The Costly Cost Obsession

Alan CameronThe obsession with cost control rather than value delivered, in both government and companies, is driving me mad – because it’s so 20th century and backward-looking. It’s time to put the customer or citizen first.

Cost-Cutting Now Won't Balance the Books

Recently I heard on the radio that suicides amongst UK young offenders remain at unacceptable levels, and we understand too that recidivism is high amongst offenders in this age group. The Prison Service, like so many others, is being asked to make cuts so that the government can balance its budget, but that means that prisoners aren’t adequately supervised, nor is their criminal behaviour addressed.

The lack of systems thinking is, I don’t hesitate to say, criminal. The result of cost-cutting leads to no change in recidivism and the long-term effect is an increase in our already high prison population, and an increase in costs. In turn, this spreads supervision more thinly and suicide rates don’t fall.

At a small and large society level, unnecessary deaths are tragic failures of management, and failing to turn young offenders into useful citizens not only increases the costs of continuing to incarcerate them, it loses the economic value of having these people usefully employed.

The value of the positive is ignored in the downward spiral of cost cutting that actually leads to an increase in costs in the medium- to long-term while, negatively affecting productive income generation. There is obviously a balance to be drawn – crime will always be there – but, like a successful fraud investigation system, success can be measured in a reduction in convictions as compliance improves and longer-term savings are generated.

A value-driven spiral needs to be primed, but the result is positive. As recidivism is reduced, staff are freed up to provide better supervision of and guidance to those with potential suicide risks, repeat offenders behaviour is changed and they start to add to society. Costs go down and tax generated from employment goes up. Instead we “cut” costs and build more prisons.

Short-Termism Damages Share Value

Let’s turn to industry. When profits don’t meet targets, the dead hand of hierarchical management and finance tends to decree, “No training,” or “No travel,” or “No process improvements.” You choose, and then let’s look for “Efficiency Savings.”

Examples abound. One company I know of provides support for purchasing for customers. 60% of these orders are single line items, and so the support is being removed from everyone. However, a small piece of analysis shows that the largest clients with the biggest global spread make up much of the other 40%. Some of their orders may be 100 line items, but the support has been removed so the end operatives have to take longer to complete orders for the highest value clients. So costs have been cut to help now, but some global clients simply won’t renew their contracts if deliveries of products are delayed.

The company looks only at costs and not at the value of the complex clients. Great for this quarter, but not so good in a few years. Revenue and profit will fall, but by then all the executives will have changed, and the next lot will start another round of frantic cost-cutting.

Similarly, a potential client, which is supposed to be Agile in all it does, has had to postpone a value-add process improvement in order that costs can be controlled. The hierarchical management is driven by 20th century share value behaviours at the expense of stable, predictable projects, delighted clients and future growth.

Contrast that with another client who can see that spending a few thousand pounds on a robust estimating service can assist with the control of projects worth millions. They see the value of what’s traditionally seen as an overhead, i.e. discretionary spending.

Shifting the Mindset

As Steve Denning pointed out in his keynote speech to the Agile Business Conference in London, cost-cutting is an inward looking view of what matters most to organisations, and as such, the only people ever satisfied are the inner circle who take the short-term gains it delivers. Executives paid in share options and politicians, wanting to make themselves look good, cling to the view that the customer/citizen doesn’t matter.

Contrast that with a customer-centric view where delighting the client matters most, where the value of actions is thought through and implemented. Self -organising teams manage their training to ensure that skills are optimised, and process improvements are continuous and focused on delivery for the client. Finance takes a client-centric view with a greater appreciation of how development teams deliver value and they support those activities.

In government, local control is real and targets are based on outcomes and not cost alone. Teams are multi-disciplinary and the silo boundaries between departments are porous. Vulnerable adults in prison are assessed to see if that is an appropriate place for them to be. Prison is not seen as primarily a place of punishment, but rather one where success comes from reducing re-offending and making released prisoners valuable to society. Teams address basic issues such as illiteracy, and social interactions to break cycles of behaviour. The cost is balanced against the value and not the need to cut for the sake of someone’s ego.

We firmly believe that the most successful software development comes from Agile teams focussed on adding value to clients. It is demonstrably true there and also in government.

It’s time to leave the 20th century and to put the customer/ citizen in the middle of all our thinking and to only do something if it adds value to those people. If you can’t answer the “What’s the value of this?” question, then don’t do it.

Written by Alan Cameron at 05:00

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"It's frustrating that there are so many failed software projects when I know from personal experience that it's possible to do so much better - and we can help." 
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