Do executives really want cost reduction?

February 19, 2008

With the US economy getting worse every day, many executives have started to cut their budgets. Cost reduction for many companies is now number one on the priority list. As logical as it may seem, this is a great mistake. Why? In yesterday’s contribution I pointed out that any improvement must be focused on what you want. Therefore, if the economy goes south and you want to improve your business results, you must be focused on what you want. What top management should want and be focused on is to increase the value for its stakeholders. This is markedly different from focusing employees on cost reduction.

The basic question any management team must contemplate is why does the company exist? Why do customers buy from them (and not from others)? When would they buy even more from them? What customers are we not serving and could we profitably serve? Why do banks give them credit and why do shareholders buy their stock? Etc..

All answers to these questions are related to the value proposition the company presents to its stakeholders. Therefore, any management team must ask its employees to stay focused on the key question: How do we increase value for our stakeholders, rather than ask its employees how we can reduce cost.

As I explained in my previous contribution, the solution domain is much larger if you focus on what you want. A company does not exist to lower its cost. Hence focusing employees on reducing cost, means you are directing their energy to the wrong objective. Often, asking employees to focus on cost reduction leads to the wrong decisions. For an example, see also my contribution in my second blog.

Mind you, cost reduction is not excluded from the solution domains employees will come up with if you ask them the value improvement question. But cost reduction becomes an outcome as a result of asking the right question, rather than an input because you ask the wrong question.

Ask employees about how to improve value and they will come up with many solutions, for example those that are related to improving profitable sales, a refinancing of a loan, using video Skype conferencing rather than a business trip, improving procedures with suppliers that could lead to less problems and therefore less cost etc..

I was reminded of all this when I saw a segment on TV last week when at the morning news, two so-called experts advised employees what to do now the economy was worsening. All suggestions were focused on the individual. For example, now is not a good time to ask your boss for a salary raise, get your resume in order, start looking around for other possible jobs. Not one suggestion was related to helping the company you work for do better. Not one expert suggested that now was a good time to brainstorm with colleagues how you could improve revenue generation, work smarter etc. and bring these ideas to your boss – thereby also impressing your boss with useful ideas and how good you are as an employee. Perhaps I should not have been so surprised. After all, the US is a hyper individualistic society. But it does underscore my main point: if top managers don’t ask their employees the right question they are certainly nog going to come up with the right kinds of answers.

Do executives really want cost reduction? No! They need value improvement.

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The Cynefin Company (formerly known as Cognitive Edge) was founded in 2005 by Dave Snowden. We believe in praxis and focus on building methods, tools and capability that apply the wisdom from Complex Adaptive Systems theory and other scientific disciplines in social systems. We are the world leader in developing management approaches (in society, government and industry) that empower organisations to absorb uncertainty, detect weak signals to enable sense-making in complex systems, act on the rich data, create resilience and, ultimately, thrive in a complex world.

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