All about the bottom line - A (corporate) cultural revolution
Ken Boekhaus
August 28, 2008
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Cost containment in business requires a cultural revolution to minimize their costs effectively.
The most common roadblock to effective cost management is the company's corporate culture. Why do
we need a corporate revolution?
Most businesses are seeing their sales slide and costs rapidly increasing due to the recession combined with rapidly increasing prices. Yet, surprisingly 80% of companies pay too much for the goods and services they buy. With profits being squeezed from both ends why aren't companies doing a better job of cost cutting? Especially given the fact that a 5% reduction in costs impacts the bottom line as much as a 30% increase in sales for the average company.
Fostering Corporate Culture
Whether or not management recognizes that they have a corporate culture, every company does have one. Corporate culture is defined as "the specific collection of values and norms that are shared by people and groups in an organization and that control the way they interact with each other and with stakeholders outside the organization." Generally executives and/or principals define the corporate culture of the business either purposely or unwittingly. While some companies try to define and manage their culture, most pay little attention to their culture and let it evolve without much thought.
Does your company have a cost-conscious corporate culture? Ask the people in the mailroom or on the shop floor. They likely have a totally different perspective on the culture than those at the top. In day-to-day practice, the behavior of the company will more closely reflect the perception of those on the front lines than it will the executive suite. This is especially true for indirect costs where executive management is less involved in decision-making.
If you strive to make your company cost conscious, you must start at the top. Define your cost consciousness and communicate it clearly and distinctly throughout the organization and communicate it frequently. When I worked at ARCO, the division President regularly defined the company's objective and orientation to cost. Every speaking opportunity he would say, "We are the low-cost leader." Everyone in the organization knew that we were focused on taking cost out of the business every day and in every way possible. When day-to-day decisions were made, cost reduction was a part of that decision, whether it was conscious or sub-conscious. It was just a part of the culture.
Be careful, however, that your culture does not become overly punitive when cost savings are uncovered. This practice causes people to become defensive and protective. In our cost reduction work, we find many managers and employees who feel threatened by us. They are afraid they will look bad if we find cost savings that they didn't. Instead, if you are non-blameful and promote finding cost reductions, your staff will be more open and actually seek the help of others. In a recent engagement the Buyer drug her feet and resisted my cost reduction efforts. She took a lot of pride in here ability to minimize the cost of the goods and services she purchased and rightfully so. She was doing an excellent job. Once she realized that her contributions were recognized and that no one was chastising her for further savings we found, she became much more cooperative and supportive. Punishment and reward both help shape a company culture.
If you want your employees to buy in to your desired culture, you must walk the talk. Subordinates take their lead from their superiors. If you want your employees to be cost-conscious then you must demonstrate cost-conscious behavior. If you spend money frivolously, your employees will emulate that behavior in their decisions and actions. Just as a child learns by emulating their parents, your employees learn by emulating your behavior.
A former employer recognized the need to change the corporate culture. Management defined the new culture and clearly communicated it to the employees. One key element of that stated culture was, "Employees are our most valuable asset." Within six months, we went through significant downsizing and let a number of people go. The Most Valuable Asset culture was a standing joke throughout the ranks. Not only was the Valuable Asset component of the new culture discredited, but the entire cultural remake collapsed and they reverted to the old culture. Employees take their lead from the "walk" not the "talk".
Policies
One clear way to demonstrate the walk is through company policies, both in their creation and enforcement. If you have a cost conscious company, your policies will reflect it. When I worked for Chrysler, their travel policy set a maximum daily spend for meals of $13.50/day ($56 in today's dollars). When I left and went to ARCO, their policy was that any single meal costing more than $25 ($103 in today's dollars) required a receipt. In other words, there was no defined daily maximum for meals. Goodbye McDonald's; hello fine dining!
Do your company's policies promote cost containment? Do you require competitive bids? What is your travel policy? Who must approve expenditures? Does your budget promote cost-consciousness? What are your policies for accepting gifts from vendors? You should have documented policies that address all of these and similar issues.
Conclusion
Although there are many factors impacting a company's ability to minimize costs, cost containment starts and gets its charter from the corporate culture. I find it very ironic that the companies most eager to engage outside cost reduction assistance are those already doing a good job of cost containment. Logically then we can deduce that the companies most needing cost reduction are the ones most resistant to seeking help with it. I think this is very sad and reflects a bad corporate culture as it relates to cost management.
What is your company's cost orientation? Start by studying your culture. Ask employees on the front-line who will be honest with you or your surrogate. You may not like what you hear. Then look at your company policies. Is there a gaping hole when it comes to cost containment? Are you communicating and enforcing the policies you already have on the books. Finally, what are your personal practices when it comes to cost containment?
If its not a pretty picture, then it is time to make some changes. Define and document your corporate culture as it pertains to cost containment. Communicate the culture, communicate the culture, and communicate the culture some more because you cannot over-communicate it. Align your policies with your defined culture and enforce them. Policies are the bridge between corporate culture and mission to corporate action. Finally, you personally must walk the talk and hold your direct reports accountable for doing the same. Corporate cultures, good and bad, flow down from the top. If you are cost conscious, your people will be cost conscious. Now, step back and experience the positive impact on your bottom line.
Ken Boekhaus is managing director of the Atlanta office of PAR Cost Reduction.
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