Are you nickel and diming yourself to death?
12.12.2016
When reading the business press or talking to decision makers, you can get the impression that short-term profit maximization through cost cutting is a company´s primary goal.
Of course, it is necessary to continuously optimize one´s cost position in the face of hyper competition. However, short-term cost cutting can be fatal in the medium and long term. The example of Deutsche Bahn shows what can happen when a company runs its equipment until it wears out and when it doesn´t invest sufficiently in personnel and infrastructure: Service quality will dramatically decline and the company will have problems serving its customers at all!
Other companies have fallen into a similar trap: Dell Computers outsourced its corporate customer service to India to save costs and later brought it back to the US because of massive customer complaints. Lego outsourced its production to Hungary and the Tchech Republic and then moved it back to Denmark. Lego´s CEO Jorgen Vig Knudstorp commented this decision saying that hourly wages in Denmark were 4 times as high as in Hungary and in the Tchech Republic, but that Danish workers were also 4 times as productive as their counterparts in these countries! If you want to cut costs without putting your company at risk, don´t focus on the short–term gains only, but look at the medium and long-term domino effects as well. Deutsche Bahn has dramatically reduced its service quality through massive cost cutting. Bad service leads to low levels of customer satisfaction. Customer don´t come back and they actively spread their frustration among friends and acquaintances. This leads to mid and long-term financial losses, which have to be taken into account when calculating short-term savings resulting from lack of investment.
Why are mid and long-term losses often not considered? Presumably, because short-term cost savings can be calculated easily, while mid and long-term financial consequences can only be estimated hypothetically. However, reasonable assumptions are possible. What about the following: Let´s assume that Deutsche Bahn reduces the number of customer complaints by half – a plus of several thousand happy customers would result. They would recommend the company to their friends and a certain percentage of these would take the train instead of their private car.
These types of assumptions can be financially quantified using scenario analysis, and potential turnover and profit increases can be calculated.
If you want to earn money, you have to spend money. If you want to be fit for the future, invest your money in the right things, don´t save it in the wrong places!