Archive for July, 2010|Monthly archive page

Seven ways to making cost reduction stick

One of management’s dirty little secrets is that most cost reduction initiatives fail to produce significant long-term savings.  According to recent McKinsey research, many executives expect some proportion of the costs cut during the recent recession to return within 12 -18 months.  Earlier research found that only 10 percent of cost reduction programs show sustained results three years later

To be fair, some savings have been easier to achieve than others.  For example, total cost of goods sold have fallen by more than2.5% over the last 10 years due to manufacturing relocation, outsourcing of non-core operations and exploiting lower input costs & IT innovations.  However, selling, general & administrative costs (including R&D) have actually remained flat over the same period reflecting higher labour costs and increased system complexity.   

In the short-term, most companies are successful at generating cost savings of up to 10% through a variety of proven strategies like improving purchasing efficiencies, outsourcing and tactical headcount reductions. Soon afterwards, however, these savings are lost as firms and individuals lose their cost cutting zeal and regain the bad spending habits that got them into trouble in the first place.

Cutting deeper and then making those savings stick requires managers to tackle the root causes of cost and inefficiency.  To do this, firms need to address messy and difficult product, structural, cultural and management challenges:

Product

Many consumer and industrial goods companies as well as service firms market too many underperforming stock keeping units (SKUs) which generates system complexity, increases error rates and prevents the firm from maximizing scale economies.  

Structure

Structural challenges prevent companies from cutting more aggressively.  These barriers include: supply chain resistance, poorly designed & administered purchase controls and siloed & overly-hierarchial organizational structures that minimize scale economies and data flows.  In addition, a lack of circulating information on internal costs and peer performance prevents managers from identifying and quantifying larger reduction opportunities. 

Culture

Many organizations have a growth-focused culture – with enabling performance-measurement systems – which is out-of-sync with an aggressive cost cutting mandate.  In these firms, serious cost cutting programs will dictate people changing attitudes, practices and priorities, something that is not easily done without change management methodologies and patience.  

Management

Generating meaningful cost reduction usually takes more time, communicating and management commitment than is usually bargained for. Furthermore, instituting major headcount reductions and role changes is not something that many EQ-focused managers would willingly embrace.

Increasing competitive and shareholder demands are dictating firms target deeper cuts.  To do this, they will need to go beyond traditional cost reduction strategies towards a more systematic and holistic approach.  There are a number of ways that managers can approach this:

Link cost reduction plans to overall corporate strategy to avoid the wrong kind of cuts that will reduce key capabilities, penalize high performing business units or starve new initiatives.   

Look at cost reduction as a change management issue in addition to a financial one.  As well, consider changing the reward system to incentivize individuals and departments towards driving and sustaining savings.

Clarify roles, decision rights, and information access so that the right individuals at the right level have the right information and empowerment to drive cost reduction.

Pursue SKU rationalization and input harmonization initiatives in order to reduce complexity and achieve scale economies.

Consider vertically integrating some key cost centers like production and logistics in order to capture greater operating leverage.

Explore ‘out of the box’ innovations like crowdsourcing whereby your customers undertake key operations like support, product testing and word-of-mouth marketing.

Treat cost reduction as an ongoing management priority that is measurable and where best practices are shared internally.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Two More Best Practices in Sustainability: Wal Mart and Rio Tinto

Earlier, we explored two companies, GE and Nike, that are considered ‘best in class’ when it comes to generating financial and environmental value from sustainability initiatives.  Below are two other leading firms in this area, according to research from MIT’s Sloan Management Review.

Wal Mart

Background

The World’s largest retailer of 7800 stores (and growing) has been at the forefront of implementing sustainability initiatives. Initially, Wal Mart focused on internal programs like greening their roofs and moving to more energy-efficient light systems.  Lately, the firm has turned its focus to greening its supply chain and encouraging it suppliers to follow its sustainability lead.

Some Key Strategies

In 2005, Wal Mart set ambitious goals of producing zero waste, using only renewable energy and selling only environmentally sustainable products.  They backed up these goals with one of the most comprehensive sustainability plans at the time.  As part of this plan, Wal Mart has pushed [sic] most of its large suppliers to switch to more green-friendly products and to track their environmental footprint.   In addition, Wal Mart is undertaking a wide-ranging product lifecycle analysis of its supply chain to identify areas with significant environmental and cost savings potential. For example, to hit its zero waste target the company is implementing a number of programs that improve inventory management, increase donations, and ramp up recycling.  Finally, Wal Mart is participating in a consortium along with academics, retailers, NGOs, suppliers, and the government in order to build a global database of product information.  This data will be used to develop an index for consumers to evaluate products based on environmental impact.  A centerpiece of this plan is the creation of a Sustainability Index which requires each supplier to rate their products based on sustainability criteria.

Results

Wal Mart’s efforts have yielded important savings.  For example, at Wal Mart’s behest Unilever switched to concentrated detergents in 2006 order to save packaging and reduce its carbon footprint. According to the firm, the packaging change has saved well over 80M pounds of plastic resin, 430M gallons of water, and 125M pounds of cardboard.   Importantly, Unilever’s packaging decision triggered a category shift to concentrated formats driving further savings.  For the future, Wal-Mart is aiming to turn its Sustainability Index into a global standard that measures and communicates the green footprint of a product, thereby becoming “a tool for sustainable consumption.”

Rio Tinto

Background

Rio Tinto is a big mining entity with a big environmental footprint.  For new projects, the company needs to win the backing of local communities, governments, and NGOs in order to reduce political, economic and brand risks and to deliver steady returns. 

Some Key Strategies

About a decade ago, Rio Tinto came up with the concept of working within countries and communities in order to operate in an environmentally respectful fashion. At the time, the company was developing a mine in Madagascar that was a source of contention.  The Madagascar government as well as NGOs were worried about threats to biodiversity and the local communit, given that the site was one of the last pristine regions on the island and a home to aboriginal people.  A plan was developed to protect the environment and create economic opportunities in the communities surrounding the project, including setting standards and goals for the company to meet. Key components of this plan include:  policies to protect biodiversity and water quality around mine locations; plans for the time mining operations would be over in order to prevent the emergence of “ghost towns” and; goals for greenhouse-gas emissions and energy use.

Results

As a result of this initiative, Rio Tinto has obtained what it calls a “social license to operate” in Madagascar thereby increasing overall corporate revenues and profits and improving their corporate reputation.  As well, the company also helped form the International Council on Mining & Metals, which encourages sustainable practices across the mining sector.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Till death do our client relationships part

Challenged by service commoditization, margin pressure, and higher client expectations, smart Business-to-Business (B2B) firms are rethinking their approach to business development and client retention.  Since it is increasingly difficult and expensive to acquire new customers, prudent B2B firms are concentrating on maximizing client retention and selling more products & services to them. Maintaining client loyalty makes intuitive sense given the 80/20 rule – 80% of revenue and profit comes from 20% of the clients.  High retention is also strongly correlated with high profitability, operational efficiency and likelihood to refer (i.e. the Net Promoter Score).  For example, loyal clients are more likely to purchase additional offerings, beta test new products and be easier to support.

Creating tighter relationships, however, is easier said than done. Deep connections are often elusive due to a variety of business and organizational factors such as poorly designed reward systems, strategic misalignments and misguided business processes.  How can firms overcome these challenges to get more out of their relationships?

One way is to design your product strategies, service plans and capabilities into your most valuable and highest potential relationships. Tighter integration between firms often leads to higher retention, share of customer wallet and customer satisfaction. For the client, they really get what they need, when they need it and how they need it. This relationship-driven model is best deployed through the sales & marketing functions using a 3-step framework: 

Analyze & Prioritize

Since every company has limited resources and time, leaders need to focus their efforts on identifying and understanding strategic accounts. To find these accounts, managers need to analyze the revenue and margin contribution of each client and then estimate what additional revenue can be garnered by cross or up-selling other products.  Managers should also drill down into these clients to understand their needs, behaviors and business drivers.  Estimating revenue risk is critical so companies need to have a good understanding of competitive offerings and the unique value they bring. Once this analysis is complete, clients can be grouped according to common needs, opportunities and characteristics.  This clustering would enable sales teams to identify cross sell opportunities, at-risk clients and accounts where higher pricing could be supported. 

Design & Implement

Richer relationships are fostered by tightly integrating a strategic client’s current and future needs within your firm’s delivery model (e.g., business development, support and product development functions).  This need not be an onerous task.  Often, firms have the right platform and structure in place but the wrong resources, policies and mandate attached to it. Companies must also ensure that their internal teams and partners are aligned in theory and practice with the vision and that their culture is conducive to a relationship-centric approach. For example, I have often observed how reluctant some sales representatives and channel partners are to asking clients two basic questions:  “How are we delivering on your needs?” and “Will you buy other products and services from us.”

Measure & Manage

To be successful, your relationship strategy needs metrics that can be collected, tracked and managed.  These metrics could include customer satisfaction, Net Promoter Score, cross-selling or retention rates.  Regardless of the choice, they should be part of the company’s strategic planning and performance measurement system  in order to guarantee internal alignment and proper resource allocation. 

Tight client integration must be a vital part of your corporate B2B strategy.  To make this happen, it pays to follow a systematic and cross-functional approach to relationship planning and implementation.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Workin’ 9 to 5…Not

Dolly Parton was on to something when she wrote this song for the workingman in 1980.  Unfortunately, things may have gotten worse since then.  Thanks to the current recession, globalization and the Internet, those employees lucky enough to have jobs are working harder and longer hours. Soon this will become problematic for both the workers and their employers.  I touched upon this topic in an earlier blog post but now a recent article in The Economist magazine sheds more light on this issue and discusses what some companies are doing to adjust:

The Corporate Leadership Council, an American consultancy, surveyed employees in 1,100 companies. The findings tell a grim story.  The average amount of work expected from each employee has increased by over 30% since the beginning of the recession. As well, the number of respondents who are willing to put in “discretionary” (read: extra) effort has fallen by 50% since 2007.  Those employees claiming to be “disengaged” from their jobs has risen from 10% to 20%.

Another consultancy, The Hay Group, found similar results in a survey of 1,000 British workers.  Over 65% of respondents said they are performing unpaid overtime. Worryingly, 63% of employees indicated that their employers do not recognize their extra efforts while 57% contend they are treated like dispensable commodities.

In a world of salary caps, deferred bonuses and shrinking benefits, many people are working more for less money.  So far, firms have gotten away with this approach outside of some staff grumbling.  Most employees have proven to be quite resilient and willing to suck things up to keep their jobs.

However, if these surveys accurately reflect what is really transpiring there are significant implications for companies looking to manage costs, increase productivity, maximize human capital and reignite their growth prospects.  When the economy does turn around, firms will increasingly pay the price for their shortsightedness.  Over-worked and over-stressed workers are less productive, take more sick days and exit firms at higher rates.  The Hay Study found that 59% of their respondents where either actively looking for another job or are considering leaving.  And very often, it is the top performers who choose to vote with their feet. Harried staff members are less likely to be innovative, strategic and good team players, denying their employers the very skills that are required to be competitive in the future. 

In the longer run, employers with a bad reputation may face labour and skills shortages as the overall workforce ages and shrinks.  Additionally, workers who see themselves as being exploited are more likely to consider striking or joining unions.  What can organizations do to avoid the stampede to the door and position themselves for growth?

Emphasize non-financial rewards

Common sense suggests that publicly recognizing employee successes, increasing job flexibility, truly delivering on empowerment schemes and promoting basic human kindness can go a long way to improving the burdens of work, morale and loyalty.  Providing more formal and informal training is another way of rewarding employees plus it has the added benefit of (hopefully) improving corporate performance.

Coddle top and high potential performers

To keep high performers happy, give them more interesting work and exposure to senior leaders.  For example, P&G lets its strongest performers loose on their toughest problems.  HP allows its top performers to attend and participate in high-level strategy meetings.

Cull the malcontents

Judicious pruning of under-performers or those permanently jaded by the circumstances can go a long way to free up more compensation and senior roles for your high performers as well as help mitigate existing morale problems.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Merging Professional Services Firms: Mixing Oil and Water

The recent failure of two leading management consultancies – A.T. Kearney and Booz & Co. – to merge highlights a common challenge facing these types of transactions.   Namely, why do so many mergers and acquisitions among service firms fail to create meaningful value?  This question is of particular interest to professional services firms – consultants, lawyers and accountants – who look to M&A as a good way to grow revenues, increases capabilities and undertake succession planning. 

A considerable body of research shows that most mergers fail to generate incremental shareholder value.  With PSFs, M&A deals may be even tougher to pull off and harder to make work.  Why?  Talent and cultural considerations, important in any transaction, are even more challenging in an industry where so many talented individuals are central to the delivery model, client relationship and brand image.  In particular, the impressions and actions of the partners is often the difference between transaction success and failure. These factors play out in many ways:

Culture mismatch

Each firm goes into a deal with its own unique culture that influences and guides its activities day-to-day and over the long run. In many cases, each firm pays insufficient attention to how different cultures would meld especially as it impacts partner compensation, core values and employee roles.  If cultural considerations are not addressed before the deal is consummated, there is a greater likelihood that norms, beliefs and work practices will never meld in the new entity.  The result will be disastrous for the new company in terms of falling employee morale, lower productivity and higher client attrition. 

Clashes over control

By their nature, PSFs are populated with successful and aggressive ‘Type A’ individuals, who possess healthy egos and an emotional need for control.  Post transaction, which individuals exert control and maintains a public face becomes a fundamental question. For example, if the top management of one firm is under-represented in key operational roles and committees (e.g., the income/compensation committee), the deal could come undone. 

Different retirement schemes

Problems can arise when Firm A has more retired (or soon to be retired) partners who are paid more generously (e.g., 50% of current partner income) than Firm B’s partners. The partners who never got this benefit will want it (raising the transaction price and future financial obligations) or they’ll want to remove it from the other firm’s partners and retired partners compensation plan(unlikely once granted).

Bloated headcount

It is common for the new entity to have too many employees and partners even after staff rationalization schemes.  Retaining too many people occurs for many reasons including the need to protect client relationships or to maintain skills depth.  However, problems will inevitably arise due to skills & role overlap, a lengthening of the partner track and the probability of a higher than expected cost structure.

Client risk

Unless clients believe they will gain tangible benefits from the merger, they will – at best – view it as neutral.  In many cases, their impression will quickly turn negative as they perceive integration activities as distracting, risky (e.g, they lose their relationship and delivery teams) and potentially more expensive (e.g., higher costs needed to support the transaction).

Merging professional service firms doesn’t have to end in divorce.  Once the parties start the courtship, they would be prudent to closely review cultural, people and compensation issues in order to minimize business risks and maximize the potential of attaining the desired synergies.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Mobile health care: Its (almost) here

Are we at the tipping point for widespread adoption of mobile health care solutions?  Device usability, power and ubiquity have improved immensely. Mobile networks now cover virtually all of the globe.  And, social networking sites are now a driving force in community-building for tens of millions of people.  Yet, this would not be the first time that expectations have exceeded what is technically and behaviorally possible in the short term.   

Wireless health care delivers major benefits to the 3 Ps: patients, providers and payers.  It speeds diagnosis and treatment, extends services to under-served regions and saves doctors’ and nurses’ time, all compelling factors for over-burdened, expensive health care systems which must cope with aging populations. Mobile health care has many appealing applications for major disease areas like heart disease and diabetes in terms of treatment compliance, remote diagnostics and community-building.

The Economist magazine recently published an excellent overview on the latest developments in wireless health care.  Below are some of  the highlights.  The market-research firm Kalorama Information estimates that the US market for wireless health care devices and services will be $9.6B in 2012, up from $2.7B in 2007. Importantly, significant players like GE, Sprint and Virgin have begun entering the market bringing new applications, scale and credibility. Already,  Apple offers thousands of health-related applications in their App Store.

Mobile health care can already claim successes, particularly in the emerging world.  For example, Medicall Home, a Mexican firm that provides medical consultations by mobile phone, has signed up millions of customers. Some applications have been so successful in the developing world that they are now being adopted in the rich world too. Voxiva, an American firm that has set up mobile health systems in Rwanda and Peru, is helping launch Text4Baby, a public-health campaign to educate pregnant mothers (they receive free text messages with medical advice).  T4B will soon become the biggest deployment in the world.  Virgin HealthMiles is using online social networks to enable friends and family to encourage (or nag) patients electronically on weight loss and exercise.  Thousands of patients already participate in Facebook communities to seek medical support and information.

Fully leveraging these new solutions will not be easy. Firstly, wireless health care will require a standardized Electronic Health Record that can be shared by all health care providers. This remains to be created.  Technical issues continue to hamper system reliability and device inter-operability on existing 3G networks.  To reduce risks (and legal exposure), all devices will need to seamlessly, privately and securely operate on all networks with 99.9% or better reliability.  While tremendous strides have been made with wireless devices, they will still need to demonstrate better performance in terms of usability and battery life in order to support health care applications.  

Like the adoption of other technologies, the human element looms large.  Patients – particularly the elderly, the largest consumers of health care – will need to embrace new technologies and make the necessary behavioral changes to use them. Furthermore, their health care providers will also need to be wired, compliant and integrated through standardized EHRs.  Given that up to 25% of all physician offices in some geographies are not connected to the web, ensuring close to 100% compliance will take time.  Finally, though technology exists to ensure patient security and privacy, additional safeguards will have to be developed to keep personal information safe.

Given its real and measurable benefits to multiple stakeholders, mobile health care is poised for growth.  As soon as the technical, standards and human issues are sorted out, a broader roll out can be expected.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Behavioral Economics 101: Influencing Customer Choice

Learnings from Behavioral Economics (and its related discipline behavioral finance) have important ramifications for many industries such as wealth management, consumer goods, insurance, healthcare, technology and professional services.  BE findings are grounded in science, based on cognitive and social psychology experiments conducted over the past 30 years.  Managers can use BE to help understand how consumers decide which products they purchase, when they purchase them and what they pay for them.   Firms that ignore these learnings run the risk of squandering capital, upsetting customers and missing revenue opportunities.  Although many BE principles are well known, it is surprising how many managers are unaware of the basic concepts when designing, pricing and distributing their offering. For example:   

Loss Aversion says that people strongly prefer avoiding losses to acquiring gains.  Some studies suggest that losses are twice as powerful, psychologically, as gains.  Loss aversion has many implications for marketers. To improve retention, use trial periods to take advantage of the buyer’s tendency to value the good more after she uses it. Additionally, when debating whether to reduce prices consumers would prefer to avoid a publicized price increase than get a price decrease (assuming the net effect of a price change is zero).

The Endowment Effect suggests that individuals tend to place a higher value on a product that they own versus an identical product that they use but do not own.  In consumer and engineering goods businesses, encouraging purchase of a good, as opposed to a leasing arrangement, is more likely to increase customer satisfaction. Furthermore, delivering a digital good in a package will communicate higher value because it provides a tangible manifestation of ownership (versus digital files on a PC)

People experiencing a Status Quo Bias will not change an established behavior unless the incentive and ease of change is compelling.  Research suggests that a new product must deliver 9 times the value as the incumbent – regardless of the risk profile – to incite someone to switch.  Though the existence of a SQB is obvious, many companies launch new products and upgrade old ones without delivering better value.  Even when the new product does have demonstratable benefits, many firms fail to communicate these advantages through advertising and messaging 

According to the Money Illusion, individuals tend to think of money in nominal rather than real terms (i.e. after the effects of inflation or extra costs).  As a result, MI can influence pricing in many ways. Price stickiness occurs when companies are reluctant to raise prices or change sales contracts in response to inflationary effects.  Not only does profitability suffer – especially if input costs are rising – but the brand image can slowly move out of synch with the desired price level. Furthermore, the MI suggests that an a la carte pricing approach (with costs added incrementally) will generate more trial than a bundled pricing strategy that reflects total cost.

Herd behavior describes how individuals can act together without planned direction.  Stock market bubbles and crashes are an obvious example of this effect.  Savvy organizations are leveraging herding behavior through crowdsourcing strategies that trigger word of mouth promotion, perform support and develop open source products like software. More tactically, marketers can exploit herding effects by using leadership positioning in advertising or by publicizing large client lists and case studies.

BE is not the final answer for all product or investment decisions.  However, managers would be prudent to heed its key observations as part of its product management activities. In a future post, we will consider how BE impacts strategic decision making in organizations.

For more information on our services and experience, please visit the Quanta Consulting Inc. web site.