To Avoid Waste, First Ask, Is It a Cost or an Investment?

Almost daily every business owner or top executive hears someone explain a terrific way to spend the company's money. A question people whose hands are on the purse strings must always be prepared to ask is this: Is it a cost or an investment?

The key to effective cost control is to determine whether something is a cost-which may be nice to have-or an investment-critical to success and coupled with an expected dollar return. In a turnaround situation, or in a very competitive market, it is crucial that costs be cut to the bone. No "nice to have" spending can be allowed. ROI (Return on Investment) must rule the day or the competitors will pass you by in efficiency and have better costs with which to attack you with on price.

For example, entertaining ourselves. Does that bring a return? Of course not. How about limousines and private jets? Or flying first class? Or, for example, you might ask why the company uses a bunch of different marketing companies? How does that help us sell more product? Just because a marketing executive likes a particular ad firm does not justify having to duplicate efforts and pay twice for them. By consolidating, you might be able to get better deals. So lets consolidate.

William T. Monahan gives an example in his book Billion Dollar Turnaround: The 3M Spinoff that Became Imation about a "nice to have." When he took over the Austin, Texas group for 3M there was corporate jet service from St. Paul, Minnesota, to Austin and back three times a week. It was a convenient way to go to meetings at 3M headquarters in St. Paul, and it saved time for the twelve people on the plane each day. But it was a luxury he felt the group could not afford if they were to turn around profitability. It also in effect encouraged people to take unnecessary trips to the headquarters. The challenges the group faced were not in St. Paul. They were at the Texas location, around the country, and around the world.

One of the most unpopular decisions Monahan says he ever made but also one of the easiest was to scuttle that shuttle. The very next quarter trips to St. Paul went down by forty percent. So not only were costs reduced, productivity was increased. Monahan became known as "the Grinch who stole the shuttle," but it was the right thing to do.

While we are on the subject, let's talk about corporate jets. They are an executive perk that insulates executives from the real world of commerce. It seems to me executives need to travel with their sales people, to see the market first hand, and stay in touch with reality. Private aircraft and limos set executives apart and reduce effectiveness and hands-on time. They remove executives from their team and place them far from the customer, their field people, and an understanding of their needs.

Your constituencies don't always have to agree with the rationale or like the actions you take. That's goes with the territory of being the boss. Monahan writes about an announced a change in medical coverage, for example. His HR people took the medical programs of the ten top companies in Minnesota including 3M, Medtronic, and others and pegged his company's program right in the middle at number five. The problem was, 3M had a very positive program that was far ahead of number two. The gap between where Monahan's company had been as part of 3M and the new program as Imation was significant. And that's what people looked at and thought about. They didn't care if what we were providing was better than Medtronic, Honeywell, or whomever.

If people are strongly against what is being done, they leave if they are an employee, or sell the stock if they are an investor, but at least they have the information they need to make this decision. Experience shows, however, if you really provide the "why," people tended to give the strategy or direction a chance and usually ended up buying in. But if you dictate and don't explain, you end up in a painful situation, often with a loss of credibility and with many uncertain and indecisive people whose productivity is going to plummet.

You need to ask, "Is it an expense or is it an investment?" And you also need to be open and honest with information and rationale. Then let the chips fall where they may. This the simplest and most effective way to get the organization moving in a positive direction.

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