TagEnterprise Performance Management

Achieving True Cost Transformation

Suppose your business is facing significant competition from traditional and non-traditional competitors. Demand for your company’s products and services is tepid and customers are deserting you. Revenues are in sharp decline and the impact is beginning to show in shrinking margins.

To increase revenues and alleviate shrinking margins you try to cross-sell and up-sell your products and services, but all your efforts are in vain. You ultimately decide to embark on a company-wide cost transformation initiative.

Do you cut back on equipment investments, reduce marketing and IT spend, sell some of your business assets, lower inventory levels, lay off certain employees, freeze salaries, shrink transactional administrative costs or eliminate all cosmetic travel and training?

Although the above cost reduction measures are all necessary, they are basically short-term wins which are difficult to sustain in the face of new technologies, changing customer expectations and increasing competition from new entrants and other disruptors.

Cutting costs for the sake of it

Many organizational cost transformation initiatives fail to deliver lasting gains because they are often implemented in isolation without the context of the broader strategy of the business. You need to understand that cost transformation is not simply a matter of cutting costs randomly.

Rather, gainful cost transformation is linked to strategy and drives the effective execution of that strategy. In my experience, I have realized that majority of cost initiatives are more inward focused and less outward focused.

It’s all about increasing the bottom line as opposed to making sure the business remains competitive. More backward-looking and less forward-looking.

Because cost management is misaligned with business strategy, there is little focus on generating capital to fund strategic growth initiatives or diverting resources from low performing business units or unviable markets towards higher value and return opportunities.

Partly to blame for this misalignment is lack of understanding of strategy by employees across the organization. As a result, employees are unable to distinguish necessary costs (essential to meet customer expectations and deliver the organization’s value proposition) from unnecessary costs.

That is why it is important for employees across the organization to have a clearer understanding of the strategy of the business, its objectives and how these will be achieved, including the costs.

The devil is in the detail

Given that there are necessary and unnecessary costs, implementing across the board cuts will only yield marginal gains. Ultimately, high performing business areas or markets end up badly impacted because of such mediocre management decisions.

Instead of channeling resources towards investments, projects and markets which matter, or customers who matter, lackluster business performance areas tend to receive the limited resources.

To obtain customer, product or channel profitability visibility and optimize costs, you need to understand the key drivers of each. Implementing activity-based costing principles and techniques can help you answer any cost transparency and visibility questions you might have.

For instance, basing cost reduction decisions on consolidated gross margin alone obscures the reality that your business is actually making losses on particular products, customers or in certain markets.

You therefore need to drill down and understand the costs-to-serve each customer, service line or product and their drivers. This will in turn help you explain why costs are unnecessarily higher in certain business areas and make informed decisions.

Thanks to advances in technologies, companies are now able to leverage advanced analytics to analyze customer, product, market and channel data and generate insights into costs and where savings opportunities exist.

Use it or you will lose it

This culture is prevalent in organizations that are yet to break free from the shackles of the traditional annual budgeting process. During the financial year, business unit managers underspend their budget allocations.

However, towards the end of the year, to avoid losing the unused budget allocation in the forthcoming year, they willy-nilly spend the funds resulting in unnecessary costs. These funds could have been deployed somewhere for profitable return.

Unfortunately, such scenarios do little to transform the cost structure of the business and transition to a value-based model.

To avoid the culture of “use it or you will lose it” spreading over, leaders need to foster a culture of accountability, performance reporting and continuous improvement.

Hence the need to align cost transformation initiatives with strategy. Cost reduction targets must clearly be defined, both at enterprise and business unit levels, then hold leaders accountable for achieving performance improvement goals.

It’s therefore imperative to educate employees on the future financial needs of the business. They need to understand the costs that really add value in your business, and those that don’t.

Cost transformation is not a one-time initiative. Instead, it is a continuous improvement approach for leaders seeking to transform the cost structure of their companies and deliver a sustainable business advantage.

This does not necessarily mean that leaders should entirely focus on cost reduction efforts. You need to maintain an appropriate balance between achieving cost reduction targets and supporting necessary innovation and process improvements that drive effective execution of strategy and the ultimate success of your business.

Prioritizing cost optimization initiatives with only short-term goals in mind can cause unanticipated problems.

The Basics of Strategic Planning and Strategy Execution

Effective strategic planning and strategy execution are key to driving business success and growth. Unfortunately, leaders tend to focus more on the planning process and less on doing or executing.

Strategic planning is the process of articulating the vision of what the organization wants to be, defining its strategy, setting strategic initiatives, making decisions on allocating its resources to pursue this strategy, and aligning the organization to ensure that employees and other stakeholders collaborate toward common objectives.

The focus is on the future direction and performance of the organization. Through strategic planning exercises, organizations tend to produce 3-5 year rigid strategic plans documenting the organization’s strategic goals as well as action plans to achieve those goals.

Rigid strategic plans work best in a stable environment. However, times have changed. Today’s business environment is awash with substantial volatility, uncertainty, complexity and ambiguity. The abnormal is now normal and uncertainty is now certain.

As a result, enormous doubt has been cast on the effectiveness of strategic planning in the current environment, leading some to claim that strategic planning is dead.

I don’t buy this view. Strategic planning is not dead.

Yes, the environment is constantly evolving, and the organization needs to be flexible, adaptive and responsive. But, how can you address and navigate the future without a well laid plan and strategy?

In their book Sun Tzu: The Art of War for Managers, Gerald A. Michaelson and Steven Michaelson cite that:

A common mistake is to consider planning as only a mental process, an idea in our head that simply looks at the past and adjusts for the future. If your plan is not in writing, you do not have a plan at all. Instead, you have only a dream, a vision, or perhaps even a nightmare.

This is not about producing long strategy documents that very few read. Rather, it is about a producing a simple written plan that is easy to understand, such as a strategy map.

Strategy maps helps leaders define and communicate the strategy of the organization by creating a visual representation of the key business objectives on a single page. Strategy maps also outline the strategic aims and priorities of the organization and help to ensure everyone is working towards common goals.

The organization’s plan must not be rigid in nature, but flexible enough to accommodate changes in the environment or business requirements.

As a football fanatic and an avid Arsenal FC fan, I have experienced a fair share of exciting and disappointing matches. But, over the past few years, I have come to appreciate the fact that rigidity does not win matches.

Within the same match, I have watched Arsenal quickly switch from a 4-3-3 formation to a 4-2-3-1 and make substitutions depending on the realities of the match. Even though the manager had a 90 minutes’ game plan before kick-off, he also had other plans that allowed for flexibility in formations to adapt to reality.

The same approach should be adopted in business. Rather than stick to rigid planning systems that convey a message that obedience to the plan is key to business success and growth, leaders need to implement plans that allow the assessment of business performance under different scenarios.

Defining strategy and tactics

Put simply, strategy is about doing the right thing. It is about how an organization will move forward and figuring out how to advance its interests. In war terms, it is seeking victory before the battle.

On the other hand, tactics is doing things right. It is the implementation. The battle or action of the war.

However, often times there is confusion on whether strategy determines tactics or it is tactics that determine strategy.

Seeing that strategy definition is part of the planning process, and tactics is about implementation, it is safe to conclude that strategy always comes before tactics.

It is therefore important for leaders to understand that for tactics to effectively support the strategy by doing things right, the strategy itself must be right first. You must be doing the right thing. A bad strategy underpinned by good tactics can be a fast route to failure.

To do the right thing, leaders need to primarily stop focusing more on or reacting to competitors. Great strategies do not arise from reacting to competitors.

Instead, they are a product of intense discussion and deliberation that take into consideration the organization’s internal strengths and weaknesses including external threats and opportunities.

The focus should be on identifying unfulfilled customer needs or Jobs to Be Done, then devising solutions to meet those needs and ultimately assessing competitive realities to determine the viability of your strategy.

Oftentimes, the decision sequence is wrong. Leaders initially focus on profit requirements, and the decision on the needs of the market is secondary. First, you must satisfy the needs of the market. Then, and only then, can you profit from your actions.

Separating planning from execution

Innovation, profitability, and growth all depend on having strategy and execution fit together seamlessly. However, spending too much time in planning can breed indecisiveness and error.

The important thing is to get started. Unfortunately, many of us are good at thinking and bad at doing. With the right strategy, the battle is only half won. The strategy succeeds only with informed and intelligent execution of tactics.

Issues arise when planning is separated from execution. Majority of good strategies fail due to poor execution. Well thought-out plans are not followed through properly because of limited resources, managerial talent or operational skills. In some cases, it is because people are focusing on the wrong things, products or services.

To avoid poor execution of good strategies, leaders must have the ability to clearly define and communicate the strategy to employees in a format that is easy to comprehend. This is necessary for ensuring that everyone has an idea of what the key priorities of the organization are and their role in accomplishing these.

It is also important to measure, track and report on the progress of the strategy against the critical success factors of the business. This is essential for determining what is working and what is not working and make immediate adjustments to prevent further deterioration.

I welcome your thoughts and comments.

More Data Doesn’t Always Lead to Better Decisions

Thanks to advancements in technology, our digital lives are producing expansive amounts of data on a daily basis.

In addition to this enormous amount of data that is produced each day, the diversity of data types and data sources, and the speed with which data is generated, analyzed and reprocessed has increasingly become unwieldy.

With more data continuously coming from social spheres, mobile devices, cameras, sensors and connected devices, purchase transactions and GPS signals to name a few, it does not look like the current data explosion will ebb soon.

Instead, investments in IoT and advanced analytics are expected to grow in the immediate future. Thinking back, investing in advanced data analytics to generate well-informed insights that effectively support decision making and drive business performance have been the paragon of big corporations.

And smaller businesses and organizations, as a result, have for some time embraced the flawed view that such investments are beyond their reach. It’s no surprise then that adoption has been at a snail’s pace.

Thanks to democratization of technology, new technologies are starting to get into the hands of smaller businesses and organizations. The solutions are now being packaged into simple, easy-to-deploy applications that most users without specialized training are able to operate.

Further, acquisition costs have significantly reduced thereby obviating the upfront cost barrier, that for years, has acted as a drag on many company IT investments.

While the application of data management and advanced analytics tools is now foundational and becoming ubiquitous, growing into a successful data-driven organization is about getting the right data to the right person at the right time to make the right decision.

Distorted claims such as data is the new oil have, unfortunately, prompted some companies to embark on unfruitful data hoarding sprees. It is true that oil is a valuable commodity with plentiful uses. But, it is also a scarce resource not widely available to everyone.

The true value of oil is unearthed after undergoing a refinement process. On the contrary, data is not scarce. It is widely available. Nonetheless, akin to oil, the true value of data is unlocked after we have processed and analyzed it to generate leading-edge insights.

It’s a waste of time and resources to just hoard data and not analyze it to get a better understanding of what has happened in the past and why it has happened. Such insights are crucial to predicting future business performance scenarios and exploiting opportunities.

More data doesn’t necessarily lead to better decisions. Better decisions emanate from having a profound ability to analyze useful data and make key observations that would have otherwise remained hidden.

Data is widely available, what is scarce is the ability to extract informed insights that support decision-making and propel the business forward.

To avoid data hoarding, it is necessary to first carry out a data profiling exercise as this will assist you establish if any of your existing data can be easily used for other purposes. It also helps ascertain whether existing records are up to date and also if your information sources are still fit-for -purpose.

At any given time, data quality trumps data quantity. That is why it is important to get your data in one place where it can easily be accessed for analysis and produce a single version of the truth.

Unlike in the past where data was kept in different systems that were unable to talk to each other making it difficult to consolidate and analyze data to facilitate faster decision making, the price of computing and storage has plummeted and now the systems are being linked.

As a result, companies can now use data-mining techniques to sort through large data sets to identify patterns and establish relationships to solve problems through data analysis. If the data is of poor quality, insights generated from the analysis will also be of poor quality.

Let’s take customer transactional data as an example. In order to reveal hidden correlations or insights from the data, it’s advisable to analyze the information flow in real-time; by the hour, by the day, by the week, by the month, over the past year and more. This lets you proactively respond to the ups and downs of dynamic business conditions.

Imagine what could happen if you waited months before you could analyze the transactional data? By the time you do so, your insights are a product of “dead data”. Technology is no longer an inhibitor, but culture and the lack of leadership mandate.

As data become more abundant, the main problem is no longer finding the information as such but giving business unit managers precise answers about business performance easily and quickly.

What matters most is data quality, what you do with the data you have collected and not how much you collect. Instead of making more hay, start looking for the needle in the haystack.

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