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From “more for less” to sustainable profitability

06 Nov 2019

The operational efficiency that we talk about so much these days should not be focused only on the surface, which would be, limited to the reduction of costs. Achieving operational efficiency implies minimising costs, but also implementing a responsible culture regarding issues such as innovation, commitment or training that contributes to the pursuit of new models, structures and processes oriented towards continuous improvement.

The strategy that many organisations are committed to in this context of permanent change is generally to set up operational structures that are committed to the so-called “sustainable profitability”, which is something like the search for profitable growth.

Such sustainable development over time involves taking action and generating a positive impact on revenue, both through transformation programmes or initiatives, especially in the customer’s environment, and on operating costs. In this sense, it is essential to point out that, in all organisations, both in the business areas and in the support or “back office” environments, it becomes strategic to maintain cost containment on the waterline to make operational efficiency worthwhile.

This vision may have a lot to do with the now-classic “doing more for less”, but it gives a twist to putting the customer in the spotlight, not so much to control costs – but to increase revenues. Building customer loyalty is always much more “profitable”, not only in economic terms but also in terms of brand reputation, than permanently making new customers, having to “soften” the impact of the tsunami that leads to the loss of a customer or the flood of criticism from an unhappy customer.

Operational efficiency is a metric. It is a way of measuring the use of resources such as time, people employed in the production, money, marketing and distribution. Or the provision of a service, and comparing it with the income it generates. The higher the revenue compared to expenditure, the more effective it is; and, the more the resources used to increase income and minimise costs are adjusted, the better.

Seeking the balance

Meeting the established objectives is necessary, but not enough. Now the goals must be satisfied with the additional challenge of doing so with the strictly essential resources, no more and no less. Quality and service must be maximised, while optimising the operations involved in all the processes that participate in the value chain to provide the best products/services, at the best possible price. This operational efficiency eliminates unnecessary expenses because it eliminates superfluous processes; it automates complex processes, and it provides faster access to the information within the organisation.

The new digital ecosystem implies not only changes from the customer’s point of view – having new requirements and higher levels of expectations – but also from the competitive point of view – with new players coming from different backgrounds – and from the technological point of view – which is now capable of transforming the nature of practically any business.

To this end, it is essential to point out that, generally speaking, companies are transforming into a digital model in which technology plays a crucial role. Consequently, investing in technology, marketing, or automation is strategic at a time when margins are becoming tighter and tighter. The question is how to tackle the extra pressure these factors put on operating budgets and curb the appetite for cost-cutting strategies – generally speaking.

The aim is to provide the necessary expenditure – INVESTMENTS – in technology, in marketing or in acquiring new skills and competencies to remain competitive and, at the same time, to focus on cost containment.

It may be that the answer to this paradox will have to be sought in the implementation of a balanced approach that allows companies not only to improve operational efficiency but also to enhance their abilities to respond to the needs of the market – both present and future – through innovation and talent, the two key elements for driving the success of operations and the profitability of the business, also in the long term.

Talent and wage bill

Until a few years ago, the quintessential measure to improve the operational efficiency of organisations was to reduce their wage bill. In other words, the contractual relationship with employees was terminated by means of different formulas, whether they were incentive layoffs or not, redundancy procedures, pre-retirement, etc.

In some cases, such drastic and severe measures certainly meant significant cost savings. But, at the same time, in many cases, they implied a systemic downturn in income since, for example, the reduction in the sales force did not allow positive figures in terms of attracting new clients. Also, the reduction in qualified professionals for the provision of after-sales service caused levels of customer satisfaction to fall and, therefore, references were lost much more frequently.

This is a mistake that is often made under the pressure of the need to reduce costs and the – misunderstood – need to check the “positive” effects of cutting in the short term. This short-sighted view of efficiency is harmful and always implies a quantitative and qualitative worsening of the business, which is difficult to reverse.

So, what is the key to keeping companies efficient while keeping costs down? This is the million-dollar question, particularly in a macroeconomic context such as the present one, in which there are signs of a potential slowdown. It is clear that there is no magic formula that serves all organisations equally, but, in general terms, I believe that programmes and strategies for continuous improvement in terms of operational efficiency should be valued.

Technology and two-way cost-effectiveness

The new operational efficiency should focus, on the one hand, on people, through initiatives to improve their knowledge and develop new skills to streamline every one of the operations, tasks and processes in which they are involved. Furthermore, the company should implement loyalty and motivation programmes that will have an impact on their productivity ratios and, if possible, on their profitability. An employee must be profitable for the business to the same extent that the company must be worthwhile for the employee. When I associate profitability in this case, I also refer to profitability from an intangible point of view, that is, in terms of work-life balance, flexibility, CSR, training, etc.

The new operational efficiency must also be supported by technology to re-think processes – including systems – through re-engineering, optimisation, automation and robotics.  In this sense, the BPM – Business Process Management – “low code” platforms and the robotic process automation tools – RPA – become the great allies of the moment. The former because, in addition to all that they provide from a functional point of view, on an operational level, they print the speed demanded by the current market and require a minimum investment in configuration, training and deployment. In other words, more for less.

Secondly, because they automate back-office tasks and processes, making day-to-day operations more efficient and effective by carrying out repetitive and low-value tasks. With this, what is achieved is redirecting workers towards positions of more significant impact, having more complex and specialised functions that increase their productivity. To put it simply, RPA enables the implementation of an unattended mode of back-office activities and simplifies the tasks of the front-office. In fact, according to the recently published ISG report, “RPA in Europe”, 92% of companies in Europe will adopt RPA measures by 2020 to make their processes and structures more efficient.

With RPA, it is possible to emulate and integrate human intervention in digital systems to execute a process. In this sense, “robots” perform interpretations, activate responses and communicate with other systems to operate in a wide range of repetitive tasks. And they do this considerably better than humans, with no mistakes, no breaks, no demands and no wages. That said, I understand that it is tempting to think that “robots” are replacing humans. However, the truth is that their task is to facilitate the reordering of the workforce to impact on operational efficiency. And not so much to eliminate the wage bill. We shall have to wait and see the interpretation that advanced companies make.

I’m looking forward to it. What about you?

Ignacio De Sopeña

Global Business Consulting Director at VASS

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