Early in his career, J. Edwards Deming, father of Continuous Improvement, hypothesized that about 35% of any company is waste. Later, after direct experience with scores of businesses, Deming upped his estimate to 40%. Where is all this waste?
Most organizations initially look for waste in expense line items. Too many unnecessary paperclips, or first-class air tickets. They attack this sort of waste through “belt tightening,” or as one company called it, “stop stupid spending.”
After reaping the relatively small rewards of belt tightening, it is only natural to turn to the greatest expense: labor. Can we do the job with less people? “Downsizing” is an attempt to find out. Cutting labor through attrition and layoffs often results in dramatically reduced expenses without much, if any, reduction in output – at least in the short run. As systems snap back from downsizing and resettle, stresses become apparent.
Waste in expenses and labor don’t nearly account for 40% of a company’s revenue. So, where’s the rest?
Deming taught us how to look for inefficiencies in processes BEFORE we look for them in people. Using well-documented techniques, organizations can distinguish between fluctuations attributable to noise in the system and special causes that call for attention. Being able to discern between the two helps inform decisions about when to improve processes and when to leave them alone. Needless tampering can be very costly. On the other hand, ignoring special causes can be just as expensive.
Two even more fruitful places to look for waste are customer and employee churn. It’s common sense that the cost of acquiring new customers is far greater than the cost of maintaining them. Likewise, attracting and training new employees is more expensive than retaining the ones we have.
Multiplying the number of customers and employees lost each year by the average cost associated with each loss-and-replacement generates an annual total of waste in these areas. These totals can be truly scary.
Examining the cost of lost customers leads to challenging questions about marketing methods and sales compensation, about customer service and recovery, and about what constitutes a good customer and what to do with ones that fail this test. Costs can be reduced by taking actions to retain exisiting customers, earn more from existing customers, fire customers who take more than they contribute, and become more selective about taking on new customers.
Examining the cost of lost employees often leads to questions regarding the value of matching the right person with the right job. Effective recruiting, hiring, orientation, training, evaluation, and retention return substantial benefits.
And what of waste in corporate culture? The same employee may perform much differently under different leadership/management styles. Does the culture maximize output? In this area too, recent work is revealing valuable information about the value of managing culture.
That leaves knowledge management. Is information in employees’ heads being developed and captured for the benefit of the organization? Is captured knowledge well organized and easily accessible in a timely manner?
We may wonder if Mr. Demming wasn’t still a bit low in his estimate.
