CUTTING COSTS WHILE PROTECTING SERVICE

Some organisations appear to have learned the lessons of over-reacting to recessionary forces by imposing arbitrary downsizing. Perhaps they have undertaken some detailed cost benefit analysis and have reached a conclusion that retaining employees is a lower cost in the short term, or perhaps they simply don’t believe that the current recession will last and can afford to ‘weather the storm’.

2010 DILEMMA

The NIESR (National Institute of Social and Economic Research) recorded economic activity in 2009 at its lowest level since 1921, lower than the Great Depression. At these levels it is no wonder that the marginally improved Q4 2009 GDP statistics - heralded as a ‘return to growth’ - were met with a somewhat muted response by business. In the real world, conditions have hardly changed and unemployment levels, public spending cuts and tax increases continue to threaten consumer spending. Many businesses are still faced with a dilemma: should they continue with current strategies in the hope that conditions will improve, or ‘bite the bullet’ and restructure? Employees, often our largest cost, are not easily flexed. There are legal frameworks to consider, commercial and organisational implications and of course they are ultimately people, not robots. We therefore have to be very careful about when we take a downsizing decision and be very sure about its associated costs and expected benefits.

BALANCING COST AND CUSTOMER SERVICE

The problem of course is that many organisations are often pretty sure about the benefits of downsizing but allocate little time to considering its service level implications. Customers will usually only worry about your bottom line if they believe that you might be heading towards insolvency; most of the time they are far more interested in the level of service being provided. They may initially accept what an account manager has been instructed to say about the changes, and may even believe assurances about service levels remaining unaffected. But the downsizing alarm bell has sounded and they will be watching. A previously unblemished reputation for service will soon start to tarnish when fault attendance and call centre response times start to extend. Existing customers will start to become more demanding about quality and prospective new customers may no longer see your brand as a guarantee of service quality. Without the quality platform, a sales force will chip away at a previously unassailable pricing structure. Your customer proposition will start to migrate from one based on ‘excellent quality at a competitive price’ to one based on ‘cheapest in the market’

The real challenge with any cost reduction process is in how to re-size the business while protecting service and reputation. A service level based approach is clearly better than an arbitrary ‘across the board’ cut but it does require a little more time and effort  To achieve this a multi-step process is recommended involving understanding the cost structure, identifying improvements to the way tasks and processes are undertaken and establishing service levels. Project governance and an appropriate senior review mechanism should be installed, whatever the basis for the downsizing process.

STEP ONE – UNDERSTAND THE COST BASE

After dividing the organisation into manageable units it is useful to obtain two pieces of information. The first is based around identifying a department’s key processes, breaking them down into steps, and undertaking a basic RACI (Responsible, Accountable, Consulted, Informed) analysis. This will provide a basic understanding of what takes place and who gets involved and is also useful later when developing improvements to method. A second and more important element is an activity based cost analysis of those same key departmental processes. By the end of this stage we should have a deeper understanding of what takes place in a department, who gets involved and what those processes actually cost. This cost analysis will effectively establish the current cost baseline.

STEP TWO – IMPROVE CURRENT PERFORMANCE

Prior to considering service levels we should be clear that the operation is working effectively. Step two is about challenging departmental heads with the task of identifying improvements to method and process. It is here where that ARCI analysis can be used to help eliminate wasteful tasks and unnecessary sub-processes. It is also here where senior or independent managers can get more involved through a formal review mechanism, making suggestions or providing direction on where a departmental head ought to look. Expectations should be high and managers should not assume that once the target reduction has been achieved they are necessarily ‘off the hook’. Having achieved a baseline level, more should always be sought – flexibility may be needed elsewhere in the organisation. The process and method improvements that have been identified should be quantified and expressed as cost savings against the current cost baseline established in step one.

STEP THREE – CREATE LEVELS OF SERVICE

The revised cost baseline established in step two is already more informative and useful than an arbitrary ‘across the board’ cut approach; it provides enough raw data for the creation of a basic service level matrix. To achieve our goal of a service level basis for downsizing, it will be necessary for department heads to generate a matrix of service levels - at least three – and cost them accordingly. The ‘improved’ cost baseline established in step two will effectively form the ‘current’ service level and at least two others, say ‘improved’ and ‘reduced’, should be tabled. The customer service implications of each level should be clearly delineated together with any associated cost savings or increments. An ‘improved’ level may be desirable if the benefits are enough to warrant funding.     

STEP FOUR – MAKE THE SERVICE LEVEL DECISION      

The senior review committee is involved in all steps but its most important task is to determine which departments warrant ‘current’, ‘reduced’ or ‘improved’ funding. Despite an overall objective of reducing cost, it may be that a compelling case can be made to protect current service levels or even improve them, providing of course that enough of the more difficult ‘reduced’ decisions are made. It is here where the choices on customer service are made and the real implications of a strategic cost reduction exercise fully understood.

COMPLEXITY AND CHANGE

The process can be more complicated to apply in larger organisations with diverse inter-dependencies and multiple internally facing units, but the approach can nonetheless still be successfully applied. People based change management aspects can also affect behaviour and cooperation at all levels and should also not be underestimated.     

CHALLENGE 2010

Many organisations are still faced with a decision on whether to downsize and the problem of how to undertake it without prejudicing the future. A service level based approach assists organisations in making better choices about where departmental budgets should be allocated and reduces the impact on the customer, the ultimate paymaster of any business.

Unpublished article written in 2012              

Darwen Management Services

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