The New Golden Age of Cost Cutting Strategies
Our last blog post pointed out how the objectives of the original U.S. Tax Code in 1913 reveal ways to standardize white-collar, or knowledge, work today. In this article, we’ll challenge some longstanding assumptions about cost reduction. In the process, we’ll uncover one of the most valuable business opportunities of our time.
Value migration and sustainable cost cutting
Here’s one of the biggest assumptions that hobbles cost-reduction initiatives today: the Darwinian notion that businesses naturally operate rationally and productively. The rules are clear and simple, right?
Most assume that waste is relentlessly reduced and eliminated. The latest technology automates operations. Competitors and shareholders root out under-productive businesses and executives. The market is, in a word economists favor, “efficient.” Nothing goes unnoticed.
It all sounds reasonable, almost unquestionable. But examine the seismic shift that has upended these assumptions.
For generations, this dog-eat-dog competitive scenario accurately reflected reality. But reality changed in the 40 years between 1975 and 2015. Drastically. Most business value shifted away from familiar tangible assets: property, plants and equipment. It migrated. It moved from the plant floor into white-collar organizations, such as finance, engineering, sales and customer service. Today, these intangible assets account for 85 percent of the typical S&P company’s market value.
Yet this asset-value migration went largely unnoticed. That’s hardly surprising in hindsight. Intangible assets are a relatively new development in business. Knowledge workers have always existed. But they have never been so numerous—or so valuable.
A golden age for cost cutting initiatives
As the asset terrain shifted, conventional wisdom failed to adapt. This created an unprecedented “golden age” to cut costs by boosting asset productivity. No technology is needed. Capturing this value requires an updated perception of assets, waste and worker productivity.
To appreciate the new, consider the old. Historically, knowledge workers have focused on improving the productivity of tangible assets, such as factories. They did so by mandating standards. And they succeeded wildly. Over the past century, the productivity of manufacturing workers increased fiftyfold. This delivered history’s greatest increase in economic wealth.
Viewed this way, it’s easy to see the next big thing. It’s time to apply the lessons from the manufacturing worker to the knowledge worker. It’s time for knowledge workers to turn their skills inward, mandate standards and turbocharge their own productivity. Their work activities are now the most valuable assets in the business.
The benefit of this approach to strategic cost reduction is staggering. As we noted in our last article, knowledge workers devote a third of their day to easily avoidable work, such as error correction, rework and over-service. They squander 20 percent of the company’s earnings in the process.
Cost cutting measures that were ahead of their time
In 1920 perceptive managers proposed that knowledge work could be revolutionized without new technology. They envisioned “knowledge-work factories.” These would capitalize on the then-new ideas that enabled manufacturing mass production: standardization, simplification and division of labor.
They sought to streamline office work in such unlikely functions as marketing and advertising. They looked to standardize and simplify business processes for knowledge workers. They aimed to transform free-form processes into well-documented virtual assembly lines. They foresaw breakthrough gains in office work productivity and effectiveness.
You probably can guess how this story ends. Their pleas fell on deaf ears. But back then, it didn’t matter very much. After all, knowledge workers were an insignificant share of total employees—and business value. A hundred years ago, tangible assets were king. Increasing the productivity of property, plants and equipment was the top improvement imperative.
Back then, the idea of “knowledge-work factories” was too far ahead of its time. Today, it’s too far behind.
Cost reduction strategies for today’s reality
A lot has changed since 1920. Knowledge-work jobs have grown six times faster than total employment. Today, daily knowledge-work activities account for 85 percent of an average business’ market value. That’s more than four times the value of its tangible assets.
Yesterday’s perception must catch up to today’s reality. Knowledge workers are the best-educated and highest-paid human resources. They’re also the least standardized. But they make up half of the workforce. There’s never been a better time to institute factory-inspired structures for their operations. That might seem impossible. But in our very next article, we’ll share a story of a global company that did it.
Full disclosure: That story involves experience drawn directly from the case files of The Lab Consulting. Learn more about how we enable non-technology improvements for knowledge workers every day.
Email us at email@example.com to learn more today.