Three things to remember when designing your organisation to reduce cost
Aligning your operating model and organisation structure to your organisation’s vision and strategy is key to reducing cost.
In an uncertain economy where every dollar counts, even the smallest increase in revenue or cost-cutting can impact profitability. While recent headlines covering waves of layoffs across large organisations (hello, tech sector) might have you thinking that this is the only way to reduce spend, we’re pleased to tell you that there is a better way.
In fact, reducing costs is often quite simple. Rather than taking a blanket “reduce 10%” approach, we recommend making decisions based on where the value is produced in your organisation.
What does this mean exactly and how does it help to reduce cost?
To effectively design your operating model or organisation structure you need to align your people and structure to the value in your organisation. This means providing a clear line of sight between what the organisation does and how each team and role contributes to commercial outcomes and tangible measures of success. No, it isn’t rocket science. Rather, it’s about understanding WHAT you do; WHY you do it (based on your vision and strategy) and using this as a basis to explore HOW to do things more effectively and efficiently (and in turn, reducing costs).
The benefits of designing your organisation based on how you deliver value
By working with countless organisations during periods of change, we’ve built a rigorous method that helps organisations to:
Improve performance,
Reduce costs,
Increase collaboration, and
Better address their market.
By putting the customer at the heart of the process, we focus on co-designing the operating model and organisation structure to deliver your strategy and/or respond to the needs of the business.
This approach can cut through the short-sighted (and often ineffective) methods that attempt to improve the bottom line. Instead, if you need to reduce costs, we believe that your organisation could benefit by focusing on three key things.
Three things to remember when designing your organisation to reduce costs
One: Define WHAT you do to deliver value
Successful organisations are those that have found a way to create value for their customers and stakeholders. That is, creating a way to help customers solve their problems.
We find that organisations that are clear on WHAT it is they do to deliver value are better placed to make decisions about how to shape their organisation to deliver their strategy and respond to what’s going on in the external environment (e.g., increased cost pressures).
We help our clients gain this perspective by working with them to define their value chain. The value chain is a tool that we use to develop a comprehensive and aligned understanding of WHAT the organisation does. Each step in the value chain adds a component of value (as defined by the outcomes and measures for each step) that - when delivered together - enables the organisation to deliver its purpose. See the graphic below for more information.
Figure 1 Value Chain: Features, benefits, and limitations
Without the value chain, operating model and organisation design can be a lot like pulling together a jigsaw puzzle. Without a clear understanding of what you’re trying to achieve (i.e., the picture on the puzzle box), you’re left trying to figure out what to do with a bunch of puzzle pieces.
When considering ways to reduce cost, this can result in slashing key activities and roles that are critical to the success of the business without even realising it. It sounds crazy but there are many war stories about organisations cutting roles only to hire them back less than three months later when things start to fall apart. Sound familiar?
Ensure your business has a clear picture of what it does and how it creates value before you consider your structure.
Two: Review HOW you operate; before you consider organisation structure
Once you have a clear picture of what you do to produce value, the next question should be ‘HOW do we do this most effectively and efficiently’? Understanding the answer to this question and building an aligned view of what needs to change is fundamental to success in organisation design and cost-reduction projects.
Our approach is simple. We engage your workforce and the people who actually do the work to participate in the design process.
A typical starting point is to understand how the value chain is delivered today using a simple framework like RACI to identify opportunities for improvement.
From a cost-reduction perspective, this process can shine a light on how you can:
Stop low or non-value generating activities (e.g., business support activities that are highly transactional)
Remove duplication in roles and responsibilities for the delivery of key activities (e.g., HR and/or Finance support roles that exist centrally and in discrete business units)
Streamline cross-functional interactions and governance arrangements (e.g., less time in meetings and more time on value generating activities)
Highlight where time and effort are spent to take a more strategic approach to cost-reduction initiatives (e.g. identifying 30% of people leader time being spent on HR administration indicating the need to invest in process improvement).
Opportunities (like the above) are often used to define and agree some key problem statements that should be addressed as part of the design effort moving forward.
By clarifying the problem and aligning your people on what needs to be fixed, we find that this approach is far more likely to generate buy-in and support change adoption.
Engage your people to review how you operate before you consider organisation structure.
Three: Shape your organisation design to meet the needs of your operating model
Translating your operating model into an organisation structure is never an exact science.
Our approach involves breaking the value chain and responsibilities down into logical buckets that form the basis of a high-level structure (i.e., the functional model). From there, we analyse the requirements of each function by considering the 4Cs:
What CAPABILITY is required to deliver the value chain?
How much CAPACITY is required to enable delivery?
What is the best way to measure the CONTRIBUTION of each team and role?
How can we best CONFIGURE the organisation based on the nature of the work? (Check out the example below)
Figure 2 Example of a 4 C's analysis
The focus is on identifying and defining what is required for the organisation to deliver the value chain and ensure that it is ‘fit for purpose’. In other words, the organisation is equipped with the resources it needs to actually work vs. just looking good on paper.
When conducted collaboratively with the right people, the 4Cs analysis can highlight additional opportunities to:
Consolidate functions with ‘like’ capability requirements (e.g. a sales and a customer service team with a shared need for customer engagement capability) (have a look at Figure 2 above)
Reduce the capacity required to deliver key activities by better leveraging technology and automation (e.g., automating transactional activities such as customer transactions, case management and/or call handling)
Optimise spans and layers (e.g., by increasing the number of direct reports a leader manages and reducing the levels in the organisation hierarchy).
Shaping the organisation to address these questions should result in an organisation design that;
Meets the needs of your operating model (i.e., it is fit-for-purpose and will actually work)
Addresses the key opportunities to reduce cost (e.g., by consolidating like functions and/or optimising spans and layers)
Engages your people as part of the design process (i.e., to gain insight from people who are involved in the work and will ultimately lead the change)
Will deliver a sustainable reduction in costs (i.e. the changes won’t fall over and be patched up three months later).
Conclusion
Our experience tells us that organisations that successfully reduce costs are those that base their decisions on how they deliver value.
We know that many organisations tend to overlook their value chain or operating model before they commence cost cutting. This, as we have often seen, can result in a negative impact on business operations and short-term cost ‘savings’ that are quickly reversed.
A better approach is to define how you deliver value to customers, review how you operate, and shape your organisation to deliver more sustainable changes.
If you want to know more about our approach to operating model and organisation design and how we can help, please get in touch.
TYSON CORRIGAN