CHAPTER 8
Cost Optimization: To Free Up Resources to Fuel Commercial Growth
The operational playbook has three components: cost optimization, operational excellence, and technology. This chapter gets at cost optimization to free up resources to fuel commercial growth.
As the French philosopher and mathematician Blaise Pascal taught us a few centuries ago, while in theory there's no difference between theory and practice, in practice, there's a great deal of difference. Don't underestimate the importance of your operational, executional, and financial practices in terms of putting all your value-creating theories into practice and in freeing up the resources you need to fuel them.
You'll need:
- Resource allocation practices
- Rules of engagement
- Action plans and processes
- Performance management plans and processes: operating and financial performance standards and measures
Resource Allocation
In theory, strategy is about the creation and allocation of resources to the right place in the right way at the right time over time. You thought that through or will think that through per the guidance in Chapter 3.
Now drop the other shoe. If there's a right place and a right way and a right time, there's a wrong place, a wrong way, and a wrong time when it comes to allocating resources. To allocate resources to something, you have to pull resources away from something.
A simple example: Employee raises for the next year. You decide raises should average 4 percent. Your first idea is to give below-average performers 3 percent raises, average performers 4 percent, and above-average performers 5 percent. This works mathematically, but then you decide to give outstanding performers 10 percent raises. That throws the math out the window. You cannot allocate more resources to outstanding performers without taking them away from someone else. Mathematically, you're going to have to give others less of a raise, reduce what you're paying people in some positions, or eliminate positions to fund this.
This is the heart of what comes to the minds of most people when they hear the word synergy in a merger or acquisition. It matters—a lot. It's the way to free up resources to fund the most important value creators. As we said in Chapter 3, the critical resource allocation choice is to
- Win by being predominant or top 1 percent, superior or top 10 percent, and strong or top 25 percent; or
- Not lose by being above average or competitive and good enough or scaled; or
- Not do by outsourcing or not doing at all.
Now's the time to turn that theoretical framework into practical reality.
- Predominance is a bold, expensive choice. You're going to have to outspend everyone else and give these areas a tremendous amount of your attention and time.
- Superiority is one click below predominant—almost a shared predominance in which there is no one better than you. You're going to have to outspend 90 percent of your competitors and give these areas a huge amount of your attention and time.
- Strong is a winning position. You may not be the market leader. You may not be able to attract the absolute best people. But you will be a market leader and will attract strong people. Outspending 75 percent of your competitors and devoting your best attention and time is a material choice.
- Competitive is another word for average. “We pay competitive salaries” is playing for a tie. Expect to be in the middle of the pack. Expect to devote an average amount of attention and time to these areas.
- Good enough is code for “minimum viable.” Your objective here is to devote as little money, attention, and time as you can to get by. This is the first place to cut resources by systematizing, automating, and scaling processes.
- Not do is as bold a choice as predominance. Michael Porter taught us that strategy is choosing what not to do. Former PrimeGenesis partner Harry Kangis took it one step further, suggesting that choosing not to do something that's a bad idea is easy. The hard choice is choosing not to do something that's a good idea—for someone else.
Good Enough Example
The Power Information Network collected retail data from automotive dealers, turned it into reports, and used it to model the impact of marketing programs. The real value creation was in the models. We overinvested in model makers, bringing in PhDs from all over the world. Then we sat down with the people collecting and managing the data and had this conversation:
“We're dividing the organization in two. There will be an A team and a B team.
“The A team are the model makers. They are our competitive advantage. They are going to get paid more, get faster, bigger raises and faster, bigger promotions. We're going to push them hard.
“You are the B team, collecting and managing data. You need to be just good enough. Expect to get paid less, get slower raises and slower promotions. But expect to have lives outside of work.
“You have three choices:
- You can say, “This is fine. It's a job. I'll be here from 8:30-4:30, earn my pay, and then go play golf or tennis with my friends and family.”
- You say you want to be on the A team. If you've got the required strengths, we'll move you and push you and pay you.
- You can leave. Not right now. Stay as long as you want and then leave for another organization in which what you do puts you on their A team.
“Note that was three choices, not four. You don't get to complain.”
Then we made it clear to the chief operating officer that his job was to manage this group so that the rest of the senior management team never had to talk to them again. We couldn't focus more time on our customers and A team model makers without spending less time with the B team.
So leap into this with both feet. Get granular on the specific human, financial, technical, and operational resources required by your strategic priorities, programs, projects, and tasks. Identify the sources of those resources over the short, mid-, and long term. Put in place processes to create and apply those resources.
Where to Start
Create a list of high value-creating processes to look at while layering in the new required processes on top to deliver the needed cost reductions, leverage capital synergies across assets and capital and working capital, and fuel revenue growth.
Marketing and Sales
Go-to-Market Process, Driving Commercial Success
- Market definition and frame of reference to understand the universe of opportunity
- Market segmentation to sharpen your “where to play” choice
- Target market insights to help you win
- Brand positioning and competitive differentiators, the bedrock of all your communication (and everything communicates)
- Lead generation to fill the top of the marketing and sales pipeline: awareness–interest. Advertising, PR, referrals are critical tools for lead generation
Sales Process
- Lead nurturing to move prospects through the marketing and sales pipeline: interest–desire
- Customer relationship management (CRM) system and process to enable a disciplined approach to managing the marketing and sales pipeline
- Lead conversion, moving prospects through the final parts of the marketing and sales pipeline: desire–action
- Demand management to ensure you can deliver on your commitments
Design
- Follow through with last-mile commercialization of innovations to make them real.
- Strengthen the innovation pipeline with evolutionary and revolutionary innovations, each of which play their own role per the discussion in Chapter 4.
Production
- Reduce inefficiencies and waste in current processes: safety, quality, delivery, and cost, focusing resources on the few highest value-adding production activities, and automating, outsourcing, or eliminating the rest.
- Institute goal deployment process.
- Make rapid-cycle execution improvements.
- Deploy Lean daily management.
- Leverage improvement events.
Delivery
- Apply SIPOC to the ecosystem: supplier–input–process–output–customer focusing resources on the few highest value-adding delivery activities, and automating, outsourcing, or eliminating the rest.
Service
- Refine focus on highest-value customers.
- Inspire, enable, empower those serving them with stronger delegation to those serving customers, with everyone else in supporting roles.