Don’t Reduce your Costs……

September 25th, 2016

………Improve your Processes.

The costs of any organization, setting aside fraud, incompetence and stupidity, are largely a function of its processes (and adherence to them or not). The costs further reflect the supporting technology, the application of people’s skills and behaviours and, critically, the management attitude, i.e. the balance of autonomy and constraint as expressed through control (or management) processes.

I am struck by how often business leaders focus on the implementation of cost reduction plans, how rarely they focus on causes of cost – duff processes – as opposed to symptoms – overspent budgets. Like sticking a plaster on an arterial bleed, cost reduction plans often create the illusion of action without actually making any difference. As often as not they end up with the cancellation of the biscuit order for meeting rooms, buying cheaper coffee or cheaper, less absorbent, toilet roll. This tinkering at the margins makes no substantial difference to the cost base and, when the pressure is released, costs bounce back – usually with a bit of addition to reinstate the standards that existed before, to repair or restore those things that have been neglected and to restore morale to a workforce who feel undervalued.

How much better and more productive would it be to focus on processes (the things that generate costs), improve them and watch the costs fall?

Taiichi Ohno, creator of the Toyota Production System says

‘Our products are scrutinized by cool-headed consumers…….where the manufacturing cost of a product is of no consequence, the question is whether or not the product is of value to the buyer’.

Exploring the budgeting process with the finance team at a global engineering business – we found that it occupied many accountants for much of the second half of each business year and stimulated hundreds of meetings and discussions with thousands of spreadsheets. There was a stunned silence when I pointed out that the entire exercise was fatuous. First, the inherent dynamics of the organization itself, its order book, its installed base of equipment and its maintenance regimes largely dictated what the volumes of activity would be and if the volumes were understood then, informationally, the budget could pretty much write itself. Unless the processes were changed the budget would be last year plus inflation! End of discussion. Second, the budgeting instructions sent to factory managers and other budget holders around the world were all expressed in the language of finance, whereas most of the recipients were engineers. Now, I am not saying that engineers don’t speak finance, I am suggesting that in general they are better at speaking engineering.

How much more sensible would it be to say to them: ‘can you improve process efficiency by xx% while maintaining effectiveness’ rather than ‘can you reduce expenditure by yy%’. The second leads the recipient to focus on the soft lines in the budget – training, biscuits, staff travel and toilet paper. The first – ‘do it better but maintain quality’ leads the recipient to focus on the thing that causes the costs – the process.

Now, a commercial organization has its shareholders to account to for its financial performance and, bluntly, if it fails to keep its costs and prices under control then, eventually, its customers will shop elsewhere. Public and third sector organizations are in a different position. They, often with the connivance of government, simply increase their prices, ration their services, or sometimes (often) both – ‘we will charge you just as much but we will do less for it’!

Universities are currently (and in anticipation of success in the forthcoming Teaching Excellence Framework) increasing their undergraduate ‘tuition only’ prices to around £9250 per annum. They do this arguing that their costs have increased so they must increase prices (Yes, a tuition fee is a price!) in order to maintain financial viability. Note that non-tuition fee (accommodation) costs are unregulated…………….

Meanwhile they do not appear to be substantially tackling the things that cause most of their costs – the teaching and researching processes. A quick reminder at this point, whatever Universities are ‘for’ they generate much of their revenue from teaching and researching – though some might be close to raising more money from renting out their living and teaching accommodation than they do from the other activities! A recipient of many University emails I do know that there is a lot of work going on in relation to the administrative costs of non-teaching activity. Some of it is no doubt worthwhile, much of it perhaps less so. In order to ‘improve efficiency’ (save money) academic staff in one university are now expected to take the bins from their offices to a central collection point……the ‘savings’ have been taken in the cleaning budget, the departmental budget has been kept the same, the net effect, much less academic work is done in order to make cleaning marginally more efficient. Assertion, in general academic staff are paid more than cleaning staff so making cleaning cheaper increases the total costs of the University OR some other, revenue earning activity, does not occur.

To elaborate:

2 minutes per day * 1500 academic staff = 3000 minutes/60

= 50 academic hours PER DAY

= 8.3 academic staff being paid to empty bins………….assuming, rather ambitiously, that each is genuinely academically productive for 6 hours each day. In truth the impact is probably rather greater.

In a competitive world, and they exist in a competitive world, students are already beginning to question the value of a University education (blogs passim). British students are, as yet, still able to consider learning abroad while many overseas students consider a UK University as preferable to those of other countries – and UK Universities are becoming reliant on their fees. However, as prices increase and perhaps post-Brexit UK universities will be less accessible to European students, (which would be a shame) the price-value point will be reached where the premium on a UK degree is offset by the cost? Whither the growth? Or should that be ‘wither the growth’?

In the 60s and 70s much of the traditional industry (steel making, ship building, car manufacturing, clothes manufacturing) of Britain died out, not perhaps because we were suddenly no good at engineering (we still have some of the worlds’ most productive car factories and exploit some of the most advanced technologies) but because failure to adapt and improve processes meant that costs rose faster than value and that quality failed to keep up with the competition. No process advantage is immutable, no organization not subject to entropy.

Probably the ultimate public sector organization in the UK is the NHS. Revered and lauded – and it does amazing work – it (and the public who fund it) are caught in a vicious trap. Established to address the ills of the post-war population the NHS has succeeded admirably. However, medical research in the UK and throughout the world and the spectacular advances made in pharmaceuticals, diagnostic imaging and other technologies means that the rate of growth of treatable disorders exceeds the rate of growth of funding and, in a system which is free at the point of delivery, demand will always exceed supply. Ergo, the NHS will always be in a state of funding crisis unless and until a) all disorders are prevented b) somebody, somewhere, defines the limits of the NHS in a manner which can be sustained. So far no one has shown either the insight or the political courage to do so.

This places immense responsibility on those who seek to govern and manage the NHS to be as transparently process efficient as they can be whilst also being effective in prevention and cure. When we watch the NHS (when we experience its services and observe how they are delivered) we find, as with so many other organizations that the obligation to transparent efficiency is not lived up to. Quite often it is transparently inefficient.

This is not the fault of those who operate the processes but of those who do (or quite obviously in some cases) don’t, design them. Across several hospitals and services in multiple trusts and across a wide variety of clinical fields, it is quite clear that processes (if they exist at all) are often not adhered to. Doctors and Nurses can be observed, all through the day, bouncing between patients, not quite completing one thing (usually the paperwork) before being drawn to the next. The paperwork uncompleted, the patient cannot be discharged, the bed is blocked, the Doctor is doing his or her best, the process is failing.

One recent example (I really don’t make these up). Patient A, post day surgery, is not recovering as expected and is not considered by the nurse ready to be discharged. The on call Doctor is called. She is busy accompanying Patient B to A&E (Why? We don’t know but it doesn’t seem a good use of the time of a Doctor). She parks Patient B visits the day surgery unit (a 5 minute walk) reads Patient As notes, explains to the Nurse that she is taking Patient B to A&E and disappears (another 5 minute walk). No one talks to Patient A. 30 minutes later the Doctor reappears to deal with Patient A having abandoned Patient B in A&E – waiting.

Now, the Doctor is working very hard, far harder than she should have to and all because no clear process is being followed, because there is no process discipline around the hospital and its units.

Observing this and other similar incidents I estimate that Doctors and Nurses are losing something like 20% of their working day on duff processes. Imagine what a difference that 20% could make to their performance, their working week and, importantly, to the health of their patients (the reason they are there in the first place).

My point, it is no good worrying about the cost of the public sector, we need to worry about the processes that cause the costs. What is needed is to develop sound processes and then consistently use them. Only in that way can we truly understand the levels of efficiency and effectiveness (of any organization) and judge the level of resources that need to be provided. Doing that is the primary obligation of those who purport to manage the NHS and other public services.

Processes are the drivers of cost and whether in the private, third or public sectors, executives and managers MUST focus the attention of the organization on improving processes and thereby reducing costs. Only in that way can the costs be justified, only in that way can the desired funding be obtained, only in that way can the purposes of the organizations be fulfilled and their existence sustained.