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(originally published by Booz & Company)


Keeping Costs Cut

Instead, companies should strive to develop strategies for top performers that emphasize lateral promotions, which confer more responsibility and higher salary without a move up the management ladder. Such moves serve not only to put the brakes on the build-up of excess management layers but also to open up the channels of communication, thanks to the increased movement of managers from department to department.

Putting together the whole package — combining structural changes with better managed decision rights, a new approach to incentives and motivators, and the access to cost information on which it all depends — involves taking an integrated approach to a sustainable cost management program. A consumer-goods manufacturer that was looking to cut costs offers a good example of how all of these factors can come together: Top managers knew that distribution — inventory, sorting, shipping, and returns management — was a considerable expense. The problem lay in the fact that distribution costs were treated as fixed costs, and were charged back to sales teams as a percentage of sales. Yet executives also knew that teams’ expenditures on distribution varied widely, due to special requests for services such as more frequent delivery and expedited shipping.

The answer to the problem, top managers decided, clearly shouldn’t involve making distribution decisions themselves, using their knowledge of costs as a guide; such a system would have gummed up the works and kept the customer teams from acting quickly and flexibly. Instead, the company decided that the effort to fix the problem should begin at the level of information transparency. The introduction of a “rate card” that clearly defined specific charges for added levels of service — at prices competitive with outside distribution services — forced the customer teams to make decisions within a true supply-and-demand regime. At the same time, lower-level managers within each team were given the rights to make decisions on the basis of the information available on the rate card. Finally, their incentive structure was changed to reflect not just their sales gains but also their ability to keep costs low.

The results were dramatic: Costs came down even more than the company expected, and they stayed down. Newly empowered managers who were then promoted to different divisions took the rate-card mantra with them. And these changes allowed each division to maintain its lean structure, given team managers’ expanded spans of control and greater flexibility in making distribution decisions.

It’s not enough simply to cut costs; they have to stay cut. And the only way to do that is to reach deeper into a company’s makeup to put in place an integrated program that takes into account all four of its DNA strands.

Author Profiles:

Matthew Ericksen ([email protected]) is a senior executive advisor in Booz Allen Hamilton’s Chicago office. He has 20 years of cross-industry experience, with a focus on optimizing organization and overhead.
Elizabeth Powers ([email protected]) is a principal in Booz Allen’s New York office. She specializes in organization design and effectiveness in health care, primarily with health plans and life sciences.
Frank Ribeiro ([email protected]) is a principal in Booz Allen’s New York office. He specializes in strategy development and corporate transformation for clients in the health industry and services companies more broadly.
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  1. Gary Neilson, Bruce A. Pasternack, and Decio Mendes, “The Four Bases of Organizational DNA,” s+b, Winter 2003: A more complete explanation of organizational DNA and the four elements that make up the concept. Click here.
  2. Gary Neilson, Bruce A. Pasternack, and Decio Mendes. “The 7 Types of Organizational DNA,” s+b, Summer 2004: Close analysis of the results of a survey, and the seven different corporate models that emerged. Click here.
  3. Gary L. Neilson and Bruce A. Pasternack, Results: Keep What’s Good, Fix What’s Wrong, and Unlock Great Performance (Crown Business, 2005): In addition to the “building blocks” of organizational DNA, this book describes seven principal organization types and their characteristics. Click here.
  4. Gary L. Neilson, Bruce A. Pasternack, and Karen E. Van Nuys, “The Passive-Aggressive Organization,” Harvard Business Review, October 2005: This article examines one of the more dysfunctional examples of the seven organization types: the passive-aggressive organization. Click here.
  5. The Organizational DNA Web site: Booz Allen Hamilton has developed an online assessment tool, the OrgDNA Profiler®, that allows individuals to diagnose their organization’s culture. Click here.
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