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Cutting
the Fat
By Michael Alan Hamlin
December 09, 2002
Financial consultant Vincent Loh
was in town last week to conduct a morning briefing entitled "30
Ways to Cut Costs." Given the general malaise prevalent in
the business community, it's not surprising that the briefing was
well attended. Interestingly, about two thirds of participants were
from service sectors. In a way that's not surprising because the
service sector accounts for the biggest chunk of the Philippines'
gross domestic product (GDP). However, it is strong service sector
growth that is supposed to account for the surprisingly strong GDP
growth figures reported by government. If that's so, why are so
many service companies so desperate to cut costs, then?
Well, I guess that's just one more
of those quirky little anomalies so often associated with the Philippines.
Right?
Anyway, Mr. Loh is a former group
managing director of the Royal Selangor Group of Companies, one
of Asia's most respected brands. He is something of a turnaround
expert, often hired to restore financial health to acquisitions
snapped up by his clients in the post-1997 feeding frenzy for vastly
devalued corporate assets. Mr. Loh spends most of his time in Hong
Kong, Malaysia, Indonesia, and Thailand helping companies reduce
costs.
A portion of his briefing last week
provided "10 Guiding Principles" for cutting costs, which
I'm about to share with you. For the rest of what Mr. Loh had to
say, you'll have attend his next briefing, which should take place
sometime around April, if current plans work out. Oh, I should mention
that the participant profile was wonderful. The group included well-known,
successful entrepreneurs, country managers for multinationals, and
even a respected congressman. Given the administration's difficulty
in managing costs, it should have been well represented as well.
But of course, no one from the executive was there.
The first of Mr. Loh's guiding principles
is "Setting the Meritocracy Standard." He points out that
when performers in an organization are paid more than the underperformers,
it is the underperformers who complain. But when performers and
underperformers are rewarded equally for what they do and don't
do, respectively, it is the performers who complain. And give up.
Yet it is the performers who account for an organization's success,
including success at reigning in costs.
The second principle is "Results,
Not Processes." Mr. Loh believes that companies too often become
obsessed with business processes and as a result lose focus on results.
Whether a process is important should only be determined by the
results it generates. The third principle is "A Sense of Urgency."
Achieving organizations, he believes, are those that have people
focused on doing important things quickly.
"Strategic versus Non-Strategic
Costs" is the fourth principle. Mr. Loh believes that when
managers mandate across-the-board 10 percent reductions in costs,
it is frequently the strategic - and most important resources -
that get cut. He cites advertising as an example. It's easy to cut,
so it gets cut while non-strategic, non-profit producing overhead
is maintained. The smart albeit more difficult thing to do is lose
the overhead so that the organization can apply resources to strategic
assets, like advertising and people.
"Focus on the 20%" is the
fifth principle. Mr. Loh says companies generally fall into the
Pareto trap. Now, the Pareto Principle is that notion that 80 percent
of a company's profits come from 20 percent of its customers. But
it has internal application, as well: 80 percent of profitability
is accounted for by 20 percent of products and services. Therefore,
sell those products and services. Perversely, 20 percent of overhead
items account for 80 percent of costs. Therefore, attack those.
The sixth principle is "Keep
Costs Flexible." In other words, outsource. Seven, "Strategic
versus Non-Strategic Executive Time," suggests that executives
should devote their time to doing things that produce profits, not
running around doing things like attending association meetings,
and frankly, playing golf. Time-wasting meetings are another culprit.
Mr. Loh's eighth principle for cutting
costs is "Don't Over-Quantify Things." He believes it
is a waste of time, for example, to have staff forecast future sales
and revenues by month, quarter, and year. "No business ever
made a cent on a forecast," Mr. Loh said. Instead of tying
up sales executives and others at their desks working on forecasts
that will either be manipulated, exceeded, or forgotten, he believes
people should be out doing meaningful work. Meaningful work, of
course, being things that generate revenue and profit.
The ninth principle is "Don't
Over-Delegate; Don't Under-Delegate." Good leaders and managers
take care of critical tasks themselves. Like talking to major customers
and understanding their businesses and their challenges. Details,
on the other hand, should be left to detail people. Mr. Loh's final
principle is "Maximizing Customer Satisfaction Can Lead to
Bankruptcy." By this, Mr. Loh refers to the tendency to cater
to unprofitable customers. A customer should merit intimate treatment
only when the customer is profitable.
Now, these principles are important
in good times and bad. But they're really important in bad times
because they help bring on the good times.
(Michael Alan Hamlin is the managing
director of consultancy TeamAsia and the author of three books on
Asian economies and companies. His latest book is Marketing Asian
Places, of which he is a co-author (Wiley, 2001). Write him at mahamlin@teamasia.com.).
Copyright © 2002 Michael Alan
Hamlin. All Rights Reserved.
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