Cost Cutting Opportunities in Intangible Assets
In our previous post, we’d examined ways to overcome three different roadblocks that impede your company’s efforts to cut costs using IT. In this article, we’re going to take a closer look at the often-overlooked intangible assets of the business, and how to unlock their hidden value while cutting costs.
Reduce operating costs by cutting…clichés?
You sure don’t hear that everyday. But here are some expressions that you do:
- “Our people are our greatest asset.”
- “Our most valuable assets go down the elevator every night.”
Now here’s a surprise: If you simply add a few words to these threadbare adages, you’ll uncover an important insight and unlock a massive cost-cutting opportunity:
- “Our people and how they work are our greatest asset.”
- “Our employees take the knowledge of how they work with them down the elevator every night—or when they leave the company.”
Today, the intangible assets of knowledge workers’ work methods represent the majority of business value. (That’s the opposite of the way things used to be, when tangible assets such as factories and equipment were king. You can read more about that shift in another post from The Lab.)
Sadly, there is a ton of waste when it comes to addressing (or more accurately, overlooking) how knowledge workers perform their job activities. According to real-world data assembled by The Lab Consulting, up to 40 percent of knowledge work activity could be avoided or eliminated.
That’s a cost reduction opportunity too big to ignore. Consider that again: Up to 40 percent of knowledge work activity can be eliminated.
Cost reduction starts by reducing waste
The solution to this problem can be expressed in one word: industrialization. Ironically, it’s a concept that was developed by knowledge workers! It’s how factories were revolutionized via standardized work activities.
Today’s executives don’t “industrialize the office” because they think that knowledge work is unique—it can’t be industrialized. But that’s not true. Both factory work and knowledge work have repeatable patterns. And these patterns can be more effectively documented and organized. They can be made radically more efficient.
Unfortunately, knowledge workers and their managers don’t think of what they’re doing as “waste.” They think they’re helping things, rather than keeping bad operating processes chugging along. At The Lab, we refer to this activity as “virtuous waste.”
Consider some statistics. The Fortune 500 employs 9 million knowledge workers. And they’re spending at least one third of their time performing virtuous waste activity. That costs the Fortune 500 some $180 billion annually, or roughly 20 percent of earnings in 2015. It is snatched from the bottom line and sent straight down millions of tiny black holes of virtuous waste activities.
Cost reduction techniques in the real world
There was once a global insurer that routinely processed applications for new business. Yet more than 40 percent of the inbound applications contained errors and omissions.
Imagine what would happen if a manufacturing plant discovered that 40 percent of its raw material was defective. The plant would grind to a halt. But the problems would be investigated. The sources of the errors would be rooted out. The raw material supply would be fixed, and the plant would roll on.
That’s not what happened at this insurer. Error rates weren’t even recorded. The individual activities of correcting these errors was considered business as usual by the knowledge workers. It’s a perfect example of “virtuous waste”: the knowledge workers felt they were fixing things (they were), and thus adding value (they were squandering it). They believed they were making the sales team more effective. They thought they were serving customers. They never questioned the status quo.
Everything changed after the company applied the basics of industrialization to its application-processing operation. “Assembly lines” were created to provide a smooth, straight work path. Each employee was given new, detailed instructions. Practices were standardized. (In the past, the amount of time required to perform identical activities often varied by a factor of seven among different employees.) A daily dashboard was developed. It tracked:
- Error rates
- Average work time for individual tasks
The results were amazing:
- Throughput tripled.
- Through turnover, 25 percent of the job positions were eliminated.
- Interactions among sales staff, customers, and the home office were streamlined.
- Three-quarters of inbound errors were eliminated at the source.
Cost cutting must address root causes
Let’s compare the office and the factory once again. And let’s apply it to the subject of knowledge, or know-how.
In the typical office today, valuable, hard won business know-how resides within each worker. They keep it in their memories. It’s subject to their own interpretations. And this know-how leaves, with them, when they go down the elevator—or out the door to another job.
In most knowledge-work organizations, know-how isn’t stored. That means it can’t be standardized. It can’t be easily transferred to other workers. It can’t be used to help design operations or improve performance.
Compare that to an industrialized plant. There, decades of accumulated knowledge is stored and available. It’s in documents. It’s in research findings. It’s in test results. It’s built into workflows, tools, and plant layout. Plant workers follow what’s already known, and build upon it. Furthermore, plant employees can change positions from shift to shift, or even plant to plant, yet still deliver strong and consistent output.
How, then, do you address these issues? How do you “industrialize” the knowledge-work office to cut costs? We’ll talk about some of the biggest obstacles, and how to overcome them, in our next article (coming soon!).
Are you searching for cost cutting strategies among your knowledge workers? Learn more about how The Lab Consulting helps companies to eliminate “virtuous waste” via our unique self-funding model and money-back guarantee.
Email us at email@example.com to learn more today.