UK: A QUICK FIX IS NO CURE - COSTS. - Cost-cutting is not sufficient to change the behaviour that led to cost increases.

by Robert Heller.
Last Updated: 31 Aug 2010

Cost-cutting is not sufficient to change the behaviour that led to cost increases.

Imagine this. You're chief executive of a company suffering an unacceptable cash outflow of £5 million a year. You conventionally instruct your finance director to crack the whip. Off he goes, with his right-hand hatchet man, to bargain hard with the spending functions and the divisions. He returns triumphant. The cash deficit can't be eliminated this year, or even next, but he forecasts sharp annual reductions to eventual disappearance - and he's sure the bank will be overjoyed. As you read his report, though, you start worrying. The overall thrust will reduce revenue growth. Is there a risk of emerging leaner and fitter financially - but feebler in competitive terms?

As you plough through the recommendations, that question continues to nag, and is joined by other worries. In fact, they number over three dozen, on a rough count. Most of the proposals will save only small amounts of money; some will increase costs, largely because of sops thrown to growling barons; contingencies have been cut because financial control is now so wonderful; other changes, nothing to do with the deficit, have been inserted by the corpocrats, taking their chance to complicate an already Byzantine corporate manual.

An old phrase - about 'saving candle-ends' - comes to mind. And haven't you read something more recently about the absolute folly of cutting costs within an unchanged system? The more you re-read the report, the more you suspect that its very complexity reflects a deeply unsatisfactory system which the finance director is making worse still. What do you do?

Probably, nine chief executives out of 10 will gladly back the finance director: the board might even recommend a raise, and fatter stock options, for his Trojan endeavours. HM Government has just acted in the same spirit. A ramshackle system for fiscal and economic management, which can't produce orderly government finances, or provide satisfactory levels of public service, or feed the economy's need for expansion, has been exploited to cobble together an unco-ordinated, unproductive, uncertain out-come. And almost everybody cheers.

Look, not just at Kenneth Clarke's budget, but at all its predecessors, and the same pattern is repeated time and again. Given the plainly unsatisfactory results, the process must be akin to medieval blood-letting: the cure makes the patient worse. What you find after administering cost-cutting treatments in repeated doses is that the process 'has hurt product quality, alienated customers, demoralised staff, and actually cut performance growth'. That's been noted 'in companies around the world' by Ben Tregoe and T. Quinn Spitzer, respectively the chairman and chief executive of Kepner-Tregoe. A survey by the consultancy revealed that companies have become cost-cutting junkies: 87% of those who responded had undertaken a cost-cutting initiative during the past five years. The fix is also very likely to be repeated: 38% of those questioned expected to be cutting again within no more than a year.

Obviously, if you don't improve the processes, the work must still be done. 'Cost-cutting usually fails to change the behaviours that led to cost expansion... people go back to the old ways of doing things. Managers return to the patterns of hiring, promoting, and empire-building. Expenses are allowed to expand. And costs inevitably come right back.' Michael Hammer and James Champy, the leading prophets of today's 'in' nostrum, make the same point in explaining why Re-engineering the Corporation (the title of their book) seems to fail 50-70% of the time. It's because corporate bosses are Clarkeists. They try to fix a process instead of changing it; don't focus on business processes; ignore everything except what they're tinkering with; neglect people's values and beliefs; settle for minor results, etc - they also pull back when people resist making necessary changes.

The analogy with government is obvious, but most of all when the pair advise against quitting too early (viz, cutting taxes just in time for the next election); placing prior constraints on the definition of the problem and the scope of the programme (viz, deciding that reducing the deficit and/or defending the exchange rate have ironclad priority); and, above all, letting existing corporate culture and management attitudes stop reform from getting started. So managements won't re-engineer the whole corporation; and governments won't re-engineer the Government. That's why the rare management initiatives inside the bureaucracy leave the real problems unscathed. In a rational world, a non-bureaucratic Office of Management would have the same scope as the Auditor-General, roaming Whitehall to root out ineffective processes (not costs, note).

The rooting, however, would have to start from the top, with Number Ten, the Cabinet, the departmental organisations, the House of Commons, and their relationships. In fact, the Treasury's Sir Terry Burns has recruited the consultancy services of Wendy Pritchard to 'help him and his officials' (says the Financial Times) 'to concentrate their minds... repair their relations with spending departments which complain of meddling...consult more with outsiders... make the Treasury a more agreeable work-place for the UK's best and brightest'.

If Sir Terry thinks those are his real problems, he isn't concentrating his mind. The history of management teaches that, unless the processes and behaviour of the organisation are changed from top to bottom, they will simply be repeated. So will their unacceptable results.

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