Execs Don't Know How to Correctly Cut Costs

Good morning. Good morning. So, in this episode, we are going to talk about one of our very favorite topics, and that is how to do cost-cutting well. We're going to start with this myth that's out there in the world that companies, company executives, know how to do this extremely well, and therefore should be brought in to the government. to apply those fantastic cost-cutting skills to waste in the government, which we all do believe exists, just like it does in corporations. But we have spent now decades, you a little bit more than me, doing this, helping companies do this. So we do feel qualified to discuss this topic. This is not going to be about Doge. It's going to be about how and why we believe corporations don't really know how to cut. costs. Would you like to dive in? I would. So if you go to any board, so you know this is the elephant in the boardroom, you go to any board or any C-suite, they will say they've been cutting costs all their lives, they're very good at, they have a lot of techniques, and to some degree, of course, that's true. The problem is that when you look at how companies cut costs and what happens after they do it. There is study upon study upon study that shows they don't work well. Yes, they announced with great fanfare that they're going to be doing something big, often with the word transformational in the press release. And then there's a lot of activity within the company, usually with people scared and worried and unclear about what's going on. And then they announced with equal fanfare this wonderfully big number that they've achieved through all these wonderful investments and things. And then what's the fourth step? The fourth step is that a year later, 18 months later, the CEO is saying internally and the board is saying, where'd it go? What happened? I thought we saved all this money. Why are our margins not bigger? Why are our earnings not higher? And that's because in, I forget what the number is in an HBR article recently, I think it was like 43%. It was. companies don't even get what they say they're gonna get within one year and another 11% after two years and it's now in the third year only 11% have sustained what they thought they were going to do okay for three years so generally they don't get as much as they hope to get they spend more on it than they expect it takes longer to get it and then it all or a large portion of it gets dissipated. Did you just call them morons? I did not. Because one thing is very important. We have great admiration for leaders in businesses. Most of them are smart, hardworking, passionate, want to do a great job. This all has to do with not realizing that there's a skill that they don't have that they could easily acquire and has been proven over the decades, but is not very commonly used in business. to the full degree it ought to be. Yeah. So the very most common ways of cutting costs that everybody hears about is, first of all, the layoff. Layoffs in general are done extremely poorly. Oftentimes they're done by voluntary retirement packages, which that may be your best people walking out the door. They're done by last in, first out. You may have just spent a fortune recruiting this wonderful person from somebody else that now you're saying goodbye to. And oftentimes those are your lowest. Yeah. And those people, you don't feel the pain of what you've done. You don't feel the consequence of it because as junior people, perhaps, or new people, they're not really producing that much. But in two years, in three years, your talent pipeline is the thing that you're complaining about because you hadn't filled it. Yeah. So layoffs are not done. We're not saying that layoffs can't result in some cost savings. but they are done so badly. They are done without changing the work. And what happens when you lay people off without changing the underlying work? You have terrible customer service. You have horrible employee morale that results in turnover. You increase risk and you have chaos. And, you know, as we said, this isn't going to be about Doge. It's not even really going to be about Elon Musk. But the best example right now, for example, is Twitter, when they had massive layoffs. And then, you know, what happened? What was the consequence of those massive layoffs? You know, outages, attrition of customers, poor content going through the pipeline that scares off advertisers. It's been a... catastrophe yeah and we don't doubt that elon musk is a smart guy but he didn't do a smart thing no he absolutely did not so let's see what are some other bad common commonly utilized bad cost cutting techniques so a couple one is well we're going to bring in mckinsey or booze allen or some big outside expert for those of you listening and not watching i just did air quotes around expert to tell us what the right answer is based on, you know, what everybody else is doing. When I was at McKinsey, we actually had kind of a joke line about that, which is telling somebody what the best that others are doing could often be like saying, what's the cleanest shirt in the laundry? It didn't necessarily mean it was the best that could be done, really what others were doing. Which is also why we don't believe in benchmarks. Right. That's a whole other topic. So bringing in the consultant, what's wrong with that? First of all, they usually get it wrong. And second of all, even if they get it right, there is not only no buy-in, there's the opposite. People hate saying, oh, yes, that outside person, you know, should be listened to. When I've been saying the same thing internally for the last 10 years and nobody's listened to me, screw them. When this goes wrong, it's not my, I'm not going to step in and help out. And then... One other commonly used practice to cut costs is tied to contracts. So oftentimes people just do a blanket, either squeeze your vendors, you know, go out to them and just say, we need more without any sort of collaborative attempt with the vendors to make sure that, you know, you're still getting the service you need. Now. We absolutely believe in talking to vendors when you need to cut costs. One of the things you should do is make sure that you're not paying for some service that you're not getting, for example. But just blanket, oh, you know, we're all, we're just stopping these contracts is a very bad practice. In fact, often vendors can be your best friend in cost cutting because, first of all, they do know things that are out there in the market that you may not know. We've got a bunch of examples of that. And the other is sometimes by expanding your relationship with somebody, you can actually get much better deals at that earlier on. Or here's another example. There's so many situations we've been in where the senior management says, we are not spending any more on law firms. Law firms take too much money. I'm sorry, on our legal department. The legal department's already well-staffed, but they go out and spend $400 an hour on some associate in a big law firm when they could have spent $100,000 bringing that function in inside. Yeah, we actually have a very cool example that I don't think we've talked about. A client of ours reached out to a vendor. The client was a bank, and they were looking for less expensive ways to send out overdraft notices. And the vendor actually had a very cool product that was just basically a folded piece of paper with glue on one side, which are now fairly common. You see these coming for various reasons. But it saved, you know, the old way was paper and an envelope. So it was not only good for the environment, it was good for the cost. And the vendor gave that idea to them. That's how it's done. Yeah. And then there was, okay, we've talked about benchmarking. The other thing is a lot of what we hear from executives is, well, we are about as lean as we can be. Our people is working as hard as they could be. No, not the smartest. They don't claim perfection, but basically as good as you could do in practice. But the problem is we don't have the best technology. And what we need to do to help our people is to spend a lot of money on, you know, an entirely new system or an entirely new telephone system or entirely new. Those things cost a lot of money. They take a long time to implement and they don't actually get a lot of the very simpler things that if you talk to the employees, they could tell you these tweaks would take care of 80 percent of time we waste. Which, of course, brings us to our first criteria that. everybody needs to do cost cutting correctly. So we have a few that we're going to talk about now. And the trick is that a lot of companies do one of these, two of these, three of these, but they don't do them all together. So they are not getting everything that they could to be efficient. So here's the first one. Anybody who's listened to us should probably already know this one. Stay along with us. Involve the people closest to the work. The people closest to the work are the only ones in a position to understand what is getting in the way of them doing their jobs and making their jobs inefficient. They are the ones who know. And when we talk about people closest to the work, we're not saying people closest to the bottom of an org chart. We're talking about everybody from top to bottom, side to side, who are closest to the work they do. Yeah. So a CEO knows that he makes the finance department create some monthly huge book of analysis and only he or she can say, you know what? I wanted this originally, but it turns out I really only look at these four pages. And so if you only do these four pages, which you know may save the finance department a lot of time and in case you think that's a hypothetical that was an actual example from one of our clients okay so you want to do sure so next one um so the next one is when you engage employees closest to the work what is it you're engaging them to do What you want to engage them to do is to come up with ideas that meet some very specific criteria. And it will sound like these criteria will limit the ideas you get so much that you'll have no impact on the company. It turns out that's not true. But if you get these criteria met. you can imagine the good things that happen and here's the criteria the first one is it has to clearly increase earnings in a way that's trackable and measurable these can't be empty promises or generalizations it's got to be something that we put in the budget and track down to the cost center so a lot of discipline the second criteria is it has to be customer neutral or positive this is not about hurting customers except in Very specific cases where the customer isn't willing to pay for something you're producing. Well, then stop giving it to them. They don't value it. But reduce it. The third is it has to reduce the risk of the conflict. This isn't about, oh, we're going to make big money, but we have to take big risks. No, we want things that are risk neutral or risk, you know, lowers risk. Fourthly, if you're going to invest, the payback should be super fast. So you only use technology where it's really going to make a difference. Now the benefit of hitting all those criteria, and there's one other but we're going to pull that out separately, is if you can find ideas that save a lot of money and meet those criteria, they're easy to improve. The effect on your company is to strengthen your company with its employees, with its customers, with its regulators. Yes. And the point that we will pull out separately is that everybody involved with the idea, and that's an important point, involved with the idea, not just has an opinion on the idea, but everybody involved with the idea, it either affects them, they do it, it affects their customers, it affects risk. They have to agree that all of these criteria have been met. So if the factory says this formula is a... pain in the butt to make this product marketing gets to say well hang on let's talk they don't get to say no as again as careful listeners should know they don't get to just say no based on their opinion everybody has to come together with facts which is actually another criteria which to talk about right so so you've got you're engaging employees to come up with ideas they're coming up with ideas that meet all these criteria and and this may just seem so ridiculously obvious They have to use facts to say whether those criteria were met. But it turns out it is so often the case when you have any organization with two or more people that opinions often take the place of facts. Okay, hang on. Nobody listening is going to be surprised by this. No. It may seem, you said it may seem obvious, but everybody who has worked in any company of any size knows that oftentimes politics, facts. I mean, politics and opinions take the place of facts. Right. And so in order to determine if those criteria are met, actual facts need to be. And that takes, again, a certain discipline and a certain practicality because you don't want to have analysis paralysis that so often happens in companies. You want a practical level of analytics. So you need the least amount of facts to make a decision. Right. And so if someone says no to this idea that's going to save $320,000, there has to be some fact on the table that says, oh, because. Now, what's the beauty of having actual facts rather than opinions? The beauty of it is you get consensus filled because. You know, you may have different opinions about Supreme Court cases. Nobody has different opinions about how gravity, you know, is going to affect a bridge. So by forcing people to put on the table what are the facts, it allows everyone to go, okay, I love this idea, but you're right, that fact kills it. Or I hate this idea, but you're right, all the facts, I don't have any facts that justify it. not doing it. So by being fact driven, you get this consensus. And what's the wonderful thing about the consensus? No real decision has to be made because by that time everyone's agreed this idea should be done. And when it gets done, everyone's agreed, yes, I signed up for that idea. I'm not going to sabotage it later on. Yeah. So if executives, if C-suite would do this, it would have, it's so much easier than what they are doing. Because they aren't, you know, nobody dumps a whole bunch of tough decisions in their lap because the hard work has been done by the people who know and also who are going to have to implement the idea. So, you know, we say the buy-in is built in when you do this. And then lastly, I think we want to talk about using a tracking system. So lots of times people declare victory. You recently called it the Bush-like mission accomplished. And then, you know, that's it. Well, we've done it. The cost is out. But you will find this is why only 11% sustain over three years. You need a tracking system to hold people accountable, yes, but also to give yourself some early warning. If an idea, I mean, obviously decisions can get made and something goes wrong. The world. Changes constantly. So an idea that was good yesterday, you know, might run into a roadblock today. But, you know, not everything works against you. So if you track a package of ideas as a whole, you can be sure that you are getting what you told Wall Street and your employees and yourself that you were getting. And if you do this, you also get the benefit of making sure that any savings you got didn't slip out the door. I think we've mentioned Lock the Vault for something that was, you know, that didn't meet all this criteria, that didn't have the, you know, the disciplined decision making that these things do, or that it's just, it's just spent on things that you didn't realize. And while that all sounds like just financial discipline, there's actually a cultural benefit to this. Because what it does... every company we know talks about accountability and transparency as being important. But turning that phrase into actual day-to-day action and behaviors that are just naturally reflected in how people go about their work is hard. But if people know before they propose something that they are going to be held truly accountable for it. the time, the date it's due, the amount, who's going to be involved, what's going to happen. And it's transparent to the whole executive team whether or not that's occurring. And there'll be consequences if it's not, or positive consequences if they overachieve and do well. It builds in a behavior of honesty, because so many budget processes are built on gaming budgets. I'm going to demand that you don't, you know. You let me have a bigger budget than you wanted me to, and that gives me an easier target to meet for bonuses. And then I'm, you know, whatever. All that gaming that goes on. This helps create more of an honest, transparent culture. With a healthy soupçon of sandbagging. Yes. Given that this process can lead to unbelievable results in terms of savings found. A little bit of sandbagging is okay. Agreed. Okay. All right. So. Get back to work. Businesses, it's good to be a model for government, but you've got to get your own house to really, in order to be that model. Agreed. Cheers. Cheers. Bye.