Balancing needs: why smart Operations Directors reduce costs for the long term
 A key part of the role of Operations Director is to effectively manage costs. The way a firm spends its money, allocates it resources and diverts its attention must be appropriately balanced between the desire to keep costs to a minimum in support of business activity, whilst at the same time investing in all those things that will help the business survive into the future. Unfortunately I have all too often seen a desire to drive the first without appreciating the second.
It is a fact of business life that keeping costs to a minimum will, by definition, reduce the amount of flex a business has to drive its strategy forward. Even for a business whose entire strategy is based around cost leadership there must be a part of the strategy that allows for growth and development (or imitation) of new capabilities or products. If the business has cut costs to the point where there is no fat, where everyone is focussed 100% on the day job, there is no - or little - scope for any form of innovation or review. Firms who have chosen a path of innovation or diversification must have a sensible allowance for business as unusual.
Keeping a degree of flex in the budget can be difficult, particularly when times are hard. There will be pressure to hold or reduce budgets, make staff redundant and dispose of any consultants, contractors or suppliers who are not contributing directly to the bottom line.
The majority of Operations Directors will, my experience suggests, reach for the knife and start slashing. Yet this is a fool's game, a short-term tactic that will do more harm than good. Costs need to be managed down in a way that both supports the business's long-term strategy and tackles the costs in the business's value chain.
Careful analysis of the value chain and the costs within it will show where there are opportunities for real long-term savings and improved controls. Reengineering processes that may have become indulgent over time can take significant inefficiencies out, while smarter use of technology can improve workflow or provide common access to information.
If this analysis is completed the majority will reach for the largest costs and start cutting. Smart Operations Directors will find where they can safely reduce their costs and start there. Improving linkages between departments, improving a process so that quality increases and reworking costs fall, integrating two IT systems to reduce maintenance costs, these are steps that will gain long-term, sustainable savings.
A medium sized business decided to reduce costs by cutting 10% of its staff across the board. All departments were affected, and when the dust settled a quarter of the staff had gone. But it wasn't uniform across the business: sensing a demise, the sales team had left almost en masse, the warehousing staff had shrunk dramatically and yet there were as many finance people as ever. With no one to sell products the orders started to dry up, while those that were on the books ran into fulfilment problems as there wasn't enough staff to load the lorries.
Yet sat on the COO's desk was a report that showed substantial sums of money were being wasted by orders being incorrectly shipped, incorrect invoices going out and non-payment not being pursued with any particular vigour. The resulting costs savings and improvements to cash flow would have gone a long way to meeting the cost saving objectives of the business. Such crude cutting, not only displayed a lack of operational control, it actually did a lot of long lasting harm.
To my mind the key to developing as an Operations Manager and showing you are capable of taking that next step up the corporate ladder is to move away from pure tactics and start to think strategically. A smart Operations Director is going to find a balance between the short-term need to cut its cost base to survive today and the longer term objective of reducing its cost base in a way that is sustainable and leaves the business able to pursue its strategy.
Previously on this blog...
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