Chris Croft's Personal Blog

June 26, 2010

Cutting Costs – Proving you’ve run out of easy gains

Filed under: Managing People — chriscroft @ 8:10 am

With all the talk of cutting costs in the public sector, and of course the private sector as well is always looking for ways to save money, I’m wondering which of the following is more true:

a) Because organisations are made of clever people but somehow end up making stupid decisions, perhaps because of the difficulty of communication in large structures, there is loads of waste to be saved, with little or no investment, just by using clever ideas like Lean, whatever that is exactly….
or
b) People aren’t stupid, it’s all been thought about, there are good reasons for things that look silly to the casual observer, and if you save in one area you probably end up paying more in another.

Yes yes I know it’s a bit of both, but that doesn’t help unravel the possible from the impossible. And if painless savings are not easy to make, the result in the public sector will be the getting rid of people, which must lead to a reduced quality of service and more unemployment – not good for anyone!

So – are we stuck in the eternal triangle of Cost, Quality and Time or not? The triangle says that if you want to reduce costs you have to either reduce quality or increase waiting time. But is this always the case?

I’ve tried to be brief with what follows, but there is some big stuff in here, so if all the details aren’t there then don’t worry, you’ll have to either trust me and follow the flow (recommended option), or email me for more information.

My theory is that there are two stages – to start with you might be able to get rid of fat and “beat the triangle”, but once the easy fat has gone then you are up against the laws of nature that govern the triangle. Here are two examples:

1 – Quality vs Cost

Quick wins
– Reducing sickness absence by better performance management would both reduce costs and increase quality of employees and their work.
– Better measurement and then increasing utilisation of resources would also save costs without affecting quality – everything from training courses half full (waste!) to equipment and people not used all the time (waste!) and although some of this might require different cost accounting and cleverer scheduling, these could be done.

Then there’s the position on the Taguchi cost curve, which says that costs are u-shaped as you increase quality (it’s expensive to be brilliant, but it’s also expensive to be rubbish), but that it’s best not to be at the lowest point of cost – ideally you should be to the right of it, at a point where your cost of preventing failures is about double the cost of the failures that you do have. If you’re not at this point then you’re wasting money.

But of course if you ARE at this point then there is nothing else to be squeezed from the system, and if you can measure these costs then you can PROVE it!

Cutting costs is likely to mean cutting your prevention costs (quality audits, training, etc) which looks good in the short term but leads to higher, less visible, costs later in the shape of failure costs (complaints, redoing work, etc). No doubt emptying bins every 2 weeks, and axeing libraries, and axeing support for Forgemasters, will have hidden costs that are not yet visible as we cut the current highly-visible easy-to-cut budgets.

But I think the onus is on local government, the NHS, or the managers of the commercial companies to prove that they are at the optimum points on these – if they can’t, then they are admitting that they don’t know where they are, and they aren’t managing, they are guessing.

2 – Waiting time vs. cost

There has been lots of work done on getting waiting times down, first in manufacturing (Just In Time, Kanban, Pull systems, smaller batches enabled by quicker changeovers (SMED), bottleneck theory (OPT) etc) and then applying these ‘Lean principles’ in the service sector. It would be shame to go backwards now by cutting costs in areas where relatively small savings will cause large reductions in service.

There might be easy gains still to be found in areas where waiting times are long due to bad planning and stupidity. If the gardeners turn up and have forgotten half their tools, because they don’t have a checklist of what to put in the van, or the Ambulance central purchasing people haven’t bought the easy-to-use equipment and the paramedics can’t do their job properly, then yes, there are easy improvements to make. (These may be out of date examples by now, I hope so, but they certainly were real at the time!)

Or if there are unnecessary steps (detailed minutes have to be written, and then checked by someone, and then typed by someone else, and then rechecked and approved, – you know who you are! – and then nobody ever reads them) or if technology could do it all for you (dictaphone that goes straight to word document via voice recognition software) then quick wins can be made.

But again, as with quality, you get to a point where you up against the laws of the universe, in this case queue theory, which says that the queue length is inversely proportional to the resources, so unless you have spare capacity there will be queues, and if you want shorter queues you need to have more spare capacity, which means cost, and, worse, it means cost that doesn’t look good. It looks like people sitting around, and equipment not fully utilised, and it’s hard for observers to understand that it’s about being able to respond, rather than waste. We can see it easily for the fire brigade, but find it harder to see for doctors or local govt planners etc.

It can be shown with maths, …or just some dice, …or a spreadsheet, (I have made one and stored it here http://docs.google.com/fileview?id=0B6BLBzKogj_iOWZlMzIyNzUtNWI1Mi00YmZlLTkxMWMtNzI2ZTY2MGUwODRi&hl=en) that if you have 20% spare capacity you get queues averaging 4 people, and you cut your apparent waste to say only 5% over capacity, a tempting saving of 15%, your queues will increase fourfold to about 20 (because your utilisation is now 95% and queue length will always be U/(1-U)).

To get rid of queues completely you have to have 50% spare capacity, i.e. double the number of people you thought you needed, and clearly this is too expensive, so basically we need to say Hello Again to longer queues for our public services.

Again, the onus is on management of these areas to work this out and to show that they have made all the easy cuts and are now up against the inescapable trade-off formula, and to make it clear that if we won’t or can’t pay then we will have to queue longer. Otherwise, if things remain unmeasured and unclear, they will just get impossible targets forced upon them and then look weak or foolish when they fail to meet them.

Right – I think I need to go and lie down now!

I hope the above has given you some ideas to ponder.

Onwards and mainly upwards

CC

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3 Comments »

  1. I am unable to comment on anything that is not the World Cup.

    Comment by Martin Herrington — June 26, 2010 @ 11:05 am

  2. I’ve been advised (by a senior manager… who MUST be more knowledgable) that the cost savings will only ever be achieved by outsourcing the service – so that any failure is backed by a financial penalty.

    From a senior manager perspective this makes sense – resource, business, customer, product all boils down to entry lines on a Profit and loss sheet. But, and this is probably why I’m not in senior management, entry lines on a balance sheet do not tell the whole picture.

    Cost savings will affect people in some way. Any good business model should (IMO) also consider the intangiable “people factor”. A delay in delivering a product may save the business a few quid, but does it make the customer happy?

    You might not need 30 people in your production line, but is it actually feasible to come up with an abitary cut of 60% of staffing?

    And (to the senior managers) how comfortable would you be in cutting the senior management team (even just financially) rather than the admin section and peoples jobs?

    Unfortunately the cuts are made in a way where the savings aren’t necessarily where they should be.. where the NIMBYism is.

    Comment by David — July 3, 2010 @ 9:37 pm

    • Yes I completely agree.

      By far the biggest cost is people, so to save money you have to get rid of people, with all the problems that leads to.

      Outsourcing just seems like a really bad idea, since the commercial companies don’t really care about the local community, they just want to make a profit, and unless their (alleged) superior efficiency and (alleged) economies of scale are bigger than their profit you just get a worse service for more money. Ask Southampton Council or Harrow Council for examples! Oursourcing feels like giving up, or an easy option where you can in theory blame someone else for not delivering – but they will excuses, and loopholes in their contract, so in the end the public still lose.

      Better management is the only answer, but who in their right minds would want to (stay as, or) move into being a manager in the public sector at the moment??

      Comment by chriscroft — July 4, 2010 @ 11:18 am


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