Management Cost Efficiency 

Cost efficiency does not mean merely cutting costs. You will notice that even the biggest corporarte companies know just one way to cut costs. Cut portions of the business and throw them away, cut staff across the board, cut bonuses and whatever else is in sight. This is because the activity of cost efficiency is totally absent in most corporate offices. Cost cutting is normally done as a fire fighting measure when things go terribly wrong. The truth is that if cost efficiency is inbuilt into the management system of an organization, the need for drastic cost cutting measures might not be necessary at all. In this management related article, we will ramble about this issue in more detail.

The recent drop in the U.S economy brought forth some very interesting observations. These are subtle things that many business analysts conveniently ignored. Take an example of an imaginery company A-B-C Insurance, now this is huge corporate giant showing profits for the past 2 decades. Numerous awards to it's credit, high paid CEO and even managerial cadre are kept happy with fat salaries.  The stock market loves such organizations, brokers make money, traders make money everyone is having a great time. This for the past 2 decades.

Now the economy takes a dip for a year or two, this should really not matter much for a company that has been oozing profits for the past 2 decades. But look what happens, the company begs for government assistance. Staff are sacked, offices are closed and the cutting never ends. So where did all the milk and honey of the past two decades go? Well, a billion dollars in bonuses, a few million dollars to furnish the plush office. You get a 30,000 U.S$ toilet for the CEO, you obviously need a 5 million dollar cabin to house that toilet.

Let's try a few random ideas that can be refined and used in almost any organization to gain cost efficiency. Most of the suggestions are based on real life scenarios that we have observed.

Hiring new staff: Before you add any new staff to a department, check out the possibility of using an existing staff who does not have work to fill a complete day. For example, you have 5 staff checking the ledger but most of them are busy only for 60% of the work day. You can take one of the staff out, provide appropriate training and plug them into the position where a new staff was needed. With this sort of arrangement, you actually give double benefits to the organization. You do not hire a new staff, the more important thing is that the department where staff were cut from 5 to 4 is also going to give you better yield based on a complete working day.

Another case where you might want to reconsider new hiring is when, the requirement is going to be temporary. You could probably ask an existing staff to stay up an hour or two each evening and handle the temporary increase in work. It is important not to be stingy though. Offer extra monetary compensation to the staff as long as the work is to be done. The important thing is that, you do not wait for the staff to ask for more (money). You talk about the additional work and the monetary benefit at the same time.

Annual contracts review: These relate to contracts for service or equipment that are made on a longterm basis. A company sets up a factory in the remote part of the country. There were no telecommunication facilities in that region at the time that the factory was set up. The company needed a high speed cable link to connect the factory to the head office in the city which was around 60km away. Out of the three telecom companies that the factory approached, just one agreed to do the dedicated cable set up from the city office to the factory. The bill per month was high at almost 3,000 U.S$ per month. The telecom company explained that since there were no other offices or factory in the area, the entire cost of laying cables and maintaining them would have to be borne by this single factory. The factory had no option and agreed to the price, each month a fat check of 3,000 U.S$ was paid for the cable service.

Five years later, the company was still paying the same rates. During this time the area around the factory developed to form an industrialized zone. Many telecom giants set up their offices around the area. Soon there was stiff competition among the telecom companies, prices dropped. The interesting thing is that this factory never cared to explore any new telecom contract, they continued to pay 3,000 U.S$ a month as per the old contract. The CIO woke up a year later and realized what was happening, the rates at that time were just 3,000 U.S$ per year, an amount that the factory was paying per month! The very same telecom service provider quoted a price that was around 80% cheaper than the old contract.

Travel expenses: This is the biggest source of waste in many organizations. Blanket rules are made to fix the travel expenses based on position held in the company. All executives above the A+ grade can be booked into 5 star hotels when travelling. They are allowed to dine and drink with no maximum amount fixed. They can call for a limosine anytime that they want to move around the city.

So this is what we saw, and it is luxury. A company had around 10 managers for a particular grade. A manager flying to Tokyo from the U.S held a first class air ticket. He checked into a 5 star hotel, a posh suite that cost around 1,300 U.S$ per night. And because this was a 5 star hotel, he was charged 25 U.S$ for laundry for every piece. He went out each morning at around 8am driven in a Mercedes Benz. He returned each night at around 7pm, went up to his room and ordered dinner probably costing around 75 U.S$. He then changed into his leisure wear and took the elevator down to the bar in the hotel. He was there until 11pm, drunk the most expensive spirits and then went up to his room and called it a night.

Essentially this manager was paying 1,300 U.S$ a night just for renting a bed in the hotel! No business clients came to meet him at the hotel, so it was always only him. The interesting thing is that the same 5 star hotel had a modest 'deluxe' room for under 500 U.S$ a night. Don't know too much about expensive alcohol but the guess is that, a drunken manager would not know the difference between a bed in the deluxe room or the expensive suite. The manager stayed in Tokyo at this hotel for 7 days.


 Mergers and takeovers: It has become a fashion to take over other companies. Very often the new business is something that the management knows nothing about. The resources in terms of time and money to justify the takeover and understand the new business can be tremendous. A successful company 'A' trading in fashion accessories, acquires another company 'B' that produces belts and shoes. The business of 'B' is totally new to 'A' which has little or no experience in any type of production. Top management needs to divert resources and time to the new business. It will be a few years before profits can be realized from the operations of 'B'. During this time, it is very likely that the main business which is 'A' is neglected.

So why do companies do take overs? The dream is to nurse an ailing company, bring it to good efficiency and profit levels and then sell it! This is fine for an organization that is flush with funds but, for most organizations the drain on the resources and negative effects on the main business is inevitable.

Medical perks: Many organizations refund all medical expenses incurred by an employee. In some cases the medical benefits extend to the spouse and children too. It is a better idea to work with an insurance company for some type of group insurance. Refunds beyond the insurance limit might be made to employees but, it is better to cap the amount of medical expenses that will be refunded. It is also possible for the organization to allow employees to upgrade the company health insurance policy. The difference in insurance premium can be borne by the employee. It might also be possible to subsidise (not entirely bear) health insurance provided to the spouse and children of the employee.

Irresponsible managers: The office starts work at 8am, the manager never enters office before 10am. This is the type of manager who can single handedly ruin an entire organization. Let us assume that the manager has 10 staff working under him. His coming late will mean that many of these 10 staff do not start work at 8am too though, they are physical present in the office. The work flow in the organization would be further affected as it is likely that the next department needs input from this departmen.

We know of a huge jewelry company that is now virtually shut. The company had a top CEO who entered office at around 12 noon each day, the company started work well before 9am. When precious metals like gold, silver and platinum were to be purchased, the company regulations required his signature on the purchase order. It is also a widely followed practice for vendors of such precious metals to request for spot cash payment the moment the metal is delivered at the buyer's office. In many cases, the entire factory of over 600 workers sat idle until, from 9am to 12 noon as there was no metal to cast. The purchase department would not allow the purchase to be made as the CEO, was not around to sign the purchase order and the check! To make things worse, the entire production unit was made to work overtime, to complete orders! Over time payments are normally made at double the rate of normal time salary.

If such a glaring problem is allowed to exist and continue to exist in a company, one can well imagine the other management related tragedies in the company. Sure enough, the company soon downsized and then shut down it's operations.

Never ending meetings: In most cases, prolonged daily meetings are a waste of time. If at all necessary, a daily meeting should be effectively and efficiently arranged to last for just 20-30 minutes. Meetings without fixed agendas are not very affective, the general talk that goes on in such meetings rarely brings about any constructive action. When weekly or monthly managerial review meetings are to be arranged, a clear sequence of events should be maintained in the meeting. An important activity that is missed out in such meetings is to review the past meetings decisions. For example, if the accounting department promised to bring down outstanding debtor figures by 30%, the next managerial meeting should discuss the progress of the target.

Management meetings also become a waste of time and money if the decisions in the meeting are not implemented and monitored. A meeting could be held for 2 hours and be attended by all senior supervisors, the decision could be to disallow the use of cell phones in the work area. A clear cut strategy should define who will be responsible for checking the presence or usage of cell phones in the work area. The meeting must also decide the course of action that will be taken if someone, breaks the regulations and does carry/use a cell phone in the work area. The decisions of the meeting need to be explained to the entire staff, the action to be taken if the rule is broken also needs to be understood by the staff. If this is not done, the senior supervisor meeting has been a waste of company resources.

Personal chatter: A group of four marketing executives enter office on a Monday, it is 8am and the office has just started work. They have signed the attendance register and left the work area to visit the rest room, they then walk to the office pantry and help themselves to a cup of tea. About 20 minutes later the four executives have taken their seats. The next hour and a half is wasted on personal chatter. The discussion is about what each of them did over the weekend. One of them had purchased a new cell phone, the latest features. There is a 20 minute talk about this new cell phone. Another executive visited the dentist, she had to fill her tooth and the discussion went on for 30 minutes, during this time, the discussion covered areas like the bill amount, the waiting time at the dentist and talk about three more dental clinics in the vicinity! The chatter subsided at around 11am and the executives got down to serious work. Lunch time was not far away and by 12noon, they were already discussing about what each of them would prefer to have for lunch which was only 30 minutes away.

The company had hired these four marketing executives at a fairly high salary, they are expected to work from 8am to 5pm. They start their work at 11am instead and that is a loss of 3 working hours a day. This is a clear example of how management throws cost efficieny to the wind. The saddest part is that if the inefficient work ethic of these marketing executives, pulls the entire organization down, the first to be fired will be the staff on the production floor! That is due to the cost cutting mood of the management who woke up too late.

You will come across numerous cases where management does not give sufficient attention to cost efficiency. The attention comes too late and by that time, there is a butcher's instinct to cut people and costs. If you have any views or comments on this management related article email us at