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Budget Cuts: Cut Your Headcount or Improve Your Processes

Stephen Davies

“It is not necessary to change. Survival is not mandatory.”
     – Edwards Deming

Budget cuts. Lay-offs. Resource restrictions. Fiscal restraint.

We hear it again and again.

As a manager, how are you going to meet these financial requirements?  If your organization is like most, you are likely considering a workforce reduction – and will probably work through a scenario that looks something like this:

  1. Freeze current and upcoming projects.
  2. Analyze to see which projects or activities (e.g. admin) can be reduced or completely cut.
  3. Reduce the number of employees, usually starting with contract staff.
  4. Manage the reduction in workforce (and deal with all of the associated issues that will accompany this activity).
  5. Stabilize the organization.
  6. Re-grow the organization as and when the opportunity and climate changes to make this possible.

A Better Question

The requirements can vary, but in the current climate Man-with-knife-265x176many organizations are looking at future budget cuts of between 5% and 15%.

The question: why is everyone’s first reaction to reduce staff? Is it because that is the largest line item on the expense ledger? Is it habit?

A better question: are there any other options that can be taken before resorting to this highly disruptive – both organizationally and emotionally – activity?

Non Value Add Activity

Through experience I have come to realize that a large percentage - typically greater than 50% - of an organization’s activities can be classified as “non value add activity” (NVA).

This is independent of public or private, large or small. NVA are simply activities that ultimately do not contribute to the goals and objectives of an organization. Very typical examples include:

  • Multiple sign off for purchase orders
  • Double, triple or quadruple checking work
  • Producing reports that are never read or used to make any decisions
  • Running meetings that never define follow up actions or are simply grandstands to vent issues
  • Adding tasks to projects that don’t contribute to the project goals
  • Looking for information that is not easily accessible
  • Continuous state of firefighting

I could go on and on – the point being that a huge cost saving opportunity is sitting in every organization as process improvement, yet we still look to reduce staff levels rather than tackle it!

10% Is Easy

Over the last 15 years I have realized the following in terms of effort:

  • 10% savings is an easy hit and relatively quick to do as long as the organization is focused and committed.
  • 20% savings requires some level of system integration, and requires time and effort - but is still relatively straightforward.
  • > 30% savings is difficult (but rewarding) and can be considered world class for most organizations.

Va-nva graphic-590x251

Heads Are Easy to Count

So why do most organizations choose to reduce their workforce rather than improve processes? From experience, I believe the following reasons to be true:

  • Savings due to process improvement can be hard to articulate – savings due to reduced headcount are easy.
  • There is an initial spike in effort (and therefore spend) to initiate process mapping activity – this puts management off the idea.
  • A percentage of staff needs to be temporarily re-allocated to perform process mapping activity – this can be difficult to justify
  • Rapid and decisive decisions need to be made to implement improvement activities – this can be difficult, especially in a public sector environment.
  • Employees need to be empowered to make small changes that accumulate to make a significant impact – again, this is typically not the case in most organizations.
  • The process mapping activity cannot be haphazard, there must be an investment in training, mentoring and facilitation – this runs contrary to the upcoming budget cuts.
  • There is a lack of understanding around the benefits of process mapping at all levels in an organization.

Cutting Heads Doesn’t Improve Anything

Again, I could go on, but the above points are typically enough to stop process mapping activity as an approach to budget reduction. However, if you do choose to implement a robust process mapping strategy you will likely see the following:

  • A relatively quick – usually a matter of months – ONGOING reduction of 5% to 15% in operating costs.
  • Increased repeatability of the output of the processes, resulting in increased customer – both internal and external – satisfaction.
  • Reduction in risk as non-essential steps have been removed, therefore reducing the number of opportunities where mistakes can be made.
  • Increased employee satisfaction in a difficult climate.
  • Improved level of documentation.
  • Capturing of the embedded knowledge of your employees.
  • Improved vertical and horizontal communication.
  • Integration with root cause analysis and risk management activities.

The Challenge

The challenge is simple; when you have to reduce costs, take a good look at your processes first.

By keeping your staff intact, you can deliver your key projects with minimal disruption, maintain capacity, maintain embedded knowledge, improve customer satisfaction, and improve employee engagement.

 


 


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Comments

Managers are ordered primarily to cut expenditures.

In some contexts such as manufacturing, eliminating NVA can reduce expenditures associated with rework, inventory, or low quality.

However I don’t see how in a public service context, eliminating NVA - while perhaps improving service outcomes (If they can be measured) - would necessarily decrease expenditures significantly.

The only way I could see this working is if the value stream mapping exercise and process re-engineering somehow produced tangible monetary savings for the public - either through reduced waiting times, elimination of fees, or redundancy. However this would only apply to certain sectors of the public service, and the time it takes to do a good re-engineering usually exceeds the time frame in which the cuts are desired.

By Anonymous on 2011/08/31

Anonymous you raise a good point; service industries which are tightly tied to people resources pose a special challenge. Take the education field for example, if the learning model relies exclusively on the teacher-student experience, reducing the number of teachers by definition raises the student-teacher ration and by extension directly affects the quality of the learning experience. The reality is that other learning models are equally or more effective, particularly in the workplace.

However, there are many public services that are not so tightly tied to a rigid model. The challenge in many instances is for managers, employees and unions to be open to changing the service paradigm as well as to be vigilent to eliminating NVA effort.

By Alcide on 2011/09/02

Anonymous, it is harder than in a private organization but there are lots of instances where costs have been reduced significantly by removing NVA, some of the following are examples that I have personally been involved with in public sector organizations include:

- Shortening a hiring process significantly (by > 50%) for admin staff. This optimization meant that internal (and more costly) staff did not have to cover the role, this typically happened over months (if not longer) so this optimization over a number of hires per year saved significant $$ for the client organization.

- Removing unnecessary decisions in a capital disposal process. This was an interesting project that allowed a (United Nations) agency to dispose of capital assets in less than half the time they normally do. A number of these assets got sold off so there was a double benefit in terms of less $$ spent on the disposal (storage for less time) and cash in the bank earlier for cash flow.

- A number of projects that optimized processes by automating through implementing IT solutions. The $$ savings here were purely in terms of time (weeks reduced to days/hours) and the staff were re-allocated to other, more highly pressing projects.

I have 100’s more examples and in virtually all cases, even if the $$ savings are purely internal to the agency the Canadian Public does benefit as the agency is more efficient and effective with its funding (i.e. our tax $$)!!.

I have left the agency names anonymous in the context of this post, but if you want more info please feel free to drop me an email.

Stephen Davies
Delta Partners Senior Consultant and Training Practice Lead

By Stephen Davies on 2011/09/02

I do not dispute the value of performing NVA reduction projects and exercises, and their benefit to service delivery and the public.

My point is that process improvement typically delivers benefits in the long term, and it is only really a good response to future planned budget cuts, and not a good response the budget cuts that call for immediate reductions. The obvious way to reduce expenditures quickly and significantly is typically to reduce headcount.

The time to propose and undertake NVA reduction projects is when the budgets provide the opportunity, not during times of belt-tightening.

By Anonymous on 2011/09/15

I agree in part. I have actually had significant $$ reductions in a matter of weeks but it is really agency or company dependent. The organization needs to be able to:

- identify and prioritize areas
- quickly perform the analysis
- quickly and effectively deploy resources to make the changes

So in reality a lot of public sector organizations are unable to do this unless they have thought about process management at a strategic level and planned for the above - not usually the case so there you are correct.

However with the above pieces in place (believe me when I say there are some govt agencies that are there), significant savings can easily be obtained in less than a fiscal quarter.

This is a lot easier in the private sector where managers and directors have, typically more flexibility and are able to react quicker.

Understanding your well made point our approach to process management is twofold:

1. Teach and implement the analysis and facilitation tools to implement the process mapping and NVA reduction
2. Work strategically with the organization to address the points I made at the beginning of this post.

In reality 2 is very difficult BUT with the new TBS risk and program evaluations looming, this is the perfect opportunity for organizations to get those pieces in place (a little out of the context of the original post but you know what I mean).

Additional thoughts welcomed

By Stephen Davies on 2011/09/16

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