactions between individuals and groups, create costs because of filtered, misunderstood and biased information transfer, and prevent full utilization of valuable knowledge residing with employees, clients, customers, suppliers and others.

Businesses are just beginning to address costs that are "built into" their organizations, people and interactions. These costs can be enormous and they are usually well hidden. Dealing with such costs can often be much easier than identifying and understanding them.

Ą A quiet, highly creative employee is reluctant to pass along valuable knowledge in a confrontational culture.

Ą A field service employee who sees a number of easily corrected problems that are creating many dissatisfied customers but is prevented from passing this knowledge along by a particularly difficult superior.

Ą A sales rep hears many customer requests for product enhancements and new products but is often reprimanded for wasting time trying to get these ideas noticed.

Ą A newly-appointed product manager full of ideas, energy and enthusiasm runs into an entrenched middle management layer that is not receptive to anything other than low or no risk, micro-changes to existing products.

Ą A bank branch manager is frustrated by having to refer local customers to a distant central credit processing center and then having to deal with the unhappy customers.

You will almost certainly be able to think of similar examples from your own organization.

Organizational culture can create great competitive advantages (e.g., Microsoft) but it can also produce large amounts of unnecessary cost. A strongly collegial culture (e.g., Xerox, Kodak, Polaroid) can stifle innovation and block vital knowledge from reaching management. A confrontational culture (Motorola, GE) can have the same effect unless you do as GE has done — purge the organization of most of the non-confrontational personalities.

Organizations with cultures driven by a charismatic founder can also inhibit the flow of valuable, vital knowledge from within. Only what the chief wants to hear gets through. Such obstacles can remain in place long after the departure of the revered leader.

Organizational costs created by such obstacles can impact not just sales and innovation but also costs that could be eliminated if knowledge of them could flow freely.

Creating a culture-free channel for communication is the first step. This can release knowledge previously trapped by cultural barriers and provide an open management with new opportunities for cost reduction, incremental revenues, and innovation benefits.

While great advances in formal communication systems have occurred, with the Internet playing a major role, informal communication between individuals and groups has scarcely been touched. E-mail has replaced memos and letters in many cases but has not changed the underlying dynamics.

We communicate today with accuracy, completeness, and clarity that is perhaps less than at any time in past, thanks to our fast-paced business environment. Inaccurate, incomplete, and misunderstood communications raise costs by requiring unnecessary meetings, fixing whatever may have been affected by faulty communications, and adding substantially to the need for additional clarifying calls, e-mails, and other interactions.

Can anything be done about such costs, or are these simply the costs associated with all human interactions?

Thirty years of consulting with all types and sizes of organizations has convinced me that there is huge potential here if approached right. I hear story after story from people in the trenches about communication obstacles that could be removed if we knew about them. The folks that know about these obstacles are everywhere in the organization but are most knowledgeable at the main points of interactions.

Territoriality, personality conflicts, and tribal behavior are alive and well in virtually all organizations. We all live with their results daily, spending who knows how many hours resolving disputes, smoothing ruffled feathers, calming rhetoric, and putting out fires. The real costs of such unproductive activity are enormous.

Can anything be done about such costs, or are these simply the costs associated with all human interactions?

Again, the answer lies in identifying interpersonal conflicts and selecting those that appear to be treatable. We clearly will never get rid of all, or perhaps even the majority, but there are enough that can be addressed to make the effort easily worthwhile.

We are all familiar with individuals who have difficulty communicating or interacting with others. Shyness, language problems, attitudes, reluctance to face a confrontational culture, and a host of other traits and abilities are at work here. In some cases, the person with difficulty communicating is highly creative, with the potential to provide valuable knowledge but unable to do so because of personal limitations.

The organizational costs created in these situations are mainly those of lost opportunity and untapped knowledge. Sales and innovation are the chief victims.

Fortunately, this can be one of the easiest and most rewarding areas to address. Many of these people will respond enthusiastically to a means of communication that gives them privacy, absence of confrontation, opportunity to express themselves in any manner they choose, and a neutral channel.

You may not think of leadership as a source of unnecessary costs but it can be. The most common situation is lack of leadership in fostering a culture that encourages and facilitates knowledge flow from every part of the organization. Common also is the opposite — very strong leadership that discourages and creates obstacles to knowledge flow. Both can generate large unproductive costs and can result in the loss of both sales opportunities and innovation benefits.

Lack of leadership in this case is by far the easier problem to address. Companies lacking communication leadership are often collegial, open, or even entrepreneurial, in which the lack of leadership is simply omission, not intentional. If they become aware of the value of actively encouraging and facilitating knowledge flow throughout their organization, many will quickly add the necessary leadership.

Step one is demonstrating to management that such valuable knowledge exists abundantly in their organization.

Once management sees and understands the potential available from more effective knowledge communication, most will respond enthusiastically and productively. Opening a new channel for communication — neutral, open, and easy to access by all employees — can be an excellent starting point. Knowledge tapped from this channel should be fed to receptive managers who are willing to act on whatever proves to be of significant value.

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