Fire engines are really important. When someone’s house or business is burning down or there is a major problem it will often be a fire engine that “saves the day”. That is why they have real value.
But, when things are quiet, fire engines just sit there doing nothing. What is worse is that they are a large cost item sitting idle. They are really inefficient.
Why would we tolerate such a large cost item sitting idle? Surely, if a fire department is to be successful we should be keeping large cost items busy or efficient? That does not appear to be the case.
The reason is that for a fire department to be successful it must have protective capacity. It must be able to respond to problems quickly and accurately. The only time it needs to be efficient is when it is travelling to the burning house. Red lights start flashing and roads get cleared.
If we kept the fire engine running and busy 100% of the time it would wear out, be more likely to breakdown, require more servicing and be less likely to save the day.
Let’s try this out with your business.
Your business is really important. When a customer needs something it will be your business that saves the day. Your business has real value.
But, when things are quite your people sit there doing nothing or worse pretend to be doing something while doing nothing. Your people are inefficient.
Why should you tolerate such a large cost item sitting idle? Surely, if your business is to be successful you should be demanding that people are busy and efficient all the time. Perhaps not.
Consider that for your business to be successful it must have the protective capacity. Your people must be able to respond to customers quickly and accurately. Consider that the only time your people really need to be efficient is when the next customer needs something. Red lights should then start flashing and roads should be cleared.
If you demanded that your people were running and busy 100% of the time they would soon wear out, be more likely to break down, require more servicing and be less likely to satisfy your customers.
How efficient are your people?
If value is a product of the customer’s perceptions (eg: people in the business work with the customer to create value) then surely those closest to the customers are some of the most valuable. I know as a customer that I don’t care about ‘efficiency’, I care about having my needs and wants met. Businesses need to understand what customers truly value and focus their attention on designing interactions that support value creation. Stop focusing on cost first – get it right with the customers, build revenue THEN focus on operational efficiency in the right areas (cut non-value adding costs, such as management retreats at the Copthorne) to increase profit margins.
Thanks for your post Linden.
You have highlighted a very important point. There are two approaches a business can take to increasing profitability.
The first approach is to focus on cost reduction (doing the same with less).
If a business focuses on cost first as a means to increasing profitability then they have to be absolutely sure that it does not harm some or several critical functions in the delivery system to the customer. It is necessary to map every single function (and it’s value proposition) in order to be successful. This can be a challenging and generally time consuming task.
If a business is serious about continuous improvement then there is something else important to consider when adopting a cost reduction approach. If they manage to get a 8% reduction in costs across the board in their first attempt (an impressive result) what will they get in their second attempt, 2%? The likely hood of doing harm to delivery system to the customer is going to go up at the same time. The third attempt is likely to gain less and increase the risk further.
The second approach is to focus on productivity (doing more with the same).
“Designing interactions that support value creation” is all about increasing productivity. The more profitability achieved by an increase in productivity the less pressure to look for profitability through cost reduction (management retreats at the Copthorne may still be on the agenda).
More importantly, if a business is serious about continuous improvement then a focus on productivity should be more attractive. If a business manages to get a 10% increase in productivity in the first attempt the likely hood is that they have improved their delivery system to the customer at the same time. What will they get in their second attempt? Could they get another 10%? What would be the impact on the customer? The third attempt is likely to gain consistent returns and improve the delivery to the customer.
So businesses have a choice. Focus on costs first or focus on productivity first.
Maybe the numbers will help? Lets do the math. A 10% decrease in annual costs across the board will result in a 13% increase in profitability. A 20% increase in annual productivity will result in an increase of 46.5% increase in profitability. Which makes more sense?
The trouble is in order to get more profitability through productivity we need to do things differently. In order to do things differently we need to think differently.
I recently read a blog from Seth Godin that is right on the same point.
Click here to read.