To Avoid Waste, First Ask, Is It a Cost or an Investment?
- Stephen Martin
- Feb 23, 2017
- 3 min read
Practically every day just about every business owner or top executive will hear someone explain a terrific way to spend the company’s money. A question people whose hands are on the purse strings must always be prepared to ask is, “Is it a cost or an investment?”
The key to effective cost control is to determine whether something is a cost, something that may be nice to have, or an investment, something that is critical to success and coupled with an expected dollar return. In a turnaround situation and in a competitive marketplace, it’s crucial that costs are cut to the bone. No “nice to have” spending should be allowed. Return on Investment [ROI] must rule the day or competitors will get the upper hand in terms of cost efficiency and gain an advantage they can use to attack you on price.
For example, entertaining ourselves. Does that bring a return? Of course not. How about limousines and private jets? Or flying first class? Or, for example, you might ask why the company uses a bunch of different marketing companies? How does that help us sell more product? Just because a marketing executive likes a particular ad firm does not justify having to duplicate efforts and pay twice for them. By consolidating, you might be able to get better deals. So why not consolidate?
A top executive we once worked with on a book told us about a “nice to have” he torpedoed and sent to the bottom. He was put in charge of the Austin, Texas, division of a company headquartered in St. Paul, Minnesota that was losing money. He soon learned there was a regularly-scheduled company jet from Austin to St. Paul and back three times a week, a convenient way to go to meetings at headquarters. The argument for it was that it saved time for the twelve people on the plane each day. But it was a luxury our top executive friend believed the group could not afford. It also encouraged people to take unnecessary trips to the headquarters when teleconferencing quite often would have sufficed.
Our friend scuttled the shuttle and told everyone at the division why. He says it was one of the most unpopular decisions he ever made, but it was also one of the easiest.
The very next quarter, trips to St. Paul decreased by forty percent. So, not only did costs go down, productivity increased. Our friend became known as "the Grinch who stole the shuttle," and he says he was proud of his new title. People didn’t like what he had done, but they understood why it was necessary. The takeaway lesson is that your constituencies don’t always have to agree with or like the actions you take. But when survival is at stake, you do what makes sense. That goes with the territory of being the boss.
The same friend told us about a change in medical coverage he made in order to bring out-of-control costs in line. His HR people took the medical programs of the ten top companies in Minnesota including 3M, Medtronic, and others and pegged his company’s program right in the middle of them at number five. The gap between where our friend’s company had been and the new program he instituted was significant, which is what people looked at and thought about when the change was announced and the reason for it explained. They didn’t care that what was provided was better than Medtronic and Honeywell, they were upset about the downgrade. Nevertheless, behind all the crumbling and complaining was the knowledge the company had to cut costs or they might all be out of a job.
If people are strongly against what’s being done, they leave if they are an employee or sell the company’s stock if they are an investor. But if you explain the reasoning behind a decision, at least they have what they need to make an informed decision. Experience shows if you really provide the “why,” people tend to give the strategy or direction a chance and more often than not end up buying in. But if you dictate, and if you don’t explain, you end up in a painful situation, often with a loss of credibility and a bunch of puzzled and uncertain employees whose productivity is likely to plummet.
So, start by considering, “Is it an expense or is it an investment?” If it’s an expense and you decide to cut it, you also need to be open and honest with everyone concerning why. Then let the chips fall where they may. That is the simplest and most effective way to get and to keep an organization moving in a positive direction.
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