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Why do most improvement initiatives turn into cost reduction?

November 25, 2015

cost reduction terms

 

So you have been to the “transformation roadshow” or launched the “insert your own catchy title initiative” or “lean enterprise”, and six months in the results are not being seen in the ultimate scorecard –the financial statements.  The quarterly numbers need to be met so we know the quickest route to moving the dial is –yes you guessed it—headcount reduction or aggressive slashing of costs.  Why is it that our well thought out strategy turns into a painful journey where we have to do more work in less time?

You are not alone.   At SBTI we have seen most corporate initiatives focus on below the line cost.  Why?  Because people understand costs and they are easy to measure.

Yet the ultimate scorecard is the financial statements.  Shareholder value is a product of not just lower costs in the income statement, but of a healthier balance sheet and strong cashflow generation.  At SBTI we look at moving all three, which requires an understanding of how they work.  We believe the more people understand how the numbers interact the more balanced and aspirational change can be.

Josh Waitzin was a child chess prodigy and won his first national Chess Championship at the age of 6.  In his book The Art of Learning he describes the similarly bewildering experience of learning to play chess.

“On day one of learning chess you have to internalize how the pieces move.  You have to learn their piece values.  Each piece is unique having its own strengths and weaknesses.  It is overwhelming to consider how and which pieces to move”

The financial statements have many moving parts that are uniquely and almost invisibly interconnected.  It is impossible for the novice to appreciate how the Income Statement flows into the Balance Sheet or how working capital elements conspire to create or consume cash summarized in the Statement of Cash Flows.  So most default to the income statement and a narrow and small element, below the line costs. We need to better educate managers in the basic building blocks.

Waitzkincontinues “ Instead, let’s take an empty board with just a king and a pawn against a king.  They are simple pieces and you learn how they move and play until you are comfortable.  Soon enough the movements and values become natural”

There are simple pieces within the financials.  Like the king and the pawn we understand their basic relationships with each other as we move them around.  For example see my previous post The secret doorway to increasing Gross Profit that discusses the two simple pieces of revenues  and cost of goods sold and how they move to create or erode gross profit.

“The pieces stop being figurines and start taking on energetic flows.  You see how they affect the pieces around them.  The network starts to come into focus.

Then I learn the principles of coordinating the pieces and I learn to place my arsenal.  Eventually the pieces and the principles merge.  The structure and the bishop are one.  Neither has any intrinsic value outside its relation to the other, and they are chunked together in the mind.  This new integration of knowledge has a peculiar effect because the initial maxims of piece value are far from iron clad.  The pieces lose absolute identity.  I learn that rooks and bishops work more effectively together than rooks and knights, but queens and knights tend to have an edge over queens and bishops.  Each piece’s power is purely relational, depending upon such variables as pawn structure and surrounding forces”

Waitzkin’s eloquent description mirrors the process of playing with the financial statement blocks.  You too have an arsenal you can deploy.  For example, debt on the balance sheet loses its absolute identity.  It can be good debt or bad debt— that is determined by the cost of that debt and whether you are converting that debt to improved cash with a respectable level of risk.  You begin to appreciate the relationship of revenues on the income statement with their alter ego, accounts receivables on the balance sheet.  Cost of goods sold and inventory ebb and flow in their power struggle.

Finally, Waitzkin observes, “Over time each chess principle loses rigidity and you get better at reading the subtle signs of qualitative relativity.  The stronger chess player is often the one less attached to a dogmatic interpretation of the principles.  You look at the board with a whole new set of navigational principles.  The great grandmasters transcend technique and have a deep presence which allows the unconscious mind to flow unhindered”.

Once you are comfortable with the main elements you will focus less on a dogmatic emphasis on below the line costs and more on the relationships between the different parts of the statements. A pattern or story is revealed.  The story will bring these relationships into a crystal clear picture and you will be able to see opportunities and meaning that have eluded you in the past.  The wonderful thing about the statements is they are indifferent to departments, silos and levels .

Now you will become a financial grandmaster, learning how to navigate the improvement terrain in a wholly different way.  Above the line improvements stimulate revenue growth and accretive cashflow. 

Give us a call at 704-904-0994 to learn how SBTI helps drive aspirational change and organic growth.

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