When you are ready to rethink and streamline your operations, organization, and management practices in this way, you have a large menu of techniques, practices, and analyses to choose from. (See Exhibit 2.) They can be implemented at many levels of the organization, by many different teams that, ideally, learn from one another as they work. These methods include the kinds of continuous improvement associated with lean management, the efficiencies of scale that come from consolidating separate activities, the savings that emerge from relocating nondistinctive work to lower-cost sources, and the value derived from strategic sourcing that reduces the expenses of materials and components. Whichever techniques you choose, depending on your circumstances and needs, the object is the same: to be deliberate in taking out costs, making sure you don’t cut into productive muscle.
Some of these methods may seem familiar to you, but they take on new meaning in the context of a capabilities-driven growth initiative. By reducing expenses in this way, you release cash for potential investment. This is generally the most reliable way to fund the development of distinctive capabilities that are strategically important for growth. (See Exhibit 3.)
One company that has used cost optimization to fund its development of strategic capabilities is Aetna Inc., a US$34 billion diversified healthcare-benefits company. “With the enactment of healthcare reform, 40 million Americans are theoretically going to be entering the market for health insurance,” says Meg McCarthy, executive vice president of innovation, technology, and service operations. “There will be significant growth in the cost-competitive individual business. Our aim is to be the global leader in empowering people to lead healthier lives. That’s our strategy.”
Developing the necessary consumer retail capabilities — “the art and science of getting and keeping every single customer every single day,” as McCarthy puts it — requires significant new investment. As part of building and strengthening these capabilities, Aetna has prioritized investment in several areas, including information, health information exchange, and clinical decision support. Of course, in a market that is highly price-sensitive, such as small group and individual insurance, cost vigilance is a necessity. “Our infrastructure — both process and technology — needs to operate at the lowest possible unit cost,” says McCarthy, “so that we’re market-competitive and attractive to consumers. We still have further progress to make, but we’ve taken significant first steps to reduce the costs of complexity.” For example, Aetna is restructuring its back-office operations — including claims processing and customer service — to realize greater efficiencies.
“We used to take a step-change approach to cost management,” McCarthy adds. “Now we are adopting a continuous improvement methodology, in which we remove waste constantly. We’re searching for nickels and dimes and any way to reuse assets. It’s like a can of Legos — we need to put the pieces together in new and different ways to grow our business.”
Reorganizing for Growth
A well-designed organization model is critical to enabling growth in two important ways. First, it makes possible and sustains the cost reductions that are required to invest in differentiating capabilities. It does this by sharing resources across businesses and functions, and by trimming management overhead. In most large organizations, long-standing relationships have developed in an ad hoc fashion among the central core, the local business units, and the shared pools of resources that provide, for example, human resources and information technology services. Local leaders may have too much power over functional activities (thus duplicating one another’s efforts and promoting inconsistencies), or the central hub may be too controlling (which generates unnecessary work).
The solution typically involves redesigning the company to create more appropriate structures and spans of control. This may mean having more people report to each manager and reducing the number of hierarchical layers. Pay scales may be rationalized so that compensation matches the complexity of the job performed, or the company may take more deliberate approaches to sharing resources and outsourcing less-critical functions. When these measures are consistent and broadly understood, they are typically supported by people throughout the company.