Home » Posts tagged 'Operational Cost'
Tag Archives: Operational Cost
Importance of an operating model simplification to get the maximum benefits from efficiency improvement programs
When the management wants to improve on the profitability of a company then at a high level there are two broad options available, the first one is to increase revenue through new innovative products and services and the other is to reduce the cost of operations. In absence of new innovative prod & services (not always because of an organization’s inability but also because of Industry dynamics or waiting period of technological evolution), the only option left in any saturated market is to reduce the cost of operations. My experience shows that organizations often underestimate the complexity of their operations and corresponding efficiency benefits. These benefits could range from > ~ 15 to 25%.
Generally, efficiency improvement initiatives could be identified in different domains like business processes standardization (or re-engineering), IT application rationalization & People (organization structure) but working on it individually brings limited incremental benefit and not > ~ 15-25% cost benefits. Hence, if management wants to take this kind of “Quantum Jump” in efficiency of internal operations then all different initiatives needs to be looked holistically and it should involve “simplification of operating model”.
This short write up discusses the importance of operating model simplification to get the maximum benefits of efficiency improvement initiatives, challenges of not doing it and benefits, if done properly. Moreover, most important point is that it prepares foundation for success of big Business and IT transformation programs.
Ideally, operating model should show how efficiently any organization delivers value (Its product & services) to client. It answers questions like how, who, where, when and includes business processes, data, people (org.) and IT systems. Hence, it should be continuously evolving based on the organization’s product & services and technological evolutions in the concern industry. However, in reality, Instead of “customer/product centric”, it is “systems & department centric”.
(How to make an operating model with details like business processes, systems, data and people is not in the scope of this post but I will publish it separately)
Below are a few important challenges in defining and executing efficiency improvement initiatives: –
- Departments (org. structure) & legacy systems define the processes, instead of product and services: Due to legacy, processes includes different teams & dept. without paying much attention of their contribution in delivering product & service.
- Withholding of Information / knowledge: Many cases, no single person/team knows or responsible for the end-to-end process spanning across different departments, allowing a situation for maintaining non-value added applications and departments. (E.g. Particular team/IT system, whose contribution in product & service is negligible and there is a possibility of merging their responsibilities/functionalities into other systems as per simplified structure).
- Resistance to simplify: Business consultants /process reengineering consultants can highlight these pain points, but then these processes are spread across different departments and rolling up to different management teams whose individual goals are different. Sometimes their existence or influence in the organization is because of the teams reporting to them. Hence, huge resistance to take action on simplifications. It is like “Turkeys voting for Christmas”.
- Efforts outweigh benefits: If one needs to execute efficiency benefit initiatives without looking at it holistically then the efforts outweighs benefits. It is difficult to justify the cost case (e.g. we have an option of improving specific process with robotic process automation-RPA or improving the IT application functionality to increase speed but if we simplify our organization structure, then this process or IT application itself is not required).
- Fixing accountability: It is very difficult to measure and maintain, “Defined KPI’s” due to the complexity of organization structure.
Inefficiency is not only “human cost”, but it is complete “ecosystem”. This Inefficient ecosystem consist of non-value added processes-activities, underlying IT systems-interfaces, operation teams and IT & infrastructure supporting it (E.g. hosting cost, license costs, development & maintenance teams including app developers, managers, external consultants etc.). This whole “Inefficient ecosystem” within an organization, which contributes to inefficiency in terms of high “cost of operations”, reduced “faster time to market” is also affecting the agility of an organization.
In light of the above challenges, it is very important to work on the “Operating model” simplification rather working on individual initiatives in different domain. In my view, paying attention to below points in early phase are very important for success of efficiency improvement initiatives,
- Top management support / push: Without top management buying, this kind of efficiency improvement programs do not bring required benefits and remain on paper/slides.
- Supporting business cases: Increasing operational efficiency initiatives generally falls under OPEX activities and depending on organization’s financial condition & budget availability, need a sound business case. A business case needs appropriate data. One needs to start immediately gathering data and if not available, then make sure (through management) to generate it with concern team for specific period.
- Benefit realization: It is necessary to make efficiency initiatives self-funded, to avoid continuous dependence on a separate budget. In absence of the KPI measurement or baselining of operational parameters, it is very difficult to show the current base for any improvement and in turn the saving potential.
Simplified operating model brings immense benefits to the organization like,
- Reduces operational expenses (OPEX).
- Efficient, agile, nimble and data driven organization: Ready to quickly, respond to changes in market dynamics.
- Foundation for big business & IT transformation projects: Thorough study and details required in making operating model has multiple other benefits towards automation and digitization. This study in terms of business processes, IT systems, organization and data is the most sought after information in “requirement analysis”, “design” and “business change management” phase of any transformation projects and in turn reducing budgets of such future programs.
- Automation and Digitization: Easy to identify areas for automation and digitization.
In summary, simple-operating model (particularly with simple org. structure) is the base for efficient operations.
I hope you may echo few of these learnings /experiences from your work, and I will appreciate your views on it.