No, this is not another “too good to be true” advertisement for a new investment opportunity or a solicitation for the newest in consulting approaches. It is an approach for assessing your operation to reduce internal costs. This approach simply identifies and recognizes what adds value. Conversely, things or activities that don’t add value become opportunities.
In today’s world, everyone is looking to reduce costs. Internals costs are a highly controllable, yet hugely valuable source of revenue that are often overlooked. Internal costs can often be tapped more quickly than new products, acquisitions, or other organic means of revenue enhancement. Though not without organizational impact, reducing non-value producing internal costs can also result in operational improvements and enhanced employee involvement or engagement.
Approaches to reducing internal costs are diverse. Some are simply a decree to reduce costs across the board. Others involve re-organization or re-deployment of resources. The approach outlined below is a means of assessing the value produced by each organizational function or activity and measuring its against 5 key questions.
The “value assessment” approach I am outlining first involves some preliminary work. You will need to identify every organizational function (e.g., via organizational charts) and business process (e.g., what activities are performed by each function). With this in hand and representatives from each function/business process in the room, you simply ask these five questions:
- Is this function (process) legally mandated or required by some regulatory body? In other words, will we run into legal problems if you stop performing these activities?
- What value does this function (process) provide to the company? For example, does the function generate sales, product, information, advice, etc.? What is the work product generated by this function or process? Ideally, you are looking for work product that has value to the company in some way.
- How would our company or our customers be different if we eliminated this function (process)? In other works, what happens if we stop doing this or eliminate everything about this? What is the impact in sales, quality, efficiency, etc.?
- Would our customers pay extra for this function (process)? In short, does this function or process enhance the ultimate product that pays our bills? Is this function or process something that truly makes a difference for our ultimate customers in a way that they would pay extra to get?
- If we keep this function (process), what should be changed to make it even more valuable to the company? Assuming this adds value, what could we do to make it add even more value?
The obvious conclusion for this exercise is that any function (or business process) that is not legally mandated, adds no value, has not positive or negative impact on our company, or is not wanted by our customers should be eliminated. Yes, it may seem harsh, but the reality is that businesses today have taken on so many non-value activities or functions that we become immune to it. We begin thinking that because we have always done it or had it or tolerated it, we must continue… no matter the cost. Even our employees know that activities are not adding value.
By taking this approach and looking at EVERY function (or business process), we can quickly identify opportunities for improvement OR opportunities for internal cost savings.
Let me add a couple words of caution about this process:
- Try to keep the names of individuals out of the discussion as much as possible. Sure, some individuals contribute more than others. However, the goal is to look at functions or processes or activities that add no value. People performance issues must be dealt with through other channels.
- This should NOT be viewed as a head-cutting exercise. It should be intended to identify activities and functions that are not contributing as much as needed to the overall objectives of the company or to the positive experience of our customers. Yes, when you eliminate functions, you impact people. However, by asking the 5 key questions, you are generating a clear, objective rationale for any such eliminations.
- Communicate to the workforce what you are doing and why. Employees need to understand the process and that the goal is to identify and enhance value, not perpetuate non-value added activities that do not benefit the company. When employees understand the approach, they begin thinking in terms of value generation. This alone can yield significant enhancements in productivity and elimination of waste.
- If desired, start the process small. Look at one or two areas and assess them via the 5 key questions. If you see benefits in the process, expand it to the entire organization.
Depending upon your company size, identifying and eliminating $10 Million in non-value added waste might be possible in an hour. For others, any cost reductions are beneficial. As a reminder, assuming your products average a 25% net profit, you would need to generate over $4 Million in new sales to equal the overall impact of $1 Million in existing, internal cost reductions. When you expand that to scale for your company, you can readily see the potential value.
Give it a try. And, to all of us, we must be thinking every day, “What value am I adding? How is the company better as a result of my best efforts? Is my work impacting the customer in a positive way? How can I add even more value?” When we shift our approach to consider value in everything we do, we unleash the potential that resides within each of us.
Have a great and productive day!