Are you in a business where reducing cost has been the main focus lately? Have you ever thought of cost of management? …or even calculated the cost of good or bad management? Is managerial improvement an easy way to do cost reductions?
Financial crisis, low oil prices, improved technology and increased global competition are some of the reasons a lot of companies have focused on cost reductions lately.
Traditionally, when we speak of cost reductions, we include lower budgets, reducing the workforce, improved work processes and innovation. Focusing on improved management might as well be a golden cost saving opportunity.
Excel and numbers as a basis for cost reductions
Excel sheets, revenue and budgets are often the basis for management decisions. This works perfectly in an economical model and in theory.
There’s something that happens with the collection of a large amount of data when it’s dumped into an Excel spreadsheet or put into a pie chart. You run the risk of completely missing what it’s about – Aaron Koblin
A lot of companies measure sick leave and employee satisfaction…. unfortunately, only a few companies translate this people information into the excel sheets when they need to make cost reduction decisions.
In a perfect world, Excel should be able to integrate feelings. This would probably revolutionise the process of decision making in a lot of companies.
Cost of Bad Management
Bad management decisions are costly. Sometimes the outcome is difficult to predict. However, there are quite a few decisions where the consequences should have been analysed before acting upon the decision.
After many years as a manager in an international environment, I have certainly participated in bad decisions. A traditional mistake is to reduce the workforce so quickly that the cost of getting the job done afterwards is higher than the reduced salary of that one person.
In addition, the total cost is increased by the demotivation of the employees remaining as they often get a work overload. The consequence will be higher stress levels, reduced performance, increased sick leave and key performers leaving the company. This carefully needs to be analysed and to be entered into the Excel sheet as an additional cost.
There is a lot of research about how to make people perform and how to best handle changes…. so why does it still happen that some employees get their redundancy letter by email? The time that it takes to send it is minimal. The cost is tremendous. The time you will need to spend with lawyers and the potential cost of court cases need to be added.
…. and do not forget to add the cost of bad market publicity into the Excel spreadsheet.
A clever person solves a problem. A wise person avoids it – Albert Einstein
By the way, the human factor also needs to be taken into account when it comes to dealing with clients and suppliers. Do we always remember to share our vision, processes, timelines, budgets etc. with the people who we are supposed to cooperate with? And more importantly, do we speak the same language and is there a common understanding of the quality requirements? The risk analysis should be done and translated into additional cost in the excel spread sheet.
Not motivating people, not sharing the vision and the total picture, lack of communication with the employees, avoiding the difficult conversations, lack of company processes, training and structure…. the list of examples of costly management is long and unfortunately rarely included in the total budgeting.
Improved Management Reduces Cost
The good news is that it is easy to do extensive cost reductions through some actions.
Whenever you enter a plane, you can be reassured that the pilot has a thorough training and is continuously using checklists. Doctors are luckily in the same situation, and surgery is done in accordance with the hospital’s procedures. In a lot of sectors, employees are recruited with specific skills and they are continuously trained and they follow a set process.
Managers in all businesses should certainly also have a basic set of skills including knowledge about human resources when they enter the position. They should regularly participate to management trainings in order to ensure that they continuously maintain focus on the importance of the people factor.
Whenever we launch a new product, the focus is on doing it right the first time. As a manager, we should have the same focus in our leadership. Managing people should be integrated into the business strategy and be reflected in the managerial organisation chart.
Good leadership is even more important in tough times. A difficult market situation is a managerial exam. Good management will rapidly be reflected at the bottom line.
Pareto in Management
Pareto and the 80-20 rule is an excellent thumb rule to start your managerial cost reductions. Focus 20% of your time where you get 80% gain. So start with spending 20% additional time with your human managerial tasks to make your employees 80% more efficient.
Obviously, managers are all human beings and the risk of failure and increased cost might occasionally occur. It is though important that you continue to include your heart and bring the human factor into the Excel modelling each time you focus on saving money.
Good luck in increasing the ROI of your managerial effort!
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