Cost Transformation

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Concerted cost-squeezing is as familiar as it is regular for any business. It is a necessary discipline to hold down costs and improve productivity.But today’s economic reality demands a fundamental step-change in the cost of delivering public and commercial services. Nothing less than a wholesale transformation of the cost base will suffice if dramatic cuts in expenditure are to be achieved while maintaining the quality and availability of services.BT have spoken to many public- and private-sector leaders about the challenge of cost transformation. Many raised similar concerns about continuing to meet obligations while fundamentally reshaping the cost base. BT call these the common ‘yes, but...’ myths.To read more about cost transformation visit the BT blog - http://www.blog.bt.com/viewpoint/index.php/category/cutting-costs/

Transcript of Cost Transformation

Crisis or Catalyst?Lessons from the frontline of cost transformation

For commercial organisations

Crisis or Catalyst?

On a GDP per hour worked basis ... the UK is above Japan, on a par with Canada and Italy, and below France, Germany and the US.Office for National Statistics1

2.

Crisis or Catalyst?

ForewordTheres no denying it the last two years have been challenging no matter what business youre in. And now the government has given companies new challenges to think about. VAT is set to rise the British Retail Consortium thinks this could depress demand by 3.6 billion over four years and cost 163,000 jobs2. And public sector budgets arent just going to be pruned, theyre going to be slashed. The amount spent buying goods and services 220 billion in 2008/09 is an obvious target, and is bound to be scaled back. Suppliers will be asked to do more for less, and this will have knock-on consequences for the economy as a whole. Overall, the Office for Budget Responsibility thinks as many as 400,000 private-sector jobs could be lost3. Expectations of what business will be able to achieve are nonetheless very high. The Government wants Britain to be open for business to be a world-class trading nation in every sense. It wants to create the most competitive corporate tax regime in the G204, which will certainly help but theres no escaping the fact that a great deal more will need to be done. As of 2008 the most recent year for which comparisons are available Britain was 15 to 20 per cent less productive than competitors including USA, Germany and France. If we are truly to position ourselves ahead of the pack, productivity, performance and levels of customer satisfaction wont just have to be improved, theyll need to be transformed. In short, we need to use Britains financial crisis as a catalyst for change. Even today, though, it is relatively rare for organisational-transformation programmes to succeed. Many surveys put the success rate at less than 40 per cent. In this context, BT is somewhat of an exception. BT reduced total underlying costs by 1.8 billion in 2009/10 and also reduced its workforce significantly. BT restored its loss-making Global Services business to profitability, introducing seismic changes while keeping its employees on board and maintaining service to customers. We learnt a great deal from working with our public and private sector customers. In this paper, we explore these lessons and describe in some detail how we applied them to our own business to drive a rapid turnaround. In particular: 1. Transformation requires some tough choices. People will find reasons to avoid it and these must be addressed 2. People are the key to success, requiring visible leadership at all levels 3. It is possible to cut costs while improving services at the same time 4. Good examples of productivity improvements in industry can be emulated We share the Governments desire to get our economy back in good shape. We can, and want, to help. More importantly, we have the skills and experience to make a real impact. So, call us its good to talk. British Telecommunications plc

3.

Crisis or Catalyst?

Transformation requires tough choicesConcerted cost-squeezing is as familiar as it is regular for any business. It is a necessary discipline to hold down costs and improve productivity. But todays economic reality demands a fundamental step-change in the cost of delivering public and commercial services. Nothing less than a wholesale transformation of the cost base will suffice if dramatic cuts in expenditure are to be achieved while maintaining the quality and availability of services. Over recent months we have spoken to many public- and private-sector leaders about the challenge of cost transformation. Many raised similar concerns about continuing to meet obligations while fundamentally reshaping the cost base. We call these the common yes, but... myths.

Yes, but...we must wait until we have a complete strategy. Short-term cost cutting is enough for nowWhen the scale of the challenge is so great, it is tempting to conclude that the first step should be a time-consuming piece of work to draw up a strategy. This is not the case. Indeed, when the financial challenge is urgent and severe, there is every reason to start the process of cost reduction straight away. Theres no need for an elaborate three-year plan before you can act. All thats required is clarity about how you are going to start and sufficient governance to ensure effective decision-making. This is not to say that work on a longer-term strategy should be put off just that it needs to be done in parallel with short-term cost cutting. By reducing spending on items such as travel, marketing and advertising, agency staff and so on, an organisation not only sends a clear signal of intent, it buys time to take a more fundamental look at its direction and strategy. Beware though: implementing cost-saving measures at speed can have unintended strategic consequences. The seemingly obvious decision to stop people travelling to meetings will deliver immediate savings. But if it means business does not get done, relationships erode and projects and careers stagnate, the cost savings will quickly be matched by reductions in productivity. The answer is not just to watch out for and address undesirable consequences, but to try to head them off from the start. By positioning change as a driver for a new operating model, people can be encouraged to respond more constructively, take measures to monitor the impact, spot undesirable consequences and address them.

Yes, but...our obligations to customers make cuts to services impossibleThough there may be activity your firm can stop or scale back and that option should not be automatically ruled out cost-cutting opportunities will often be limited. If a business has been managed well, it should be carrying relatively little fat. The answer lies in looking not simply at the products or services, but at how they are delivered. A critical step is to understand the unit cost of delivery, whether of internal transactions or services provided to customers, and to work through the hierarchy of options for reducing it. There may be surprising differences in the costs of providing the same service even between individual offices. Here, the adoption of best practice can deliver savings. But it is also important to look again for opportunities to streamline and to rationalise processes, particularly where separate services serve common customers or end users.

4.

Crisis or Catalyst?

Armed with an in-depth understanding of its cost-effectiveness, a business can then look for opportunities to share services, whether front or back office, with other firms. Every organisation has its own characteristics and often a unique purpose, but the underlying processes it uses and many of its functions will be similar, if not identical, to those of others. If protecting existing products and services is the priority, sharing the means of production may well be the answer. Demand management can present further opportunities to find savings. Simply by providing better information and sign-posting, firms can cut unnecessary demand on their operations. Even when there is a universal entitlement to a free service, such as a helpline, it may be possible to route calls to lower-cost channels.

Yes, but...big savings require automation and the effective use of technology, but we have no spare money to investWith pressure to deliver immediate savings in the early stages of a cost transformation programme, investment in new technology may well be cut or frozen. But if the focus of the programme is solely about cutting the cost of current ways of doing things effectively squeezing - success is likely to be short-lived. What is needed is a move to a new operating model, which delivers a lower cost base, and the platform from which to drive future efficiencies and productivity gains. Technology will almost certainly play a major role in taking out unnecessary people costs. The question, therefore, becomes one of how best to free up investment and set priorities for the use of whatever ICT budget can be made available. Renegotiating contracts (see below), sharing capabilities (see above) and weeding out spend that has the lowest return on investment can all create space for priority investments. Beyond that, the growing availability of on-demand, pay-as-you-go services from contact centre seats through to data storage and applications can reduce up-front costs and give businesses the flexibility to adjust spending as their circumstances change. Shorter term, efficiencies can be achieved by taking low-cost steps to reduce errors and drive up quality. By improving the content and presentation of standard letters, for example, the chance that recipients will need to call for clarification can be reduced. Improvements to scripts used by call handlers can reduce call times without compromising quality or regulatory compliance.

Yes, but...punitive clauses make it unrealistic to seek savings from contract renegotiationsSuppliers will rarely be keen to reopen hard-won contracts that are being successfully and profitably delivered. However, any supplier serious about long-term partnership and winning new business will recognise the need to work collaboratively with customers faced with a compelling need to reduce their external spend. When times are tough, no contract can be viewed as a sacred cow. If the apparent hurdle of penalty clauses is to be overcome, creative thinking will be required. There could be upsides for both parties. A reduction in margins could, for example, become acceptable to a supplier if offset by the realistic prospect of additional revenues. The answer is not to shy away from looking at the options. The way in which sup