Archive for November, 2011|Monthly archive page
Curbing labour costs is vital for companies looking to sustain profitability and maintain competitiveness. The typical approach to achieving this is straightforward albeit unsophisticated. A senior leader will establish a labour cost objective and then work with their department or business heads to convert this target into a headcount reduction. The criteria on who to let go is frequently subjective, based on who is perceived to be redundant or non-core, too expensive or on the wrong side of a senior decision maker. All too often, this approach fails to achieve the desired savings, even after years of cutbacks. Even worse, blunt cuts can lead to precipitous declines in capabilities and morale, compromising the long-term health of the business.
Well-meaning efforts fail to produce enduring savings for one fundamental reason: broad-stroke tactics do not address the structural causes of high labour expenses. A while back, I worked with a CEO who needed to systematically reduce labour costs but was jaded by previously ineffective efforts. My mandate was threefold: 1) understand the barriers that prevent long term labour cost reduction; 2) develop strategies that slashed cost but not capabilities and morale, and; 3) create mechanisms that prevent wages from creeping back surreptitiously.
Our first step was to undertake an analysis of internal/external compensation data and key learnings to understand why previous reduction plans did not meet expectations. Below were some of our key findings:
Wages will unintentionally inflate – There was a propensity for wages over time, especially for talented and loyal workers, to outpace market rates for equivalent skills and experiences. Wage inflation occurs when managers do not link pay increases to productivity gains, corporate results or margin improvements. This phenomenon is common in large, non-unionized workforces with low turnover, and weak adherence to HR policies.
Compensation policies gone wild – Within this large, decentralized and complex organization, there were different starting salaries and bonus structures as well as mechanisms to control pay raises. Where policies existed, they were rarely used by line managers and HR. This lack of compliance was as much a people issue as it was about good process design.
The risk of short term thinking – While some managers gave thought to the longer term impact on culture and capabilities, the primary focus was on delivering short-term “body count” targets. Over time, blunt plans led to a shortage of key skills, resulting in quality and service problems and eventually higher costs. And, by not adjusting the roles and the priorities of the remaining employees the managers were forced to hire expensive temporary workers nullifying the earlier cost savings.
Irrationality rules – Behavioural science teaches us that a person’s natural feelings such as a sense of fairness have a powerful affect on their actions. We observed that an employee’s salary expectations were influenced as much by what their co-workers were perceived to be earning than what the market was paying. As a result, many employees pushed for higher pay if only to satisfy their sense of fairness and equity. In turn, overly indulgent managers accommodated these requests in order to maintain harmony.
Our findings pointed to the need for a consistently-applied, cross-functional (Finance, HR and Operations) solution that was objective, pragmatic and aligned with longer term corporate goals and strategies. Below were some of our recommendations:
Implement consistent compensation policies
We canvassed internal team leads and the market to identify best practices around compensation. This learning contributed to the creation of a centralized set of policies and procedures to guide hiring practices and wage levels. The company used a comprehensive change management program to roll out this framework across the organization and made compliance part of the performance management system.
Align job responsibilities and job categorizations
We worked with HR to better align pay scales with job responsibilities and clearly understood job categories. This reduced the variance between internal and external salary benchmarks and between equivalent employees. For the first time, pay ceilings and pay floors were established. A go-forward expectation was made clear: higher pay comes from higher performance and responsibility. Change management techniques were used to reduce conflict and ensure clarity.
Retool exit strategies
In many cases, voluntary separation efforts failed to hit their targets. We worked with HR to improve the design, targeting and communication of severance packages to ensure that highly valued employees were not given incentives to leave. To retain institutional knowledge and extra capacity, we developed a new program whereby employees targeted for exit were given an option to stay at a reduced salary level.
By implementing the above recommendations, management estimates they will deliver annual labour savings of 7-10% with minimal impact on morale, service levels and operational performance. This kind of nuanced and holistic approach to labour cost reduction looks to be a winning strategy for many firms.
For more information on our services and work, please visit the Quanta Consulting Inc. web site.
A ‘new normal’ is hindering the revenue generation plans of many North American firms. This climate is characterized by zero (or negative) market growth, margin compression, and cutthroat global competition. Historically, price increases would be a manager’s number one weapon to drive incremental revenue. In this environment, however, it is extremely difficult to do this and still maintain market share. Moreover, most attempts to drive revenues through new product innovation end up failing. And, most markets continue to experience downward price pressure due to product commoditization and a growing private label segment.
To crack their revenue problem, managers should look to other industries for lessons on what works, as follows:
Go where the profit is
Many companies are discovering that higher margins and profits may lie, not in their delivered product or service, but in ancillary services that consumers need and competitors ignore. For example, Apple quickly figured out that its iTunes music service was easily as profitable, scalable and “sticky” with consumers – to the tune of $1.5B in revenues – as selling MP3 players and computers. Rolls-Royce, a leading jet engine manufacturer, discovered that servicing its engines and providing spare parts delivered higher margins and more predictable revenues than engine sales alone. Services now account for over 50% of Rolls-Royce’s revenues.
Super size your solutions
Managers understand that providing products and services deliver higher revenues than products alone. However, what is different today is the nature of these newfangled solutions. Industries as diverse as professional services, transportation, publishing and retail are creating novel solution bundles that take their businesses in new directions. For example, IBM, UPS and Amazon are leveraging their considerable IT and supply chain capabilities to offer client’s innovative performance enhancement solutions that include services like data analytics, consulting, cloud computing services and logistics management. For providers, these new solutions can improve operating leverage, deliver recurring revenue and increase client stickiness. At the same time, these new solutions are subtly redefining the provider’s mission and business model turning them away from a product-focus to an information and IT-driven businesses.
Monetize your latent assets
Content-based firms are beginning to mine the dormant value of their assets, brands and capabilities. Specifically, media companies are evolving from content producers to content custodians and facilitators. For example, leading publications like Bloomberg and The Economist have begun charging higher fees for their subscriptions and have enacted online pay walls. Importantly, they are also exploiting their extensive content and analytics capabilities to deliver research and knowledge leadership services.
Consider new pricing models
Pricing innovation can be cross-pollinated across many sectors. A variable pricing model – where the price changes in real-time based on demand, time or other factors – already proven in the airline industry can be applied to the hospitality, retail, software and entertainment industries. For the past decade, the big aircraft engine companies, including RR, has been providing engines at no charge but billed on a pay-per-time basis (plus support, of course). More than 80% of RR’s engines are now sold this way. New micro payment models like Zipcar (subscription-based and hourly car rentals from staggered locations) and iTunes (purchase 99 cents songs versus more expensive albums) allow consumers to purchase things in small increments from multiple parties, based on their unique needs. Very often, this model spurs product demand, delivers higher margins and increases revenue per use.
Pricing innovation can significantly impact a company’s business model. For a gaming firm like Microsoft, a change could involve the shift from a single X-box game launch every 1-2 years to a 365-day business, with packaged good launches sustained by frequent updates, downloadable content and extensions into social and mobile platforms.
Raise your prices
Contrary to conventional wisdom, it is possible (and essential with rapidly increasing input costs) to raise prices in low growth environments. However, managers need to be smart about how and where they do it. Opportunities to increase prices often exist in sleepy or price inelastic product categories where the firm faces weak or non-existent competition and channel partners, where their pricing is not aligned (i.e. it is too low) with value delivered or where the switching costs of leaving one supplier for another are high.
Organic revenue growth is very possible if leaders are willing to rethink their business model, better understand their customer’s needs & habits, and refine their product and service offering. All that is needed is curiosity, an analytical approach and courage.
For more information on our services and work, please visit the Quanta Consulting Inc. web site.