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 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 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!
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?
See the review of LEVERAGE in The Economist (January 9, 2014).
John also writes thriller novels: novels.johnrchildress.com