Driving Down Costs with Lateral Thinking

Skanda Kumarasingam

To My Girls
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Ramita and Sahana as they find their way in this world & Anne for making it all possible

Skanda Kumarasingam

Please Share (UNCOPY RIGHT)

This is my work of art. It was created with the utmost passion and love. It is my gift to all the managers and business owners who will take their businesses and their careers to greater heights now and in the future in a business world that is getting tougher every single day. Your efforts create hundreds of jobs and I want to see it succeed. You move the engines of our economy and hold our futures, for without economy and industry there is no future. In my own little way, I believe this guide will help in the grand scheme of things. Great monuments are built one brick at a time. Please accept my humble gift.

I'm providing this book free of charge to all, so please feel free to forward it to everyone you know so that they would be able to benefit out of it. You can cut, copy, paste, change things or do whatever you want with this book.

Skandakumar Kumarasingam Sydney NSW 07 April 2010

Skanda Kumarasingam

Driving Down Costs with Lateral Thinking

In this little book I will look at the sneakier ways costs get created and the more creative ways that we can use to cut costs. We need to understand and accept the fact that when costs gets cunning, we need to get smart to control or reduce it. The way of doing this is by using lateral thinking or more creative ways to reduce them. Excess costs can be created by indirect factors that are not immediately apparent to those who run the day-to-day business operations. You can only attack these costs by getting to the real heart of the problem rather than just bashing away at a cost itself. Remember the difference between treating a symptom versus the real problem? My experience shows that there are three biggest indirect cost generators which are time, complexity and poor quality. So here, I will consider some clever ways you can turn cost on its head, get rid of it altogether or turn it into a new profit stream. There may be activities in your business operations costing you a lot of money that you could get your customers to do for you, for free. They might even prefer that. And there may be some cost lines on your profit and loss statement that you can actually turn into revenue. That's the best possible outcome: cost into revenue. The possibilities are endless with Lateral Thinking. Lets dive in, shall we?
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Indirect Cost Generators Time

Doing things faster reduces cost. Say for instance, in the fashion retailing a big cost is the markdown or write-off of stock that was not sold during the particular season. This cost can blow up to 30% of full price across that seasons range. The shorter you make the order- to- delivery- to- sales cycle, the lower the risk of getting stuck with stock that you cannot sell. You may be able to reduce the time of the cycle by knowing immediately what is selling in the stores, using that information to place reorders with your suppliers- quickly and frequently in small batches, minimising shipment time from suppliers to the stores, and being able to reprice quickly at point of sale. If you can shorten this cycle you can reduce some other costs such warehousing. However you need to also consider the extra costs that may come into play due to quick shipping by air rather than sea. Well you know how to do simple cost benefit analysis, right? If not get your finance professional or accounting functions to do that! Another example would be the product development cycle in software. Software developers always want as much time as possible to build the product. More time reduces their stress and lets them get closer to the perfect code. However time has much more impact on cost and the product itself may be less relevant to its market by the time it finally arrives. I think a better way would be to get a product released faster and then fix customer issues and release a quick fire new version. If you can reduce cycle time you will dramatically reduce overall cost. The well known example here is the fact that Microsoft releases all its products with 10-15% bugs and gets a reasonably perfect version only the third time around!
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Shortening the product development cycle is not only critical for cost reasons but also, when you lose time, your competitors will be able to grasp these market opportunities and beat you in your own game. You can apply the short cycle approach to almost anything as I show you below. Annual budgets-they take too long and take up too much valuable management time. In fact the bigger and more complex they get the more time and more revisions are required. The best approach is to start them later, finish them faster. Do not putting so many loops and layers. Multi-nationals and across the border reporting businesses have made this a time consuming and entertaining exercise with huge cost implications, where a huge beast is fed by teams of accountants rushing to develop, revise, re-revise and print stacks of budgets. Then all so often these budgets are way out of projections! Budgeting will work better if its done by astrologers than accountants I guess! Meetings-in one of my later articles I will calculate and show you the enormous cost of meetings even when they are well run. But the point I wish to make here is that most meetings are badly organised and last too long for the simple reason. Too many people get invited; they could be done by phone. Sometimes armies of business executives travel to distant locations (think of entertainment, airfare, hotels, taxi, work undone at office etc.) to attend boring, nothing meaningfully discussed meetings. The presenters at these meetings recycle their same old PowerPoint presentations. Most guys dont even discuss the topic given as they are unprepared and often recycle an old presentation. Its a joke, is an understatement. IT deployments-do not believe the software suppliers when they tell you it takes 18 months to deploy SAP or any other ERP system. That is going to cost you serious money. Do it in three months, then pull the plug on external support and let users fend for them. The project in my last company was a 18 month project that is well on its 3rd year going!
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 Consulting projects- you can get a strategy review done in six months six weeks. The consultants will want six months for the same reasons as software developers want years to write code. Six weeks will be better for you. Obviously there can be situations where going faster (speed) is not the right choice to make. However these are in the minority. In general, taking time out of processors and decisions squeezes out cost- and it makes you more competitive in what you offer to your customers. Questions that you need to be asking in this area are twofold Can you make all your business processes as fast as possible? Are there areas where you could reduce cycle time and save on costs?

Complexity is Expensive
All other things being equal, making things simple and doing them simply will keep costs down. When management realises that complexity and lack of focus are the main enemies of cost efficiency and reduce thousands of products and dealing with armies customers who create more problems than improve your bottom line the company wins. Too many product lines mean too little attention available for each, subscale production volumes and slow accumulation of learning. When you have hundreds or thousands of products and customers you start to see a Skanda Kumarasingam

tangible extra cost layer being created in over complex businesses: a cost layer whose sole reason is to analyse and manage this complexity. This might include the highly paid members of a portfolio strategy group spending their time working out which product lines could get pooled into which strategic business units. Also top management and technology groups trying to squeeze convergence and synergy out of fairly unrelated businesses are performing endless pricing and customer profitability analysis from teams of MBAs because they have fallen into the trap of negotiating individual deals with every major customer. In each extra case complexity has produced extra costs and reduced profitability, but it has not added any value to your customers or to your business. Many consulting projects can themselves be interesting examples of the cost of complexity. Consultants like selling cross functional projects. Correctly they observed that you are organised around functional departments like sales, production, service, distribution, accounting, legal, operations, marketing and so on. But what really matters they point out is that your key activities cross functional boundaries, like fulfilling a customer order and making the customer happy, delivering quality at Six Sigma levels and so on. These are what really drive cost, they say. This speech is similar to the reengineering fad of the early 1990s. If you buy into this, soon you will be stuck in a hell of cross functional brainstorming meetings. Your key staff will be tied up for days reinventing the blindingly obvious, on process flow diagrams stuck on brown paper covered meeting room walls. At the end of this process you'll get an interesting analyses saying how much it costs to make a customer happy or not being a quality organisation costs you X amount of revenue. Consultants like these projects because they take ages to do. The conclusions are hard to disapprove one way or the other. And the bottom line is when it is cross functional and many are involved it proves to be impossibly complex to

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budget and track the processes and savings across multiple line functions. So nobody drives the action programme and no costs are finally cut. By then the consultant has moved on with her cheque. Cross functional approaches are conceptually appealing. But it breaks down as two of the basic rules of good cost management, which is establish clear individual accountabilities and avoid complexity are lacking. There are three important questions you need to ask yourself with regard to complexity in your business Can you cut costs by simplifying what you do and how you do it? If the complexity is deliberate does its value exceed its costs? Can you get most of the value added with less cost?
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Quality Cuts Cost

Back in the 1970s and 1980s Japanese manufacturers inspired by Deming, an American consultant realised that they need not spend more to get higher quality. The opposite was true. The more they focused on quality, the more efficient and lower the cost became. This unexpected virtuous cycle became known as the Toyota paradox. It works in several ways. Eliminating defects before they occur eliminates remedial costs later in the value chain. Textbooks call this as cost of quality. These remedial costs could be in the factory as goods are checked before being shipped out. Or more Skanda Kumarasingam

expensively, they could be after goods have reached the end customer leading to high warranty claims, product recalls and lawsuits. Building quality at the front end also eliminates the need for large quality control departments at the back end, which they are overheads and bureaucracy. Then the legal department to handle expensive lawsuits and warranty claims! So adopting a zero tolerance approach to defects tends to squeeze out slack out of the system. For example before the times of just-in-time inventory and just-in-time manufacturing ,businesses used to build up buffer stock at several stages of the production process to provide a cushion in case of a supply or machine breakdown. It was later discovered that most buffer stock actually reinforce the problem they were meant to solve. Since it (buffer) existed, managers got sloppy and tolerated stoppages, delivery failures and bad scheduling. Of course holding the buffer stocks was a cost too. Under the just-in-time system all buffer stock were eliminated. When that slack was taken out of the system not only was inventory cost cut back but overall production efficiency improved as there is no longer anywhere to hide. A higher quality process or firm produces a lower cost process. Consider the following to improve quality in your business 1. The productivity factor- Obviously, one of the ways any manager can accomplish more with existing resources is to improve the productivity of those resources. Improving your staff's productivity and quality consciousness is an ongoing effort and one that's important for the employee, your company, and for you as a manager.

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2. Train and develop your employeesTarget specific training opportunities in quality and productivity for each employee that helps him or her do more at a higher level of standard. The training can be internal programs that cost little to nothing other than time from one of your senior people. Or, you can use outside vendor programs that can teach specific skills to the employee that improve his or her production capability. 3. Coach and focus employee effortsToo often, we allow our employees to "find their own way." Being more proactive in delineating employee responsibilities, focusing their efforts on important tasks, and coaching them for higher quality and productivity is a good thing. Expect higher quality and productivity and you will often get it. 4. Give them toolsour employees want to be productive and to produce quality results. Invest in your employees by giving them the tools that boost their productivity. 5. Incorporate a quality improvement programOften employee productivity is hampered by poor quality in the delivery of their efforts. More than not, they can't see the problem; it's the "can't see the forest for the trees" issue. For example, if your programming staff has to fix lots of problems that are discovered after software enhancements are put into production, you have both a client service problem and a productivity problem. Every time I have implemented a quality improvement program, I have met resistance from my senior people. Only after showing them the numbers before and after the quality program do they actually believe it improves the team's output. 6. Give extra incentives for more workin a couple of situations you have an inordinate amount of backlog, need to reduce the backlog level, but dont want to hire more people. To attack the problem, offer staff incentives to work on extra projects "on their own time," this meant outside of normal hours. This type of program can be very effective, but you have to be careful to avoid creating an impression that you are paying for overtime. Hourly Skanda Kumarasingam
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people get overtime, not professionals. You also only want to authorize the additional work to those who are doing an acceptable job; in other words, the way to qualify for the incentive work is by doing your normal job well. Use a program like this only in short spurts, say three to five months, versus allowing it to become a normal work program. 7. The perception factor -Improving your staff's productivity can actually be accomplished by changing the perception of the team's productivity and quality output. I'm not advocating any type of deception, but there are things you can do to make the team appear to be more productive. 8. Organize for client service create a structure and implement processes that help your employees quantify issues, implement change in an orderly manner, escalate appropriate issues, and follow up consistently. Improving client service automatically makes your team appear to be more productive. 9. Manage client expectations to your capacityif your team is overcommitted to the capacity of what they can deliver, the natural conclusion will be that they're not getting the job done. Manage your client's expectations to your team's actual capacity for quality delivery and it will appear that the team is more productive. We should be managing this way anyway, but it's easy to get overcommitted. 10. Filter the request backlog in your departmentReview the requests coming into your department from stakeholders. Quite often, requests are made for items that are not necessary or that do not provide real value to the business. Reducing the backlog and establishing more stringent approval requirements for new requests can create a perception of improved response.
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11. Over communicate communicate the status of outstanding issues more than you have been. Nothing makes a customer feel more frustrated than not knowing the status of a support problem or outstanding request. Keeping your customers and users "in the light" creates a perception of being more productive and improves client service. 12. Over deliverCoach your staff to take the extra steps in supporting your stakeholders. Little extras go a long way toward improving service quality, and higher satisfaction creates an image of responsiveness and productivity. 13. Publish your team's accomplishmentsyou might be surprised at how much we all forget about what we accomplish every month. It's so easy to get caught up in the day-to-day issues and problems that we forget to reflect on the things that were completed in the past. Start tracking your team's accomplishments and publish the highlights monthly. If we forget what we accomplish, I can guarantee that the customers don't know all the things we do. Share this knowledge with them, and you may find that customers really are interested and that their perspective of how busy you are in your department or business unit goes way up. 14. Before you start trying to improve the productivity of your staff, conduct an assessment to determine how productive and quality conscious they already are. If possible, establish a baseline and measure the improvements as you implement specific actions that either improves your team's real productivity or the perception of its productivity. Capturing real data in key areas will help you substantiate whats really happening. To get moving in this area ask yourself Can your business invest more, upfront in quality so that you are able to get an overall reduction in costs? Can you reduce back in cost like quality control, rework, service recovery, and product recalls? Skanda Kumarasingam
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Let Customers do the Work

Here are some examples Compare grocery stores (corner shops where the owner sits behind a counter where you need to queue ask for the goods and pay to get the goods!) with self-service. You half the shopping time. Prices are much lower. As the supermarkets got bigger you got more choice and you could buy most things in one visit. This was a win-win for retailers and consumers. Everybody cut costs and saved time. On the Internet you can do all the staff that relates to foreign or interstate travel that your travel agent used to do for you and charge you for it. These include research, book, change and cancel. And in most instances we can be faster than most agents and often find the best deal. This goes to internet banking (well ATMs are good examples too), buying books on Amazon, booking and planning holidays, meeting friends and partners ( there were marriage brokers in the past),sending flowers, getting funding for all sorts of purposes, ordering food on a lazy evening, organizing parties, researching information so on. These are examples of customers doing your work and reducing costs for you. Then there are the self-service counters in fast food outlets and vending machines. You can also use the Internet to do technical self-help stuff. I have often found searching an online help data base is a lot better than being on hold with a customer service phone line speaking to someone in another time-zone on cheap phone lines whilst they keep yapping on and on, giving assurance every five minute that our problem will be solvedguess these dudes are paid by the minute!
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So if you can get customers to do the work, get it done immediately. If it speeds things up for them or if they do it better than your staff would they prefer it-and the cost is off your profit and loss statement. To make progress in this area ask yourself Are there certain activities which are not currently done by your company that can be done by your customers much better and more cheaply? Would customers actually prefer to do something by themselves?
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Cost into Revenue

I will analyse this in 3 areas which are menu pricing, turning cost centres into profit centres and marginal costing.

Menu Pricing
Changing pricing can help cut costs or rather improve your bottom-line. To see how this works you will need to visualise a spectrum of possible pricing strategies. At one end is bundled pricing solutions, selling to their customers for a given total price which comprises many elements. At the other end of the scale is unbundled menu pricing, where customers get to see the price of individual components and cherry pick the bits they want.

Skanda Kumarasingam

Bundled solutions help customers when, what they are buying is complex and risky or in an early stage of development and so not yet understood. Customers are more concerned about the ease of use and reliability than about cost. However as markets mature, customers understand better what they are buying and will take on more risk. At that stage menu pricing can help both sellers and buyers reduce costs. The airline industry has moved to menu pricing. When buying a ticket there are two cost options on the same airline. The high cost menu options could more than double the cost of a given trip. However introducing menu pricing the airline and its customers are set up to achieve a win-win situation. If a customer eliminates the airlines cost of agency commissions, credit card fees, paper tickets and call centres, they get tangible benefits in reduced cost . Customers can choose which airport to travel from and pay different airport charges as well as deciding how much luggage to take. Think of Virgin airlines as an example. They advertise the basic cheap rates with a tiny print saying, conditions apply. Believe me there are loads in their menu which will all cost you lots! However when businesses decide to provide their customers with menu pricing care needs to be taken that customers are not fooled. Some car rental companies often exploit menu pricing. Whilst they provide a great prepaid rate for a day's use which will include the usual charges for mileage, insurance and local taxes the final bill can often cost you up to a double. Creative car rental companies can come up with airport surcharges, franchise fees, exchange-rate charges, insurance against excess charges on the normal insurance and so on. Another example well known where customers are fooled is with bank charges and fees. Check your telephone bills for loads of surprises, in most instances anyways!
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Turning Cost Centres into Profit Centres

Sometimes you can turn costs into full-blown profit centres! A particular cruise company had as its biggest cost, cleaning and maintenance of cabins. Now self-employed husband and wife teams bid to get the franchise to clean and maintain a package of 20 or 30 cabins. The tips they get (customers are strongly encouraged to give) can make this a highly profitable small business. They are motivated to give very good service. This company has turned a major cost item in its profit and loss statement into a profit centre. In a particular company that I worked the human resources department was located within a great high-tech building with its entire state-of-the-art seminar, lectures and training rooms. The company also hired expensive speakers and trainers to speak to its limited staff members. In a bid to reduce costs and make this human resources department self sustaining the management decided to rent out the expensive seminar and lecture halls and training rooms during nonpeak hours and weekends. The management of the human resources department got even more creative and tickets were sold to take up the extra space or seats to listen to some other more expensive speakers and trainers which it hired for its own staff training programs. This human resources department is now currently running as a profit centre. In fact they now have their own inhouse trainers and dedicated lecturers who provide not only training and learning opportunities to the staff but also market themselves and their products to outside businesses requiring training and development. Another creative company that I worked for used its excess capacity in software and free time during nonpeak hours to provide accounting and bookkeeping services, to other small businesses. This finance function in this company is now a zero cost department. The finance manager and the accountant are considering developing the department Skanda Kumarasingam
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into a profit centre by hiring a few more accountants (on a part-time basis to balance its costs and revenue flows) and paying for a few extra licences to use the accounting software. This will enable them to market their accounting and finance services to smaller businesses close to their office thus turning this, once cost centre into a profit centre. Another example is in technical publishing where scientific or management journals are involved. Many years ago you had to pay scientists and management writers to write content for such journals and magazines. Later on it was found that scientists and management writers were willing to give you content for free. They needed to publish to build their academic reputation and to meet publication targets in order to keep their university jobs. Similarly management academics and management consultants need to market themselves and their ideas in management and trade journals to reach potential executive clients. They will willingly give high-quality content free. So professional publishing can come pretty close to the ideal business, where customers pay you to read the stuff and writers pay you (in their time) to let them write it. Another example is where a software company had to cope with growing requests from its installed customer base for upgrades and custom features. The company was continually expanding its expensive professional services team whose time was not charged to customers, but was failing to keep up with customer demand. To control the ballooning cost and the unhappiness of customers the company used a unique system whereby they charged for professional services by auctioning their time to the highest bidder. If the problem was really material and urgent customers did mind paying to get a rapid response. Introducing a market mechanism(using the simple demand and supply curves in economics) the company was able to turn costs into revenue and produce happier customers.
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Marginal Cost and Revenue

This is a fairly interesting concept that originally comes from economics and has been taken on enthusiastically by management accounting and financial management. Simply stated this concept says that in most circumstances certain costs would be fixed. Costs are fixed in most situations to build and maintain certain types of infrastructure that helps to produce products and services which will be sold at a profit. Certain costs vary with each unit that you produce which can be called as marginal cost in economics or variable cost in management accounting. This concept simply tells us as long as marginal cost or variable cost is over and above the selling price (which is called marginal revenue in economics) the company will be able to brake-even or generate more profits. However this simple concept is often not well understood or used to generate profits. Here are some examples that I had seen and used in real-life situations. Do you know why many universities and teaching institutions provide scholarships? The simple reason is, it does not cost anything extra to provide free education to a few and generate goodwill. As we know the buildings, utility costs and the lecturers time (and salaries) are all fixed. Just because an additional student sits in class (on a vacant unsold place) it does not increase building rent, utility costs or the lecturers salary since they are all fixed. Whilst giving a full scholarship may not be beneficial part scholarships are very attractive indeed. Airlines also use this concept. When an airline flies without passengers in its seats (bums-on-seats) that revenue is lost forever. So rather than having a fixed price for all seats for a particular flight it will vary its pricing based on how urgent the passenger wants to make the flight and how many seats are available. If the flight is only partly booked it will reduce its ticket prices in the last minute. This will enable it to bring in more passengers even at extremely low Skanda Kumarasingam
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prices. Flying an extra passenger only costs the airline the cost of an extra sandwich. As long as the ticket price is over and about this extra sandwich cost it will make a profit. However if the flight is fully booked or nearly full and certain passengers are desperate to make the flight the airline will substantially increase its prices to accommodate that passenger. I have seen this concept even applied in city rail and bus transport. There are nonpeak rates after 9 AM and before 3 PM before the office crowd rush. This concept can also be applied to cinema halls, opera performances and seminars. During weekdays many seats are not taken which can be sold at marginal rates to attract certain types of customers. Senior citizens, mums with little kids not in school, performances to the aged or specially gifted folks, low income earners, part-time workers and those who work on night shifts are all examples falling into this category. We often see that when the demand is extremely high during weekends and holidays these businesses actually increase their prices or tickets are sold at a premium. Even hairdressers use this concept. Many hairdressers have cheap rates and low prices during nonpeak hours and high rates at weekends when their customer flow is very high. If your business has facilities located over a multi-geographical area you may be able to rent antenna space to cellular phone companies. Typically these companies will pay for the use of rooftops as a place to erect their antennas. Another option is for billboards as advertising if you occupy a central location with a high visibility building. This enhances your revenue without any additional cost you.
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The point here is to explore alternative uses for your facilities. Remember they are assets that can be used 24 hours a day, seven days a week. There are numerous opportunities available for increased revenue if you look for them. Training room and function room facilities can be rented out in the evening or weekends. How about spare land or excess slots you own for public car parking? Establish a 45 to 60 hour per week work environment among the managers. Cost structures among your competitors are basically similar to your cost structure so you will obtain an advantage because your managers are working more hours. This assumes that your managers are productive. Managers who have responsibility for a workforce of hourly employees are usually at the facility, a retail outlet, restaurant or office at least this amount of time. Sometimes business volume is extremely low at early or closing hours. During the slow hours managers can save substantially by scheduling fewer employees and filling it themselves. In addition to the Labour savings, managers will become more knowledgeable about operations and will find ways to improve customer service, training and operations. I have put this procedure in place in several places. At the beginning there will always be resistance, but once managers get beyond the initial hump things will run smoothly. I also find that certain incentive programmes work well here. Get the manager's incentives based on Labour dollar saved and they come to understand the process. Turning cost into revenue involves asking these important questions and seeking the answers to them Are there some cost lines that you could turn into revenue? Could menu pricing lower net cost to you and for your customers? Could you get for free things that you pay for or even better get people to pay you? Can some of your cost centres become profitable third-party businesses? Can you use the slack in your capacity to earn more marginal revenue?
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