Riddell: Costs and experience
September 11, 2016
With the notable exception of the Federal government and perhaps the Clinton Foundation, every organization is under the operational mandate to do more while spending less. The cause of this mandate, of course, originates from competitive pressure, but one possible solution can be disastrous if certain realities are not taken into consideration.
The most obvious place to take immediate cost reductions lies in the area of personnel. Traditionally, all things being equal, people with longer times of employment are generally compensated more than those with less time. Said differently, older employees or those with the company the longest, cost more than relatively new employees. So the knee jerk solution becomes one of rotating the more experienced and costlier employees out while rotating the less experienced, less costly employees in. On paper, from a pure expense point of view, this may appear to work.
What is not taken into consideration, however, is that the previous volume of work has not decreased. So now, once the experience has been shown the door, there is the operational expectation that the less experienced can do the job just as well in addition to doing the job less expensively. This is clearly not the case. With experience in performing a function comes efficiency in that function, hence less cost. Despite the best of intentions and efforts of the less experienced, the very real probability that quantity of work surpasses quality of work presents itself. Said differently, lack of experience in critical areas of the business is a bona fide cost.
From a managerial perspective, this mistake usually does not show up immediately, rather it generally takes a bit of time for this self-induced inefficiency to manifest itself. But rest assured it will. It may be a decline in customer satisfaction, it may be an increase in employee turnover, it may be new operational headaches, but sooner or later they will manifest themselves in decreased earnings.
So how does a manager/owner deal with this cost/experience dilemma in a time where operating costs are under constant pressure? The first step is to understand just what functions are critical to your individual business and what functions are not. While every business is different, so too are these critical skills for success. Whatever these skills are, it is important for survival that these are never compromised. That is, independent of age, experience counts for a lot! The second step is to look at those functions that are not critical, and take the necessary steps to ensure that the employment costs of these functions are kept low or certainly variable. The third step is to ensure that a training/backup plan is in place for those critical skills as an insurance policy for unfortunate future events.
Finally, there is one other area of management that is not often addressed but is also of vital importance in the quantity/quality of work equation. Managers can sometimes be so focused on the trees that they lose sight of the forest. It is not uncommon to hear of fully taxed organizations being asked by senior management to provide additional information or studies or compliances with directives without these same senior managers having a clear understanding of just how close to capacity the organization already is. The gap here is never connecting the additional request with a perceived benefit to the organization and, ultimately, a perceived benefit for the folks in the organization being asked to comply.
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Now if all of this sounds pretty much like common sense, it's because it is. The problem for many organizations is it is not commonly applied. So do a favor for yourself, your employees, and your customers and think about work load, experience, costs, and how, in the end, you usually get what you pay for.
Following a successful international business career, John Riddell turned his attention to small business/entrepreneurial pursuits that included corporate turn-arounds, start-ups, teaching, authoring business and sports columns and serving as VP for the Chattanooga Chamber of Commerce directing its Center for Entrepreneurial Growth.
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