Allocate Resources to Build Company Value
Efficiency is alluring. The simple equation (sales/costs x 100) is easy to calculate, and the data comes straight from standard financial statements. Focusing disproportionately on efficiency, however, subtly leads to profit-stunting actions. Leaders may:
- Invest too little on acquiring customers. Spending to acquire a customer is a current cost, but the value typically spans many years. Thus, basing customer acquisition decisions on efficiency nearly always inhibits long-term profits.
- Focus too heavily on cost-cutting. It is typically easier to cut costs than to increase sales. Slashing training, travel, indirect marketing, and customer service expenses reduces costs in the current period but may cause sales to deteriorate over time
- Undervalue support departments. Executives often try to minimize ratios such as # of support employees / # of total employees. Unfortunately, cutting costs in relatively small functions such as IT, HR, Quality, and Finance can substantially affect business outcomes such as risk, quality of hires, warranty costs, and investment returns. Wise leaders compare such cost reductions to the potentially large total-company effect of diminished support.
- Outsource too quickly. On average, outside providers can manufacture products, process orders, or conduct support activities with remarkable efficiency. But when considering incremental costs, differences in quality, and the burden and risk of managing outside providers, a company may profit by keeping these functions inside.
- Squeeze too much out of the same resources. A company maximizes long-term profits not by cutting staff to increase average output per person, but by adding staff until the present value of profits from the last person hired equals his/her incremental costs. Effective leaders make resource decisions at the margin.
Every performance improvement initiative requires allocating resources. At SWA, we guide clients in making resource allocation decisions explicitly and with long-term profits in mind.
For each of the above initiatives, we provide a proven methodology and set of tools that make it easy for our clients to act decisively.