Navigating the tightrope: balancing cost reduction and performance improvement in challenging times.
Australia is currently faced with a challenging economic environment, defined by global uncertainty, high interest rates, rampant inflation, and the risk of a recession looming large. As a result, Victorian Government departments face significant budget cuts. Heads of Departments now face the daunting task of reducing costs, while simultaneously maintaining performance, or in some cases improving performance. This is a delicate balancing act and does not come without challenges.
This article aims to guide Heads of Departments through an approach to reduce costs and improve performance, whilst highlighting the potential risks of pursuing these objectives at the same time.
Our approach to reducing costs
To reduce costs in your department we recommend aligning your operating model and structure to your department’s strategy and vision. This approach will help you understand where the low value-add activities are in your department and focus on cutting costs in those areas as a priority.
We recommend focusing on the following three elements to reduce costs:
What your department does: Firstly, define what your department does to add value. We recommend using a tool called a Value Chain, which will help you understand the series of activities that your department does to deliver value, the outcome of those activities, the key deliverables produced from those activities, and the measurements of success.
How your department does it: Secondly, determine how your department will operate most efficiently and effectively. This involves removing low value-generating activities and services, removing duplication and overlap in roles and responsibilities, streamlining the way your people interact to get the work done, and establishing more efficient governance frameworks.
How your department organises itself to complete the work: Finally, convert your department’s operating model into a department structure. To do this, group your department’s value chain into logical buckets of work that form the basis of a high-level structure. Following this, analyse your department’s needs by considering the 4Cs - Capability, Capacity, Contribution, and Configuration. Consider the capability required by your department to deliver the work, the capacity to deliver the work (i.e., how much work your team can handle effectively and efficiently), the relative contribution of each team and role, and how best to configure your department to deliver the value chain and achieve your outcome.
Our approach to improving performance
To improve performance within your department, undertake a detailed analysis of critical elements of your department’s operating model.
Prioritise your efforts in the following four areas:
Efficiency and productivity: Begin by conducting a detailed analysis across portfolios, services, and specific processes to identify pain points and opportunities for improvement. Channel your efforts into eliminating low-value activities, streamlining key processes, and enhancing overall productivity.
Resource optimisation: Initiate the optimisation of your department’s resources by identifying necessary capabilities at each value chain step and consolidating areas with similar capability requirements. Next, determine the necessary capacity to deliver the work and reduce capacity requirements by leveraging technology and streamlining processes.
Interactions and governance: Understand how teams interact to complete key tasks and the interdependencies between different teams. Agree on the interactions that contribute to achieving your department’s desired outcomes and eliminate any duplicate or redundant interactions. Establish frameworks, structures, and processes that will guide decision-making and ensure clear accountability over the work.
Performance measurement: Enhance how your department measures and tracks performance by identifying key metrics at each value chain step. Ensure alignment with department-wide performance standards, set target performance levels, implement performance measurement tools such as dashboards, and establish reporting structures. Less is often more when it comes to performance measures. Identifying those few but important measures that will shift the dial is critical to success.
Risks of pursuing these objectives simultaneously
Pursuing cost reduction and performance improvement strategies at the same time involves the following risks:
Strategic misalignment: Pressure to deliver quick wins may result in prioritising short-term cost reduction at the expense of long-term performance improvement. To mitigate this, follow a structured approach to designing your operating model by regularly reassessing the alignment of your department’s operating model with broader department goals. In addition, focus on integrating performance improvement measures into your department’s strategic vision, and implement robust governance structures to monitor progress and ensure accountability. Finally, implement operating model changes in a phased manner, allowing for gradual improvements, regular performance reviews, and minimising disruptions.
Lack of leadership alignment and disengagement: Attempts to cut costs and improve performance simultaneously may confuse leaders about the department’s direction, create conflicting priorities as they attempt to balance different approaches, and overwhelm leaders, resulting in poor decision-making and disengagement. To mitigate this, invest time upfront to ensure leaders are clear on the need for change and what the future looks like. Ensure leaders understand what a good outcome looks like, the immediate priorities of the department, and the plan to get there. Finally, build leadership capability by focusing on improving skills, mindset, and behaviours through focused coaching sessions. This will prepare your leaders to actively drive change throughout your department.
Employee resistance to change: Employee resistance to change can significantly impact your department’s ability to sustain the change over the long term. Mitigate this by providing leaders with a clear narrative that speaks to both cost reduction and performance improvement and the long-term benefits of the change. Create stakeholder segments to understand who your stakeholders are, what they care about, and how they like to be engaged to bring the change to life for them. Conduct thorough change impact assessments to understand what’s changing for key stakeholders, to identify sources of resistance. Develop a robust change management plan with relevant communication and engagement interventions, sequenced over time to minimise disruption. Finally, continuously monitor resistance to change and adapt your change plan based on feedback and data.
Conclusion
In Australia's tough economic times, Victorian Government departments face a dual challenge of cutting costs while improving performance. However, tackling these objectives concurrently introduces potential risks, including strategic misalignment, leadership disengagement, a focus on short-term gains, and resistance from employees. To effectively address these challenges, it is crucial to adopt a systematic approach to cost reduction and performance improvement in your department.
Start by examining what your department does, how your department does it, and its structure. Delve deeper into specific areas of your department’s operating model to identify pain points and make improvements. By adhering to this systematic approach, your department can successfully navigate the delicate balance between cost reduction and performance enhancement and position itself for success in these challenging economic times.
Lachlan McDonough, Manager