Monthly Archives: July 2012

Cost saving vs. efficiency

Consider the following simplified scenario. You manage a team.  The team consists of four senior bods (let’s call them B‘s) and one junior admin support bod (let’s call them A).  The team works efficiently with the B‘s fully utilised doing work that only a B can do and A taking messages, organising meetings, taking minutes and the like. The B‘s cost you £50k per year a piece; A costs you £25k. So your total cost is (please excuse the maths-speak): 4B + A = 4(50k)+25k = £225k.  And because, in this idealised scenario, the team is perfectly efficient let’s accept that it provides the same 4B + A = 4(50k)+25k = £225k of value.

Now imagine that austerity is biting and you are being asked to find at least 10% in cost savings. (If you work in the public sector this will, by now, be ringing bells.) You decide there is nothing for it, A will have to go and your B‘s will have to “absorb” that admin work: take there own messages, organise their own meetings, write their own minutes. £25k saving right? Result. Or is it?

Let’s take a closer look at your new world. Yes, undoubtably your costs have reduced by £25k, but what has happened to the value?

You look closer and you notice that each of your four B‘s is now spending the equivalent of a day a week doing the stuff A used to do. So each of your B‘s now spends 20% of their time doing £25k value stuff… but your still paying the £50k cost for that time. Financially, your team is now considerably less efficient. How much so? Well, your costs are down to 4B = 4(50k) = £200k.  But your team’s value has reduced to 4(80%(50k)+20%(25k)) = £180k.

You’ve cut £25k off your costs, but in doing so, you lost nearly double that – £45k – in value.

Moral of the story? When you’re cutting costs, always have an eye to the value you may be destroying.