Abandon Cost Reduction and Focus Instead on Growth
Call the ambulances – the CFO probably just passed out when he or she read this title.
But, it is a truth. Companies need to refocus and significantly reduce their cost reduction frenzy. Was it needed? Yes. Is it still needed? It will always be a concern, but it should not be a major focus for some time into the future. Why? The world has changed and there are dire predictions for large companies.
As disturbing as this prediction may be, it is understandable given the fact that companies are no longer the bastions of advanced technology. People all over the world now have immediate access to technology that is beginning to drive the way they interact with companies they buy from. The world has changed and it will continue to change as ever more advanced technology and apps are placed in the hands of people in what is becoming a global techno-society. This is clear to anyone who will stop and look with an open mind.
The simple fact is that while companies have been busy cutting cost, the business world has changed. This change is driven by technology and those companies that have made shareholders rich by providing inexpensive advanced technology driven capabilities to everyday people. That has resulted in a technology shift and an awakening of the average person to the wonders that the young people now take for granted. And this is continuing as new mobile computing capabilities are released several times a year and people rush out to be the first to have it at their fingertips.
The fundamental question for companies today is “What is most important for the company? Is it to keep up with technology and the way customers want to interact with them or is it to continue on the quest to be optimally efficient?” While most executives will say it needs to be a mix, the fact is that most are still firmly focused on reducing cost to improve the bottom line. That is good if the long-term plan is for the company to die slowly. It seems that growth in real business (sales) should be the first concern and the focus that must be foremost in everyone’s mind. That means backing it up with a path to modernization with a long term budget and elevating this transformation to a board level concern.
The issue here is not whether cost reduction is bad or should be terminated. Eliminating it as a concern is simply irresponsible. But cost reduction has had a negative impact on many IT shops and has caused a situation for many that now requires a rethinking of the way IT will support the company and the way it will allow rapid ongoing change. Many companies have simply not kept up with technology and are scrambling, in ways that I believe are destructive, to provide “modern” capabilities. Cobbling in new tools and hardware to a technical environment that is already overly complex is simply adding complexity and creating other barriers to flexibility and rapid change.
The fact is that a great many companies are now hindered by their technology and their ability to change is constrained by their legacy IT infrastructures and applications. The situation in many of these companies is a technology environment that has evolved by cobbling newer tech on top of old tech and connecting it through interfaces. Over 50 to 70 years of this approach has created unbelievable complexity. The result is inflexibility and an inability to rapidly respond to opportunity or deliver inexpensive changes. These constraints are setting a foundation that will kill companies.
I firmly believe that it is time to put the focus on cost reduction behind us and focus on creating flexibility in the business operation and in management’s thinking – and in the ability for IT the infrastructure and application environment to deliver fast, low cost, low risk change, and support aggressive competition. Market share, not cost reduction, needs to become the new mantra if companies want to succeed.
I was challenged on this by a CFO recently and my response was that the best strategy and the most efficient company possible was worthless if it could not react to opportunity and changing market conditions to fight off competition and even grow market share. Efficiency is not a big deal if you are losing market share. The inevitable in that scenario is you can be optimally efficient and still go out of business. That is exactly what is being predicted in the quote above. That makes cost reduction a secondary concern and focuses all resources on the most important activity in any company – growing the business.
Clearly, if you are not growing as a business you are falling behind. That is a path to disaster. Today the only thing that is letting a company avoid this outcome is flexibility and a willingness to invest in those things that will win market share – not just those things that will cut cost.
This should not, however, be construed as meaning that cost control is not needed. It is. But until companies modernize their business operations and their IT capabilities, it should be a secondary concern that can be addressed after the company creates a flexible aggressive operation that is focused on winning the buyers to their products.
What is a focus on growth all about – companies do it every day!
In his current book “Digital Transformation – A Brief Guide for Game Changers”, Jim Sinur, formerly a VP at Gartner, states that companies face a choice to “Innovate or Die Slowly”.
But in defense of the CIOs, they do support new product launches and moves by marketing to new geographies and new buyer groups. The issue is that it takes a long time, is constrained by old technology, and is often severely limited in its range of capabilities.
There is an old saying in business – “grow or die!”. A little dramatic, but when you think about it, a reality of business life. If you are not growing, you are at best stagnating and just waiting for someone more aggressive to take your customers. To counter this in a really poor business climate, many companies have focused on improving their bottom line by increasing their margins – through cost reduction. With this focus, there is no real growth, but the short-term shareholders are happy.
While arguably necessary over the past 10 years, this has left many companies behind in the business evolution game. But creative business and IT managers have done their best given their financial constraints. The problem is that a “get by” approach has not allowed the type of change that was really needed. This has brought us to the point where business and IT transformation is needed. Bandaids really won’t do the trick much longer. So, how can this legacy, constrained, IT environment deliver the level of support that is needed? The short answer is that it must change and CIO/CTOs will need to learn the new technology and be creative in how they modernize the application portfolio and redesign the infrastructure to streamline operations and expand the level, type, quality, and flexibility of a new “modern”, IT environment.
There are two reasons that I say this. The first is that the past approach of cobbling in new computer hardware and tools has exacerbated an already overly complex technology environment that few are happy with. Applications are also generally written a variety of all but extinct languages and the ability to modify application capabilities is becoming a problem as the “old timers” who understand these computer languages retire. Change is difficult and unpredictable in this environment and data quality is often suspect. The second reason is that the mobility technology that has become ubiquitous, far surpasses the capabilities that exist in most companies. And it is evolving rapidly to deliver even more flexible capability. In fact, in the opinion of many, we haven’t seen anything yet. This technology explosion in the ranks of customers has shifted the way that companies must interact with the people who buy their products – and they really can’t. Few companies are flexible enough to change quickly and even fewer are able to use their ability to change as an advantage.
I believe this to be a critical problem – and it seems that many analysts agree.
But to focus on growth, we need to change our traditional business mindset and our commitment to technology. This is both a problem and an opportunity. It comes at a time when many business operations and their IT support are at least somewhat broken – in many cases this is a great understatement. Companies need to do something and they need to do it soon. This is especially true in old large companies that are so heavily invested in the past that they are technology-bound or disadvantaged. This occurs when most business managers are unhappy with their application support and IT is viewed as a constraint instead of an enabler.
This situation is really a very slippery downward sloping ramp and if you are on it, you need to get off it before too much momentum is gained and you will need to ride it to the inevitable crash at the bottom.
What that means!
Jumping off this ramp is where business and IT Digital Transformation comes in. But that requires a radical rethinking of both the business operation and IT. It also requires a refocusing to building an environment that enables company expansion into new markets and new product lives.
This transformation level change will require a vision to focus on growth and the commitment to a long term transformation strategy. That may need to be based on a broad level commitment if it is to be properly funded and staffed – and if it is to last beyond turnover in the executive ranks. This is the hard part. It will challenge long held concepts and it will impact quarterly earnings for a period of time until the growth benefits start to be realized.
The fact is that companies are at a point in the evolution of their technology operations where they need to totally rethink how they will use modern and emerging technology to gain a competitive advantage. We now have tools that were only a dream in Hollywood movies. Cobbling more technology into the old IT infrastructures is possible, but it will also greatly increase the complexity that IT professionals must deal with and continues to eat the time available to really help the business. While this approach is possible, it has worked for around 50 years, the question is – “is this the best approach?”. Although it will eventually add capability, it really doesn’t improve anything and it adds a lot of complexity.
I believe that this is the time to leverage new technology and rethink the IT infrastructure and how the company will do business in the future. We have unbelievable tools that deliver unheard of capability but many of our companies are saddled with IT operations that have been cobbled together and are overly complex – rendering flexible business operations and the ability to adjust to the customer quickly almost impossible, and very expensive. But we can change that and prepare our companies to compete in the global marketplace. We have the ability to modernize our IT infrastructures with fantastic equipment and with tools that will deliver rapid change and operational flexibility. We can even wrap the legacy applications in a shell of modern technology and give it extended life while reducing complexity (the real enemy). The fact is that many in the business world are demanding an ability to change quickly to compete and to bring new products to market. We have the tools and ability to create operational flexibility and gain market share. Now is the time to do it.
As always thank you for reading my column. I welcome all comments – even those that may disagree. I can be reached at email@example.com or 630-290-4858. Also, I recommend that you check out a new book by Mathias Kirchmer, titled “High Performance Through Business Process Management – Strategy Execution in a Digital World (Third Edition), Springer International Publishing, 2017.