Water Journal : Water Journal September 2012-1
opinion water SEPTEMBER 2012 43 6 Tips on Managing Cost and Productivity Following are six practical tips on how organisations can drive cost and productivity transformation in a complex environment: 1. Decide how much cost improvement is needed When it comes to reducing costs and driving productivity improvement, different organisations have different requirements. The main variables are: (1) the breadth of change needed, and (2) the time available to take action and capture value. Organisations find themselves within a wide spectrum of situations. At one end, healthy organisations generally have the luxury of time and can afford to pick and choose their opportunities. At the other end, organisations in a turnaround or crisis situation, such as reduced funds or declining revenues, often have no choice but to rapidly reduce their costs using every cost lever available. In the case of water utilities, lower than expected revenues, pricing pressures and increased expectation to improve ROAs and dividends, raise the urgency of any cost reduction and productivity improvement program by creating the need for greater change in less time. 2. Start with the obvious For many organisations, the most immediate cost savings often come from tackling external spend (the materials and services the organisation buys). Improvements in these areas can deliver significant savings almost immediately, with little or no downside for the business. The potential savings from external spend can be greater for organisations that have significant improvement opportunities in their procurement systems and practices. However, even organisations that believe their external spend is as good as it can get may find additional opportunities to save as procurement has often been technically led by the engineering community often to the detriment of including commercial goals. Importantly, quick wins delivered through a procurement program create change momentum for your broader program and, at the same time, release funds to underpin additional initiatives. 3. Take an enterprise view Organisations should look beyond organisational silos to include cost reduction and productivity improvement opportunities across the entire enterprise. A quick but comprehensive analysis of actionable spend (i.e., costs that are within the organisation's control over the next 12 months) can help identify the biggest opportunities and set priorities. Of particular relevance for water utilities is the adoption of an end-to-end view of your Program of Work (both Operating expenditure and Capital) from Planning, Concept Design, Project Approval, Detailed Design, Works Management, Project and Construction management, through to Field Force Management. By adopting this end-to-end process view, you will be able to truly identify waste (poor hand-offs between departments, repeated work, wrong work, overlapping accountabilities, no accountabilities etc.) and at the same time establish where key throughput bottlenecks reside within your organisation. As most managers and executives only have visibility of a narrow set of costs related to their day-to-day responsibilities, this enterprise view can be an eye-opener. A broad enterprise view can help an organisation put its existing cost reduction and productivity improvement initiatives into perspective, and allow decision makers to understand the broader opportunity. It can also provide initial guidance and direction on where the organisation should focus its efforts. 4. Balance short-term and long-term improvements Many organisations can be in such a hurry to cut costs that they end up ignoring significant business improvement opportunities. That's a mistake few can afford. In general, the most effective business improvement programs apply a tiered approach that includes a mix of short, medium and long-term opportunities. Each tier provides a different level of potential savings, complexity, risk and required investment. Tier 1 typically includes incremental short-term opportunities such as decreasing discretionary spending and improving span of control. Tier 2 consists of medium-term opportunities such as process improvement, shared services, outsourcing of ancillary processes and strategic sourcing. Tier 3 comprises long-term opportunities such as re-engineering or outsourcing of core business processes, changing the organisation's business model, restructuring the supply chain, and large-scale technology investments including billing systems. This tiered approach can provide the best of both worlds, allowing an organisation to generate immediate benefits while capitalising on more substantial and sustainable opportunities that take longer to implement. With proper planning, Tier 1 benefits can provide some or all of the funding for the more significant structural improvements in Tier 2 and Tier 3. 5. Choose the right business model In some cases, the most effective way for a business to achieve the required benefits may be through a transformation of its business model. In choosing a business model, the main trade- off is between 'operational independence' and 'cost efficiency' (through centralisation and economies of scale). At one extreme, a holding company model allows each business to operate independently, which helps foster innovation and an entrepreneurial spirit, but minimises the opportunities to save money through standardisation and shared services. At the other extreme, an integrated operating model gives an organisation much greater control over its business units, which may increase the number of opportunities for synergies and economies of scale.
Water Journal November 2012-1
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