Cost Creep . . .

Before a diamond shows its brilliancy and prismatic colors it has to stand a good deal of cutting and smoothing.  – Author Unknown

Every CFO knows about “cost creep”; the slow build up over time in the cost/revenue ratio.   And try as they might to bring it to the attention of the CEO and the senior team, the replies are always the same:  “these are necessary expenditures for competitiveness”, “we need to invest now before it’s too late”, “an investment now will payback in the long run”, “my department needs more people to get all the work done”, etc.

Then finally the cost escalation begins to impact profitability and quarterly results, just a little at first, and the explanations from the senior team are again  reasonable and loud, so another quarter or two passes.  But with a growing impact quarter after quarter the Board of Directors starts to grumble, analysts start asking uncomfortable questions, and the CEO finally gets fed up.  The reaction is swift and more often than not the hatchet swings across all departments in an effort to get costs back under control.

Problem solved?  Not really because such cuts are not precise but gross in nature and often cut deeper than required to the point where productivity is impacted, to say nothing of morale and employee engagement.  But like good soldiers department heads carry on trying to do more with less until revenues are impacted, then the cry goes out for additional resources and the insidious process of “cost creep” starts again.

Sound familiar?  Frustrating?  Inefficient?  Demoralizing?  All of the above.

The Hidden Culprit

One of the major contributors to cost creep and other forms of waste inside of organizations is excessive “silo focus” on the part of the senior executives.  By silo focus we mean an almost single-minded focus on functional or departmental goals, objectives and budgets to the potential detriment of overall company performance.  It is entirely possible for each function to work hard at reaching and exceeding their objectives, yet the whole company miss its revenue or growth targets.

And an excessive focus on functional objectives often leads to unproductive behaviors such as resource hoarding, inter-departmental competition (my department outperforms yours!), turf wars, lack of trust, poor flow of information.  Basically the seeds of a “We-They” culture.

With a heavy focus on functional objectives it is easy to see how cost creep happens.

Is your organization structured in a way that rewards and recognizes functional performance instead of overall company performance?  Do you find yourself spending excessive amounts of time dealing with functional issues instead of moving the business forward?  Here’s a sobering statistic:  less than 5% of time spent by senior teams is focused on strategic issues while the majority of time is spent dealing with functional issues!

Shifting the focus to delivering the overall strategic objectives is a good way to significantly reduce cost creep, and improve company performance.

Tight Lines . . .

John R Childress

author of FASTBREAK: The CEO’s Guide to Strategy Execution,

and the forthcoming;  ADVANTAGE: The CEO’s Guide to Corporate Culture

About johnrchildress

John Childress is currently Visiting Professor in Strategy and Culture at IE Business School in Madrid and a pioneer in the field of strategy execution, culture change, executive leadership and organization effectiveness, author of several books and numerous articles on leadership, an effective public speaker and workshop facilitator for Boards and senior executive teams. In 1978 John co-founded The Senn-Delaney Leadership Consulting Group, the first international consulting firm to focus exclusively on culture change, leadership development and senior team alignment. Between 1978 and 2000 he served as its President and CEO and guided the international expansion of the company. His work with senior leadership teams has included companies in crisis (GPU Nuclear – owner of the Three Mile Island Nuclear Plants following the accident), deregulated industries (natural gas pipelines, telecommunications and the breakup of The Bell Telephone Companies), mergers and acquisitions and classic business turnaround scenarios with global organizations from the Fortune 500 and FTSE 250 ranks. He has designed and conducted consulting engagements in the US, UK, Europe, Middle East, Africa, China and Asia. Currently John is an independent advisor to CEO’s, Boards, management teams and organisations on strategy execution, corporate culture, leadership team effectiveness, business performance and executive development. John was born in the Cascade Mountains of Oregon and eventually moved to Carmel Highlands, California during most of his business career. John is a Phi Beta Kappa scholar with a BA degree (Magna cum Laude) from the University of California, a Masters Degree from Harvard University and was a PhD candidate at the University of Hawaii before deciding on a career as a business entrepreneur in the mid-70s. In 1968-69 he attended the American University of Beirut and it was there that his interest in cultures, leadership and group dynamics began to take shape. John Childress resides in London and the south of France with his family and is an avid flyfisherman, with recent trips to Alaska, the Amazon River, Tierra del Fuego, and Kamchatka in the far east of Russia. He is a trustee for Young Virtuosi, a foundation to support talented young musicians. You can reach John at john@johnrchildress.com or john.childress@theprincipiagroup.com
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