“Save it in Six”
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16 August 2013 - 23:04, by , in Activity-Based Cost Management, No comments

“If I had six days to chop down a tree, I would spend five days sharpening my ax.”

President Lincoln’s advice is sound for any manager considering a cost cutting iniative. With the economy softening, it is prudent for managers to prepare a contingency cost reduction plan. Cutting cost, however, with a “dull ax” makes the job more difficult, time consuming and messier than it needs to be. The “dull ax” that I speak of is the common accounting system.

Traditional systems account for past periods instead of managing future cost. “Dull” reports that simply list expenditures by category (e.g. salaries, supplies, travel, depreciation) lead to lackluster actions. It doesn’t take a Harvard MBA to announce across-the-board budget cuts, 10% layoffs or spending freezes. These actions, albeit well intentioned, are doomed to failure because:

  • Layoffs ignore the root causes of faltering financial performance.
  • Layoffs cut muscle, not just fat.
  • Layoffs eliminate workers, not the work.
  • Layoffs leave in place the measurement systems that allowed the waste to enter.
  • Layoffs leave unprofitable products, services and customers in place.

Does your organization need hard facts to deal with a softening economy?
A unique little book by Ron Hoff titled “Say it in Six” holds a unique solution. In fact I’ve used Mr. Hoff’s five-step process to hold six-minute staff meetings!

Step 1: 30 seconds to present the burning issue

Step 2: 60 seconds to provide an overview of the situation

Step 3: 120 seconds to present a tangible solution

Step 4: 120 seconds to explain the payoff of the proposed solution

Step 5: 30 seconds for an interactive close

While Mr. Hoff’s book was written with the primary intent of teaching managers how to hold short, yet meaningful six-minute meetings, the author’s five-step process can also be used for “Save it in Six” cost savings.

“Save it in Six”
A six-week cost reduction process

Week 1Step 1: The Burning Issue

The burning issue is the linchpin for success. Present a calculated and convincing call to action. For example, “We have to cut annual spending by $500,000. Our sales and profits have slipped the past three months. We must define actions to turnaround our financial performance in three months.” The target, timeframe and consequences must be well defined.

Step 2: The Overview

Activity Based Management is a proven, practical method to identify waste and unprofitable products, services and customers. And while hundreds of ABM case studies are available for your management team to read and consider, the best case is an actual case. Perform a 90-minute activity accounting interview of one of your organization’s departments. Use this interview as a basis to present a 90-minute overview of ABM’s principles and how it relates to the Burning Issue. Step 2 should take no more than one day.

Step 3: The Tangible Example

Audiences at meetings are skeptical of free-floating ideas. For a successful six-week project, spend a few minutes letting participants actually see and hold a tangible example of the proposed idea.

For example, assume that you found 20% non-value added cost in Step 2. That 20% multiplied times your company’s $1,000,000 annual overhead budget means ABM will likely expose $200,000 of waste. If that projection matches the Burning Issue, ask management for approval to quickly proceed with a company-wide implementation of ABM.

Take no more than 90-minutes to “show me the money”. Be creative. Use props to demonstrate the tangible benefits of ABM. For example:

  • Create a large, colorful pie chart. The pie represents your organization’s annual labor and overhead budget. Based on the Step 2 test department’s findings, carve out the total non-value added waste you would expect to find in overhead if the principles of ABM were applied company-wide.
  • Use stacks of play money to make your point. Create one stack for value-added overhead cost, the other for non-value.
  • In a large, clear container pour 80 pieces of candy of the same color. This represents the 80% value-added overhead. Then pour in 20 pieces of another color, representing the 20% non-value found in Step 2. Rotate the container to demonstrate that the waste is scattered throughout the organization.

Weeks 2-5Step 4: The Payoff

The payoff is reduced cost. The time allotted for Step 4 is four weeks or less. The size of an organization will dictate the time and talent necessary to complete the tasks of:

(a) complete activity accounting spreadsheets for all cost centers;
(b) rank the activities and processes by cost and value; and,
(c) define action plans to achieve the cost elimination target.

One person can analyze the activity cost of 50 employees in 2 weeks. Even large organizations can be analyzed quickly with minimal outside help. For example, ICMS trained 80 managers of a company how to do their own departmental activity analysis. In two weeks, with minimal coaching, the managers simultaneously completed their tasks of defining activities, waste and cost improvement ideas.

Week 6Step 5: The Interactive Close

Five weeks have been spent “sharpening” the axe. If your current financial situation dictates immediate action, it’s time to chop. During the last week of the project, compile all the ABM findings. Focus on the 20% of activities that consume 80% of the cost. Present cost reduction ideas on the costly activities to senior management for approval. The list of actions should focus on reductions of waste, not valued by profitable customers

Give your audience a chance to interact. Maybe it’s a vote: “Would everyone who agrees that we should implement the action plans please raise their hand?” Or maybe ask everyone to review the compiled activity accounting findings and submit written recommendations by no later than 5pm the next day. Whatever the case, get your audience involved.

Abe Lincoln’s Gettysburg Address has been called the greatest short speech since the Sermon on the Mount. It took President Lincoln less than three minutes to read the 269 words of his handwritten script, yet it is one of the most effective speeches ever delivered. “Rapid reporting” of activities can result in “rapid rewards” for your organization this year. Take the next six minutes to ponder the possibilities. Be swift. Be succinct. Be successful.

ICMS offers products and services to help you Save it in Six:

  • Train your management team on the principles, uses and benefits of Activity Based Management –icms.net/training.htm.
  • Purchase the ICMS Activity Dictionary. This one-of-a-kind book provides the typical activities you will find in most departments. Use this book to accelerate Step 4.

Use ICMS onsite coaching to assist with each of the five steps. Learn more about the ICMS ABM Boot Camp, a three-day training and cost reduction workshop.

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Tom Pryor
TomPryor@ICMS.net
(817) 475-2945

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