The retail CEO finished reading the morning newspaper extracts covering the release of the organization’s half-yearly results. The news was not good, and the newspaper comments were fairly blunt and unforgiving. The organization reported half yearly growth that was a full 2% points below expectations coupled with a significant tightening of margins. This was the double whammy of growth and profitability challenges. The CEO put the finishing touches to the internal communications that were about to be released.
Many organizations have experienced such a situation. The bad year or the bad quarter happens all to frequently. But equally, the responses also have a familiar ring and show a common pattern across most industries. Those responses tend to be in three groups as follows:
1. Expenses are purged
Often a travel freeze is announced almost immediately, and restrictions on discretionary costs are put in place. Classes of travel may be changed and standards of hotel accommodation may be downgraded. Much of the day-to-day business activity is subject to somewhat excruciating restrictions or controls. Some of this can be quite illogical and dysfunctional, but these actions can be very effective in terms of pure savings in the short-term.
2. People costs are put under the spotlight
A recruitment freeze may be announced and various training programmes are suspended for a period, maybe for 3 months or till a point later in the year. Costs of people development are put under the microscope such as limiting off-site or residential activities. Existing office facilities suddenly become in demand for on-site training.
3. Profit is the urgent focus
If the organization cannot grow in the short-term, then at least be very profitable. The dreaded profit improvement programme is often dusted off, and re-shaped to ensure the organization maximizes its profitability as quickly as possible. Much organizational energy is focused on this activity with the formation of task forces and action teams.
Most organizations will respond to challenging results with activities similar to those above. The precise actions will of course depend on how bad the results are, and over what period. For example, a full year of poor performance is much more significant than a single month off the boil.
All of the above responses are valid and have their place in the management of any business. Clear and firm actions are needed to bring poor results back into the black. But are they sufficient?
From a financial perspective, all of the above initiatives will deliver results, and in most cases very quickly. They represent actions that can deliver real bottom line outcomes quickly and visibly. They also help to transmit a strong message across the organization that performance must be improved, and action is happening to deliver such improvement.
But short-term cost savings are only part of the answer. No organization has “cost-saved” its way to prosperity, especially with short-term initiatives. Yes, it may have dug itself out of a hole, but that is about all. What about the longer term?
In addition to short-term fixes that may be painful but necessary, organizations need to take a hard look at their strategic performance levers to get themselves in top shape to avoid circumstances such as those faced by the retail CEO above. Those performance levers are in four groups:
1. The value proposition
How do products, services and price all combine into a value proposition in the eyes of the customer? The organization may feel it has the best service in the market, but if customers see it differently, there is a real disconnect. Worse still, if some of this is subjected to short-term cost savings, it may make the perceptions even more problematic. The value proposition in the eyes of customers is a fundamental performance lever.
2. The cost structure
How sustainable is the cost structure in the longer term? There may be more cost-effective ways of doing business, such as outsourcing or different ways of working. Some of these avenues may be controversial, especially in the home market. For example, some jobs may need to move offshore. Cost is not just about the accounting in the profit and loss statement. It is about how the business model can survive and thrive in the longer term.
3. People capabilities
Are the right capabilities in place or do competitors have a different approach to growing and sustaining their organization capabilities? Organizations need to take a close look at their capabilities for the future. For example, if a domestic organization is seeking to expand abroad, it needs to have a very clear view and a plan to acquire and develop those capabilities.
4. Capital structure
Is the capital structure appropriate for the business and how does this drive decisions at the senior level? High gearing levels can place undue pressure back on the operations of the organization. For instance, there may be under-investment in areas like technology due to funding constraints brought about by the wrong capital structure.
For the CEO above, short-term actions are necessary and probably urgent. But the real value ultimately comes from the strategic performance levers. As the old proverb says, “Getting money is like digging with a needle – spending it is like water soaking into sand.”