Cost Creep and Silo-focus

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Silos are great for missiles, but not for organisations.

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?  Demoralising?  All of the above.

The Hidden Culprit

One of the major contributors to cost creep and other forms of waste inside of organisations is excessive “silo focus” on the part of the senior executives.  By silo focus home-Sweet-Missle-Silo-300x180we 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 behaviours 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 “Them vs Us” culture.

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

Here are some key questions I tend to ask CEOs when advising on performance improvement and reshaping culture.

  • Is your organisation structured in a way that rewards and recognises 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?
  • Do members of your senior leadership get most of their bonus based on their functional performance or the overall company performance?

Here’s a sobering statistic: when most senior teams get together,  less than 5% of the time together is focused on enterprise-wide business issues and 95% is spent dealing with functional issues!

Refocus!

Shifting the focus from functional objectives to enterprise-wide objectives is a good way to significantly reduce cost creep, and improve company performance.

A key question for the CEO: Are you leading a collection of functional departments or a joined-up and competitive enterprise?

John R. ChildressN2Growth: President, Europe and Chair, Culture Transformation Practice

Author of LEVERAGE: The CEO’s Guide to Corporate Culture, and FASTBREAK: The CEO’s Guide to Strategy Execution, available from Amazon in paperback and eBook formats.

See the review of LEVERAGE in The Economist (January 9, 2014).

John also writes thriller novels:  novels.johnrchildress.com

 

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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