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The best way to reduce business expenses? Cutting costs is the wrong answer
As my co-author Henry King and I disseminate the main findings of our book Boundless through conference keynotes and speaking engagements, we're finding that CEOs resonate strongly with our message that "silos kill." Many of them have voiced their determination to smash their own particular silos -- and we applaud and support this all the way.
But our support comes with a word of warning: When you smash your silos but don't have an alternative way to manage your resources, you risk creating a spill instead of a flow. A spill is a waste of resources that can even become a pollutant or a hazard. A boundless organization, by contrast, creates and then directs flows of resources to wherever it most needs them.
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Our message, therefore, is that Boundless can, and should, become the alternative for any organization looking for continued success in this increasingly turbulent world.
This focus on waste is an important point worth re-emphasizing -- especially in light of the more demanding market conditions that have visited us over the last few years. Shared success among key stakeholders is both the goal and the outcome of a Boundless mindset. But that does not make it a free-for-all. The risk is that the term Boundless may be misunderstood to stand for unfettered growth, signifying a lack of discipline and insensitivity to issues like cost and productivity demands.
But nothing could be further from the truth! The real question is: How are these issues handled in the boundless model compared to the silo model?
Cost versus waste
The most common business response to softening demand and/or deteriorating market conditions is to focus on cost-cutting. (See 2024 research by BCG on costs and growth.) This seems to be true, more or less, regardless of industry and company status. In other words, big or small, incumbent or new entrant, mature or fast growth, traditional or cutting edge, when things are not going as well as they were and pressure to respond is being felt at the executive level, cost cutting is the go-to strategy.
The problem with this -- at least from a Boundless perspective -- is that cost-cutting is a silo-based strategy. In other words, cost-cutting is resource management-oriented rather than value creation-oriented. Even in market conditions or business cycles that favor margin growth over revenue or customer growth, we believe that a focus on reducing waste is a better strategy than cutting costs. There are four main reasons why:
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- First, all waste is costly but not all costs are wasteful. Cost-cutting --especially when it is carried out "across the board" to appear impartial or fair (also known as "peanut buttering") -- risks harming value, quality, effectiveness, employee satisfaction, customer experience, and reputation. (See "A Better Way to Cut Costs" by McKinsey, 2009.) But all efforts to reduce or even eliminate waste will cut the right kinds of costs -- costs that generate no value. At a minimum, this means that they will not cut into the "muscle" of the organization and make it less fit. More likely they will improve its fitness and responsiveness. In other words, waste reduction is a path to becoming Boundless -- one we would recommend in any cycle -- and is thus more disciplined and more constructive than pure cost-cutting.
- Second, and of particular interest to us from a Boundless perspective, cost cutting by itself does nothing to improve the flow of data, decision-making, and action-taking across the organization, and may make it worse. As we argue in the book, silos can literally kill. All forms of silos, blockages, friction, bottlenecks, and roadblocks slow or stop people, projects, and processes in their tracks and threaten responsiveness and resilience.
- Third, waste has a negative impact on value to the customer, quality, and/or sustainability. Reducing waste therefore has a positive impact on value, quality, and/or sustainability. This means that reducing waste is always a good strategy regardless of business or market cycle.
- Fourth, some waste bears a cost not just for the company but also the world beyond it. This type of waste is known in economics as an externality, a byproduct that is borne unwittingly by a third party. Reducing or eliminating externalities has particular relevance in terms of sustainability and helps achieve shared success.
Waste cutting vs. Cost cutting
— Vala Afshar (@ValaAfshar) June 6, 2024
Cost cutting is a silo-based strategy - it is resource oriented approach versus value creation, or relationship building orientation.
All waste has a cost associated with it but not all costs are wasteful.
This means that all efforts to reduce… pic.twitter.com/UlnkNmRz5u
The challenge and necessity of identifying waste
Identifying wasteful processes in business is not an easy task. It's standard accounting practice to identify, measure, and report on an organization's costs. However, not all forms of waste are so easily identifiable or measurable. In particular, outside of the manufacturing industry -- which focuses deeply on waste, as typified by the Toyota Production System's "muda" principle -- business processes rarely get scrutinized in any formal way for waste.
Also, business complexity has grown to the point where it can be difficult to trace activities back to customer or stakeholder value. To compound matters further, people naturally favor their own ways of completing tasks and solving problems, even when those ways may be objectively more complicated and more time-consuming than consistent, standardized, or shared approaches. So waste can be difficult to pinpoint and even more difficult to eliminate.
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Despite these challenges, removing waste from all aspects of a company's operations focuses the organization on creating value both for the customer and for itself -- as well as for other stakeholders. Removing waste prioritizes the flow of resources including data and decisions, and increases responsiveness to new challenges and opportunities. A key tool in sustainability and profitability, continuous waste elimination is always a good practice and goal regardless of the economic cycle. And, perhaps surprisingly, it is always Boundless.
This article was co-authored by Henry King, business innovation and transformation strategy leader and co-author of Boundless: A New Mindset for Unlimited Business Success.