Cutting Costs vs. Improving Efficiency

Following more than a decade of expansion, the Coalition Government’s aggressive stance on reducing the budget deficit has resulted in most public sector bodies initiating major cost-cutting programmes.  Since it is a truism that you cannot indefinitely continue to spend more than you earn, the cost cutting, of itself, is no bad thing, but the same might not be said for the consequences.

The opponents of the Coalition Government argue that the cuts are going too far and too fast and are therefore likely to make the recession longer and deeper than would otherwise be the case.  Their supporters argue the opposite; that taking drastic action now will put us on the road to recovery sooner.

My point in this article is neither to support nor oppose the cuts, but to question the ability of the people making the cuts to do the job well.

On many occasions throughout my life I have heard people say things such as; “Any old fool can make cuts, but very few people can grow things successfully”.  Unfortunately, this appears to have become an accepted doctrine, whereas in my experience, neither is more or less difficult than the other.

In their excellent book “Execution”, the ex-CEO of Honeywell Larry Bossidy and the respected business writer Ram Charan argue that the reason why many strategic plans fail is not because the plan was a bad one, but because the people who devised the plan over-estimated the ability of their organisations to execute the plan.

Although their book looks primarily at the implementation of plans for growth, the same principles can also be applied to plans to reduce cost. 

The conclusion drawn in their book is that to be successful, any plan needs to be within the capacity of the organisation to execute.  In other words, if the people are either incapable or unwilling to execute the plan effectively, it will fail.  When you combine their research findings with an underlying assumption that ‘cost-cutting is easy’, you can see why there might be a concern as to how effective the current public sector cuts might be.

To understand this in more detail, consider two examples; one of good cost cutting, the other less good.  First the bad example:

When poor managers are asked to cut costs their starting point tends to be to turn to the accounts to see which items of expenditure can be eliminated.  This is bad practice as it assumes that there are things you are doing that you can do without.  But if that is the case, why have you got them in the first place?  The second reason it is bad practice is that cutting ‘things’ does nothing to improve efficiency or effectiveness.  This was a point Nick Clegg, the Deputy Prime Minster, was making when he recently drew a comparison between two councils.  One was saving money by closing libraries, swimming pools and all but one public toilet while the other was managing to make similar savings while protecting front-line services.  Putting a red line through an item in the chart of accounts is easy; delivering the same service for less is not.

As an example of best practice you need to look to the people who constantly look to squeeze out extraneous costs.  For these people cost cutting is not a task, it’s a culture.  These people are not misers, they are realists; and they tend to achieve the same or better results than others but in more efficient ways. 

Take Brian as example (not his real name).  Brian runs the IT department in an area of central government and has had a long-running battle with the procurement team over the means by which they acquire laptops. Brian buys them as and when needed whereas the procurement team would prefer that he purchases less frequently but in larger quantities, so that they can negotiate quantity discounts with suppliers.  Brian finally won his argument by comparing his approach with a similar sized organisation who used the procurement team’s preferred approach.  While the other organisation had a lower average cost per laptop, their overall costs were higher because they ended up buying more computers and the feedback from staff was less favourable as people needing a new PC were frequently left waiting until the next procurement cycle.  In Brian’s organisation, a person needing a newer and more powerful laptop received one instantly with the old machine being handed on to a less demanding user. 

The difference is a subtle one, but in one case someone is simply looking at costs while in the other someone understands how costs are incurred.

The salient question organisations should therefore be asking themselves is not what costs can we cut?  But rather, what can we do to make ourselves more efficient?

About the Author
Alistair Schofield is Managing Director of Extensor Limited.