It’s corporate cost-cutting time once again, and once again most companies will resort to the usual methods: slashing budgets across the board, taking out layers from the org chart, offering voluntary severance and retirement packages, and ordering layoffs. Such efforts, targeted primarily at the company’s overall structure, never seem to lead to lasting change — and yet whenever budgets get bloated, these approaches get dragged back into service.
The trouble is that these approaches simply don’t take into account why corporations’ costs were escalating in the first place, guaranteeing that the root of the problem will remain in place and cutting back will be a regular exercise. Going after structural issues alone while ignoring the three other critical strands of every organization’s DNA — decision rights, information, and motivators — is no recipe for successfully cutting costs and keeping them down. Excising layers of management may reduce costs for a while, but not if the managers remaining fail to use these three levers to manage to specific expense goals.
First, no company can maintain a rational cost structure if the people making decisions involving expenses don’t know how much things cost. That’s why transparency of information about all manner of expense — from the costs of shared services such as IT to manufacturing and distribution costs — is central to any sustainable cost-cutting effort, in addition to the metrics required to monitor these costs. Typically, business units and departments without access to such information tend to act as though they have a blank check. One company in our experience, for instance, did not charge IT services back to its departments or even share information on IT budgets with departments. The result: Because they had no idea how much their requests for services cost, departments simply asked for what they wanted, the requests were put in a queue, and eventually, IT provided the services. Under this regime, not surprisingly, the company’s IT costs exploded.
Information is power, and with real transparency on the price of goods and services, the law of supply and demand can take hold. Companies can allocate services by forcing departments to make decisions on the basis of fixed prices for services or by open, competitive bidding between internal and external service providers.
Once information on the real costs of corporate services becomes available, companies can use that information to make better, more sustainable cost-cutting decisions — but only if their governance structure is clearly defined, logical, and consistent. Decision rights — perhaps the most important aspect of every organization’s DNA — involve identifying who has the responsibility, the authority, and the accountability to make various decisions. If the decision rights are concentrated at a high, centralized level, companies will bog down while waiting for top executives to make critical decisions; but if decision-making authority is too decentralized, redundancies and inefficiencies result as divisions and departments replicate one another’s efforts. Even worse is the company that hasn’t defined decision rights clearly, creating a situation in which decisions are made by everyone, or by no one at all.
The happy medium requires senior managers to push decision rights further down the org chart while carefully monitoring the decisions their direct reports make. That expands the senior manager’s span of control and ensures a more efficient decision-making process based on local knowledge. And given good information, those decision makers become more efficient, lowering the cost of the decision-making process itself.
Structural change is at play here, as well. Giving managers more responsibility for larger areas of influence can save money by slowing the increase in organizational layers. But that effort must be accompanied by the thoughtful use of motivators — a system of incentives that is critical to every organization’s DNA. On one level, that means creating a bonus system that rewards managers who meet specific cost targets, not just business targets. On another level, it means developing a promotion strategy that goes beyond standard vertical promotion schemes that accomplish little more than adding layers of management and creating a cadre of highly paid individual performers with little real managerial responsibility.