Business Solutions for Your Profitable Future

Explaining the Four Approaches to Cost Reduction and Profit Improvement

Summary – the unfortunate truth about most cost reduction efforts:

You’ve cut your staff and your budgets and it’s still not enough. You’re buying the cheapest supplies and materials you see and the costs are still too high. But you’re missing something.

The employees who actually spend your budgeted dollars don’t have the time, tools, guidance and knowledge to make the best financial decision for you. They’re working hard just to get by. And at 3:39 PM the last thing on the mind of even your most skilled employees is how to increase your profits.

Cost reduction efforts typically:

Run out of steam when staff is cut so far things don’t get done well any more
Lose momentum when the purchasing staff has beat the last vendor down to rock bottom pricing
Slow when the last big system has been replaced
Limit profitable revenue growth
Come up short when the business climate changes again –as it does

On the other hand, world-class methods engage all of your people in a positive way to create a better place to work with higher profits. Unless you have a Profit Improvement Process or the equivalent you are missing out on world-class profit methods that overcome the problems with Cost Reduction.

Four approaches to cost reduction and profit improvement:

Typical cost reduction efforts focus on cutting expenses (headcount, materials, supplies, and other purchased items). They may have a narrow focus (Level 1 in the following table) or they may encompass the entire organization (Level 2). In some cases they are expected to continue year after year (Level 3).

By their very nature, all Level 1 and 2 cost reduction efforts will eventually end. And Level 3 cost reduction approaches will eventually reach finite limits where there is little left to cut without breaking bones.

While pure cost reduction has its place, no company has ever cut its way to long-term success. Sooner or later revenue must become part of the equation. The long-term question is whether or not profitable revenue growth and cost-effective thinking will be built into corporate practices and culture. When this is accomplished, the entire company can work in concert to achieve profit goals.

World-class companies use the world-class methods of the Level 4, Profit Improvement Process (PIP).

Table: The four levels of approaches to cost reduction and profit improvement.

Level	Approach	Characterisitcs	Advantages
1	Targeted One-time Cost Reduction Project	Focused on expense reduction. Narrow scope (i.e. one product or one department). Finite term. Fixed objective.	Limited impact on the rest of the company. Ends when goals are reached or opportunities are exhausted.
2	Corporate wide One-time Cost Reduction Project	Focused on expense reduction. Corporate scope. Finite term. Fixed objective.	Ends when goals are reached or opportunities are exhausted.
3	Continuous Cost Reduction Process (CRP)	Focused on cost and expense reduction. Ongoing year after year.	Ever-increasing goals are set and met. Limited to cost/expense reduction.
4	Profit Improvement Process (PIP)	Focused on all elements of profit: expense reduction, loss reduction, and revenue/margin improvement. Ongoing year after year Includes training	Ever-increasing goals are set and met. Everyone in the company can contribute. Carries a positive message – PIP is as much about building as it is about cutting.

In a Level 4 world-class Profit Improvement Process:

Profit goals are set and met on a continuous basis
Everyone in the organization is trained and involved as an integral part of the solution
Tools, processes and business methods are provided to empower the people
A cross-functional steering committee keeps progress on course
No stone is left unturned (Revenue, Loss; Expense) in every department
Profitable revenue is a key part of the equation
Expenses and losses are recognized and managed throughout the organization
Flexibility responds to the changing business climate
The process keeps on working to compound financial success year after year

What are the elements of a Profit Improvement Process that make it so successful?

The following four key elements provide a framework that gets the process up and running and producing results year after year.

Training in the most advanced creativity and innovation techniques and cost-effective business practices enables people throughout the organization to build corporate profits while they are doing their jobs well.

Tools such as Power Idea Sessions help them 1. Identify problems and opportunities, 2. Find the best solutions and, 3. Put those solutions into action quickly. Power Idea Sessions can be done in hours not weeks or months when you know how to run them.

Training not only includes these tools but also provides awareness in what elements actually determine profits and how to manage those at every level, how to overcome resistance to change, and the role that each individual can play to create a better company.
Process and structure as provided by the PIP organization keeps everything running and on track. Management can keep their hands on the steering wheel without stifling progress.
Guidelines ensure that the profits are actually real unlike many other approaches that allow for phony money and phantom profits to be counted.
Reporting keeps everyone’s eyes on the goal and measures progress toward the goals.

World-class systems include all of these four key elements for success. Anything less will not achieve your full potential.

Getting started: How can I bring this to my organization?

Achieving Level 4 World-Class Profit Improvement requires a commitment. The primary key to success is management commitment. Management and leadership must be willing to invest time, money and resources toward getting it started and keeping it supported. Once that commitment is made, the process will take on a life of its own and will pay for itself.

We start the process with an initial assessment of the following:

Management goals
Organizational readiness
Existing improvement initiatives underway – how are they working and where will they fit in PIP –productive initiatives are kept going
Potential barriers to success
Opportunity

This assessment is accomplished through management and staff interviews and through an initial Power Idea Session. Give us 16 hours over two days with a group of up to 24 of your key people and we will not only complete the assessment, we will:

Identify profit opportunities worth tens of thousands to millions of dollars in increased profits.
Prioritize and convert select opportunities into preliminary projects for implementation.
Clearly identify and prioritize barriers to success and how to overcome them.
Identify sources of support for success and how to tap into them.
Get a clear understanding of the reaction of these key personnel to the concept of moving to Level 4 with a Profit Improvement Process.
Build initial support for the PIP
Evaluate candidates for PIP leadership (e.g. project leader and steering committee membership)
Demonstrate how a PIP can improve morale, quality, attitude and overall corporate climate in addition to profits.
Get a sense for the size of your opportunities for increased profits.

It is at this point, with this powerful information in hand, that we will meet with management and make the decision on how to proceed. Options are to move ahead with a limited trial or to move toward a full PIP installation. Our Business Solutions consultants will fully support your PIP installation, teach you how to be self sufficient, and provide ongoing support if needed.

At the very least, as a result of the Initial Power Idea Session, you probably will have identified profit improvement projects that can substantially or completely pay for the PIP consulting and training work.

Power Idea Sessions and the Profit Improvement Process tap the intellectual capital of your people to help you help them achieve increased profitability and better corporate health. These methods are described in our books.

Contact Steven C. Martin

What’s the Difference Between the Profit Improvement Process and a Power Idea Session?

Element	Power Idea Session (PI)	Profit Improvement Process (PIP)
Overview	A Power Idea Session is a facilitated meeting with a relatively small number of people (typically 7 – 24) that will achieve specific results.	The Profit Improvement Process is a large-scale change process that is focused on achieving real profit growth for the organization.
Timing	A power idea session is a discrete episodic event that lasts from 8 to 16 hours.	PIP lasts for years and produces ongoing results
Scope	Is focused on select objectives and scope and includes limited training. Conducted with a small group of people. This is a piece of the PIP process.	As defined by the objectives and typically encompasses the entire organization.
Elements	This is run in a training and/or working session format. They: Clarify and set objectives Identify opportunities Find solutions Convert priority solutions to projects Accomplish training	Includes all of the elements necessary for a change process to function such as: Goals Training Process structure Guidelines Reporting
Methods	Uses specific creativity and innovation tools in small working groups led by skilled facilitators.	Relies on the above elements to organize the use of any and all appropriate business and technical tools and methods that enable people to achieve PIP goals. PI sessions are one of those tools.
Results	Finite actionable decisions and product for results within the limited scope and objectives of the session. Hundreds of thousands to millions of dollars bottom line benefit from each session.	Overall corporate profit improvement through the engaging of the intellectual capital of the entire organization.
Impact	Support for profit growth and corporate improvement	Maximum profit growth and corporate improvement

Contact Steven C. Martin