Rath & Strong Blog

3-Point Plan for Lean Cost Reductions

By David Hampton

There are plenty of examples of organisations that use rather crude methods to achieve their cost reduction but ignore the people-side of change.

–  Benchmarking is often seen as a quick route to cost savings: if our competitors have 20% fewer people in this department then we should cut staff by 20% and our people will figure out a way to cope.  But this makes some huge assumptions: there may be differences that affect the number of people that we or our competitors need?  And how do we know our competitors have got it right?  And typically, not enough is done to enable people to work more efficiently, or to help them make ongoing improvements in their processes.  And so the gains tend to be precarious.

-  You might be tempted to enforce tough targets in the belief, as with Benchmarking, that people will somehow find a way to improve their processes.  The upshot of this approach, however, is that people sometimes are forced to find ways to cheat the measurement system so that they hit their targets. This usually means that services get worse, not better.  

-  And then there’s always the good old-fashioned across-the-board headcount reduction.  But  people will be the secret to recovery when things turn up, and you will lose a lot of good ones that way – it’s a key role of leadership to look after scarce resources, ready for the better times.

So here’s a three-point plan for making swift cost reductions the right way. 

1. Base your cost-cutting on a proper assessment of your current state and what it is that customers really value.  This can be completed quite quickly – the version that Rath & Strong does is called Lean Profit Hunt, and it typically needs just 15 days.  It will show you where the real opportunities are so that you can go after waste selectively, protecting what’s important to the customer. You’ll get a vision of how the Future State operation would look and the sort of implementation plan that you’ll need to get you there.
2. The next part is the painful bit.  Management teams don’t have time to wait for natural attrition to do its job these days and so sadly it’s likely that some jobs will have to go.  But this is a much surer way of delivering the cuts than asking managers to follow through and make cost reductions after the Kaizen events. You might have to consolidate parts of a business. This shakes up all the givens, with people scrambling to find a chair and sit down before the music stops.  This also allows you to redefine work processes from scratch, staffing them up as needed.
3. Once that step is complete you can start to rebuild the team and get your employees to plan the new processes that will enable the company to return to health. Done this way round, the cuts stay, because they are already done, and the people that are left are freed of the cloud over their future so that they can use the Lean tools to help them get their jobs done in a tough environment.  And as they do this, they should work on simplifying and standardizing your processes, to reduce waste and make it easier to train people in the future, which helps sustainability.

You should plan to make ongoing improvements after the initial burst of activity that carries out the initial fix, and you’ll need some training and coaching support for that.  It not only helps you to sustain the improvements for the long term, it also helps you to keep engaging with your people and reinforce their value to the company.