COVID-19 has put significant cost and revenue pressures on many organisations. As business models are challenged a key question has emerged: How do I best position my enterprise and reduce costs while maintaining or improving performance?
Business improvement provides an answer. When done right, it can deliver up to 10 times return on investment in the shorter term, with significant ongoing benefits. Moreover, it can be executed in a self-funding and sustainable way.
In one example (discussed in more detail below), a government entity invested $3 million in optimisation. The improvements delivered a return of up to $30 million over five years, of which 60 per cent was ongoing. Results on this scale are not exceptional.
Business improvement reduces cost, improves performance and positions organisations well for an easing business context. Reinvestment of realised benefits creates sustainability for further improvement. Not doing so is a costly decision.
This article shows you how you can successfully undertake a business improvement program.
Targeted optimisation can achieve significant savings
As anyone who has ever tried to compile an organisational chart can attest, organisations are inherently complex. Multiple and diverse teams of people are seeking to deliver equally diverse – but connected – outcomes, and often with different systems, priorities and passions.
Many leaders assume improvement will occur naturally as people strive to work together. But reality shows this is rarely the case. Just as we deploy experts to optimise petrochemical processes, we also need to deploy expertise to improve organisations. To perform at its best, an organisation needs to regularly check whether it is working as well as it should and take remedial action if it is not.
The types of inefficiencies are many, varied and complex. They include failure demand, double handling, zealous and redundant checking, slow and uninformed decision-making, too long time to completion, poor process and workflow definitions, limited access to relevant information, insufficient data and analysis to monitor and improve performance, unclear accountabilities and poor IT support.
Do any sound familiar? While few organisations will have them all, almost every organisation will have some.
Deploying time, effort and money upfront to get these things right can yield significant returns in the long run. Working with government and private sector clients, Nous has seen it is possible to achieve a 20 per cent saving in operating expenses with a return on investment in less than three years, with optimisation investments ranging from 1 per cent to 3 per cent of revenue.
But many organisations, and people within organisations, struggle to justify the initial cost. In our experience, targeted optimisation can achieve savings by improving business effectiveness and significantly reducing ongoing costs. Ultimately, they can provide a war chest for further optimisation projects and can help prepare the organisation for accelerated growth when times get better.
So how do we do it?
In our experience effective business optimisation involves moving through three steps:
- Conduct baseline business review. Determine the current baseline for services, revenue and cost, along with capacity to deliver across organisation structure. This process will highlight challenges and opportunities to improve.
- Define optimisation program. Identify and quantify discrete projects to improve service, reduce costs and increase revenue. This will prioritise projects that have a positive impact and define a well-sequenced program of work.
- Embed in business planning and execution. Set program accountability and execution targets in business plans. This involves quantifying achieved revenue growth and cost reduction. Organisations can then partially reinvest in further improvements.
Throughout the process it is essential to monitor the overall direction, and to engage internal stakeholders so they buy into the process. Optimisation needs be done with people, not to them.
What projects are the right fit for optimisation?
It can be hard to know where to start. In organisations that have not previously had systemic optimisation, there may be many worthy projects seeking funding and executive attention. Choosing among them is difficult and involves managing competing priorities and satisfying different parts of the organisation that each feel their projects ought to be a priority.
The worst option is to choose all of them. When everything is a priority, nothing is a priority. This is likely to lead to diffused attention and resources, minimal results on any single project and no savings that can be reinvested in future optimisation initiatives. In our experience, it is essential to develop a sequence of priorities, achieving outcomes in one before advancing to the next.
In choosing where to start, it is useful to break down the complexity of projects and understand how they contribute to key revenue, cost and service performance drivers.
We then need to zero in on optimisation that will reduce costs to supply services or increase their revenue. A vital tool in achieving this is a Value Driver Tree, which maps the value contribution of cost drivers to overall improvement goals:
From this process, you may find that fruitful targets for optimisation include procurement, assets, failure demand and opportunity cost.
It is essential to consider the differing scales of optimisation projects: some projects will improve transactional practices while others are truly transformational and require significant effort. Remember there is an upper limit to the amount of change an organisation can absorb, so the nature and quantum of an optimisation program of work requires balance and realism. It is also important to realise benefits early, even if they are small. Finding and realising concentrated benefits is motivating and shows that optimisation works.
Successful optimisation requires organisations to take risks, but also to create an environment in which it is safe to fail. That is, the failure of an initiative will not have a catastrophic impact on the progress of the organisation, nor on the career prospects of the champion of the change. This is essential to overcoming reluctance to undertake projects because they are inherently risky and may fail to deliver.
Attaching a high price to failure drives organisations into “failsafe” behaviour – that is, lots of bureaucratic process and oversight, often with significant cost implications. To avoid this, executives need to create projects that are safe to fail.
What does this look like in action?
I have applied this approach to help a government client improve its business performance.
This work involved partnering with the client to conduct a baseline organisation review, in which we analysed services, cost and revenue structures. Through this exercise we benchmarked costs compared to revenue, which helped us to determine opportunities to optimise.
We then prepared a Value Driver Tree, from which we selected priority projects along with clearly articulated investment and benefits. These projects were then embedded in business plans and enabled with suitable governance structures to keep the delivery on track.
All up, the government entity invested $3 million over three years in optimisation. The improvements delivered a return of $20 million to $30 million over five years, of which 60 per cent was ongoing.
Momentum can build for further improvements
Even with the best of intentions, optimisation efforts do not always succeed. Effective optimisation needs discipline in approaching tasks in a prioritised and consistent way. Done right, it can develop its own momentum, in which cost savings, deferrals of expenditure and revenue increase can be partially reinvested to drive new optimisation.
Whether it is due to the passage of time or disruptive events like COVID-19, organisations can find themselves out of step with their context and need to reposition for success. By necessity, this involves examining what you do and how you do it.
Organisations should expect their competitors are making strides toward optimisation. If they fail to act, they risk being left behind, constrained by their own inefficiencies.
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Get in touch to discuss how we can help you design a self-funding business improvement program.
Connect with Martijn Schroder on LinkedIn.
Prepared with input from Tim Orton and Paul Kennedy.