Long but most profitable road to cost reduction

A while back I was reading an article in the magazine 'outlook business' that touched on the need to be prudent when it comes monetary policy. When an economy surges ahead it gives some scope to tighten interest rates. But rarely central banks do that as that is seen as anti growth by corporates and even politicians. If tightening the belt makes one sit upright, it will only help in sensible and safe driving. However we do see rate cuts to further fuel growth. When the tide turns it leaves central banks gasping for breath with already low rates. Rates can't go below '0'. Similarly businesses get carried away when times are good and don't look around much for cost cutting opportunities.

Cost cutting and cost reduction may have hardly troubled the corporate minds when the picture was rosy. But today everybody wants to cut costs. Nothing wrong with it just that people turn cost conscious only when pushed to a corner. If companies constantly work on reducing / eliminating unwanted costs, they will find it easier to navigate through rough waters. Unwanted costs present greater opportunity to achieve substantial recurring cost savings. However they also pose greater challenge and prove harder to crack.

Operational issues and problems

Unwanted costs happen due to operational problems and issues (OIPs). They are not something that can be easily and immediately done away with. They (OIPs) require a systemic solution. For a systemic solution we need better understanding and clarity of what they are and where to look at. In this post I am presenting a broader picture of operational issues and problems. It is an attempt to understand various factors that contribute to operational issues and problems and what causes each of these factors to thrive at work. The diagram given below captures two different sides of OIPs. On one side it has 'causes' and on the other side 'outcome' of operational issues and problems. By no means causes listed in the diagram are exclusive. There could also be some that may not find a place on the left side of this diagram but can impact one of the outcomes listed on the right side, directly. Click on the diagram to expand it and give me your feedback and suggestions.


I have broken it down to the next level, for example, expanding 'myopic view of the organisaiton' under 'Cooperation'. Currently going through them to filter and identify high impact causes. It's too huge a picture currently and there are some 128 causes with 39 duplications. In any case we are looking at not less than 89 different causes that when unattended infects and negatively impacts a business with the business virus called OIPs.

I will take up major causes of OIPs and discuss them one by one in future posts.

Link to earlier post on cost reduction

When people will share and use knowledge?

In sports, we often say 'he/she is an enigma' when performance falls flat despite high promise. It applies to businesses also. Many businesses under perform due to the gap between knowledge acquired and knowledge used. Nowadays companies understand the importance of knowledge and how it can help them gain or sharpen the competitive edge. They are trying with KM systems, and software play a huge role in that. Software help companies to capture, store and channel knowledge. But knowledge sharing (converting the tacit form into explicit one) and using the knowledge in store are outside of the software systems. These two aspects of knowledge management require people to have faith and trust besides other facilitating systems.

Conducive environment for knowledge sharing

I have had numerous interactions with people on this issue and what motivates or demotivates people to share knowledge. The diagram given alongside captures those responses and my own observations. It tells us when knowledge sharing will take place or in other words the diagram captures the environment that facilitates knowledge sharing.

Listening ears - This is paramount for knowledge sharing. When one learns about an issue or has a idea to share he needs a listening ear. It is men at the front who knows more than the men in corner rooms. Irrespective of where someone is and what he does, he must be listened to when he comes up with an idea, solution or even a problem. Each piece of information thus received should be assessed for its worth and treated accordingly. When one knows his words found a good ear, he will be motivated to share more.

Formal record - It is important that each piece of knowledge shared and found useful must be recorded and due credits given. This further improves a person's faith in the system.

Feedback / Action - Was the knowedge acted upon? What is the status? Into the dustbin or to the penthouse? Feedback is important as it acknowledges and is also a way of respecting the person who shared the knowledge.

Recognition of contribution - When knowledge shared is useful and to be acted upon the same should be recognised and the person concerned be given public credit. Depending upon the importance and criticality of knowledge shared, the concerned person be made responsible for action or be rewarded in other ways.

Career growth - Count knowledge sharing for promotions and other recognitions. Rewards are fine but almost everyone would love to move up the ladder.

Direction - Last but not the least, direction. Lack of direction can kill a KM initiative. It's just not enough for a CEO to know the direction, everyone must know. Otherwise databases will be full with less or none to act upon. What? Why? How? Where? must be clarified to help people contribute better. Direction alone is a subject for many more posts. I will do it at later.

Making people use knowledge

The other challenge of KM, as we already discussed, is making people use knowledge. Primary reason for people to not use knowledge in public domain could be the credibility of knowledge shared. To make people use knowledge shared and feel comfortable and confident in doing so, one may ensure that following are taken care of.

Certify knowledge - Once a knowledge shared is accepted as useful then the same should be certified by an appropriate authority. This is more vital for a knowledge that is yet to be used or tested.

Proof / Evidence - Show evidence of work or benefits of a knowledge acted upon. This helps people to adapt it faster with confidence. More such evidence; more confidence in using new knowledge.

Do not penalise - When a knowledge acted upon fails to yield positive results, do not penalise the one who used it nor the one who shared it. Learn from the failure as that's an opportunity to improve things. But never forget to reassess the status of 'knowledge' in question and inform concerned people.

Reward / recognise - Reward and recognise people who show enthusiasm to test uncharted territory and use new knowledge shared. Publicise successes and learn from mistakes

When you develop a knowledge management system, remember to keep above points in mind. KM system is not just software but much more than that. People must be prepared, nudged, helped and cared to share and use knowledge. If two big challenges of KM are tackled well then other challenges, if any, can be handled with much more ease.

All the best.

See the earlier post on KM 'Two big challenges of Knowledge management'

Two big challenges of knowledge management

"when a person joins an organisation he/she is obligated by the terms of employment to use and share the knowledge in his possession for the benefit of the organisation"

Knowledge is central to the success of a business. But then knowledge acquired (recruiting people) does not automatically translate into knowledge shared or in use. People, the carriers of knowledge, rarely volunteer to share their knowledge to the greater good of the organisation. Some people (viz., owners) treat this as a betrayal. This kind of thinking hardly helps the situation and knowledge further retreats into the shell.

Knowledge acquired is not knowledge shared and used

Knowledge gained from schools pares in comparison to knowledge gained out of experience. It takes quantum leaps with exposure to work environment, people, situations, challenging positions, problem solving, failures etc. A person starts at say K0 and travels upwards to Kn. This gain in knowledge helps people to establish themselves firmly in an organisation and determine their career advancements, emoluments etc. Asking an employee to share his knowledge for the common good, without proper systems to facilitate it, is tantamount to asking him to lower his guards. Just like a company that wants to grow, every individual wants to grow. How many companies are willing and volunteering to share their knowledge for the greater good of the industry or economy and run the risk of blunting their competitive edge? There may not be an agreement to that effect, one may argue, but the case is similar when the context shifts to employees and an organisation. A worker cannot machine a component if the lathe is not there. Likewise an employee cannot be expected to share knowledge voluntarily if knowledge assisting and supporting systems are not in place.

Knowledge captured is not knowledge used

"We have a KM system in place and recently bought a KM Software to take care of it"

You may have heard those words from many CEOs and managers. The truth is you cannot buy a knowledge management system. A KM software is not the be all and end all of a KM system. It just is a part of a KM system. It serves a business as a means of storage and retrieval. To store, something has to be entered. Even in the case of 'explicit knowledge', if completely captured in the software, it has to be used by people.

If making one share knowledge is challenging enough, making another to use that knowledge is equally difficult. Quite a few things like ego (I can do better than him), lack of trust (What if he is wrong?) and lack of training & sophistication (How to use that software? Looks too cluttered. Where is what?) can come in the way of using knowledge in the public domain of an organisation.

Any business organisation that wants to harness its knowledge assets must successfully jump over two challenging hurdles and thereby

• help people to share knowledge
• make people to use the knowledge shared by others

To prepare to overcome these hurdles read the post 'When people will share and use knowledge? linked below.

When people will share and use knowledge?

I will be happy to have your feedback and know whether my posts are helpful.

Thank you.

Cost cutting - The way forward

Cost is something that a business must incur to create and deliver value for its customers. However it is far from the reality. Businesses do incur costs that do not create value or costs that add little value to its customers. 'So what's the big fuss? Just remove costs that add no value and your job is over'. well it's not as simple and easy as that. Each cost, rather each expense item that figures in the financial statements of a company conceals both 'wanted' and 'unwanted' costs. Chaff should be carefully separated from wheat as otherwise wheat could be mistakenly thrown out.

Operational issues and problems (OIPs), a business virus, cause unwanted costs and to ward off against this virus a company needs to take a systematic approach that may require changes at various levels and things, in-depth training and a change in attitude. OIPs and guarding against them is a big topic that could fill many blog posts. But for the moment we will focus on a n approach to cost reduction.

If you are on a cost cutting mission then I would recommend you to consider the following approach to cost reduction.

Reducing cost

We can classify costs (not in the cost accounting way) into four different categories viz., essential, necessary, optional and unwanted costs.

Essential costs are those that are incurred to create and deliver value for customers. If by any chance these costs are reduced then a company will be compromising on the value it offers. To distinguish essential cost from the rest, ask the question what if this cost is removed or reduced? If the answer casts a shadow on quality, customer satisfaction, or sales capability then stay clear of it.

Necessary costs are those incurred to keep the business running. Certain employee related expenses, statutory costs and the like do not add much value to the customer but are necessary. It's hard to reduce these costs but they can at best be monitored and kept as tight as possible with some rules and tinkering.

When a company can afford luxury it incurs optional costs. They also help boost the image of the company among employees, customers, industry, analysts and the lot. It may not be possible for a company to entirely root out optional costs as some of it, when reduced, can damage the image of the company. But with effective PR and communication most of the negative impact of reducing optional costs can be avoided. For each expenditure falling under optional cost ask, what would happen if this is removed? If the answer is not damaging and the company can afford to remove it go ahead.

click the picture to enlarge

If there is one cost that requires most attention and effort to deal with then it's got to be unwanted costs. Generally six sigma and lean management interventions help companies achieve significant cost reductions as they attack unwanted costs head-on. There are case studies that claim 40 - 60% cost savings. But one thing can be said with confidence that operational issues and problems (OIPs) present huge opportunity for companies to achieve greater and recurring cost savings.

The picture given alongside captures some of the factors that contribute to unwanted cost. They reside in every process and activity right from the top to bottom. Many a times they may not be obvious and would require lot of questioning to identify. To identify and attack unwanted cost, scan each process, raise questions, scrutinise decisions and actions. A picture will emerge out of this exercise and that act as the basis for eliminating unwanted cost.

Final words

Form a team to handle the whole cost reduction exercise. Start from understanding what is essential, necessary and optional from companies' point of view. It would also be a good idea to explore people's mind on what these could be. Once this picture emerges and is clear then straight away attack optional costs by questioning each item under that. Form a separate team with a clear mandate to attack unwanted cost.

Good luck.