McKinsey has published an article on a better way to cut costs. This is an area I’ve been helping companies and non-profit organizations with for well over 2 years now and it continues to surprise me how many organizations are willing to use the knife without much thought behind where to cut and why. This article picks up on that theme.
According to a recent McKinsey Quarterly survey, 79 percent of all companies have cut costs in response to the global economic crisis—but only 53 percent of executives think that doing so has helped their companies weather it. Yet organizations continue to cut. Cost reductions often go wrong, we believe, and our experience suggests that they can be done in a better way.
In an example of how badly things can go wrong, McKinsey offers a story.
An international energy company that needed to save money fast started by simply defining the amount of savings it needed and then required each department to cut costs by a similar amount, primarily through head count reductions, which varied from 17 to 22 percent. The reality, however, was that the company needed to invest more in certain technological areas that were changing quickly, as well as in operations, where performance was far below industry benchmarks. What’s more, the HR and IT departments substantially duplicated certain activities because different layers in the organization were doing similar things. Much deeper cuts could therefore be made in these functions, with little strategic risk. But the company cut costs across the board, and just six months later, technology and operations were lobbying hard to bring in new staff to take on an “uncontrollable workload,” while substantial duplication remained in HR and IT.
McKinsey has published a paper on how to survive a merger and combine sales forces. By involving employees and customers in the integration process, it is possible to retain critical staff, generate momentum with key accounts, and increase customer satisfaction. If you are in the process of approaching an integration, can you risk loosing these key elements by doing a botched job?
We have identified four steps essential to facilitating the successful integration of sales operations. At the top of the list: understanding the importance of sharing information about the integration process with customers and the sales force. Many companies take the opposite approach and are surprised when postmerger revenue fails to meet expectations. In addition, the combined sales team must quickly win prominent accounts to build momentum and generate internal confidence in the merger. The executives running the integration effort must also recognize that, as important as sales reps are, essential support people must be identified and retained. Finally, senior managers should review the merged portfolio of customers and make tough calls about those that are worth new investments and those that might be shed or given less attention.
The other paper this week from McKinsey takes a closer look at how to use the economic crisis as an opportunity to create better boards. Essentially, economic condition justified self-assessment of a board can make huge gains towards improving an organization’s performance. We are working with a few boards at the moment who need a cleansing like this and the use of a mirror is the first step to understanding what’s currently going wrong and working well.
Today, boards are probably underreacting to the stresses—and opportunities—of economic turmoil. Directors themselves seem to agree: a McKinsey survey conducted in conjunction with an article published earlier this year1 showed that only half of the 186 directors responding thought their boards had met the demands of the crisis. Just 30 percent reported that a wider range of information was now presented at board meetings or that conversations were more frank than usual (exhibit). Even among directors who believed that their boards had responded effectively, overall, to the crisis, only 19 percent felt that those boards had really addressed the problems of talent management—meaning not only the composition of the board but also its role in hiring and remunerating senior executives.
McKinsey’s just put out another high quality article on helping CEOs to help their top leaders learn the new rules of the new economy. This is an important read for CEOs because it addresses executive behavior which has a trickle down effect through the rest of the organization.
The article hits the following points:
- Overcoming fear: breaking the cycle helps execs move towards higher productivity,
- Overcoming denial: leads to leading serious reassessments of current strategies,
- Overcoming learning blocks: leads to a reexamination of false ‘truths’ upon which the business and their careers were built.
Todd Guild, a man I highly respect, has just published a McKinsey Quarterly marketing article on reaching the Asian consumer. His paper argues the most successful global enterprises are rapidly refocusing their efforts to target the up and coming Asian high-grwoth markets.
The paper argues for global consumer companies, a regional / local structure will be an enormous challenge but one that cannot be ignored. Asian market invovlement will soon become necessary for survival.
Todd, and McKinsey’s article, recommend a few steps:
- Go where the growth is
- Leverage innovation and talent through regional teams
- Think in terms of cities, not regions or countries
- Customize market reach locally, don’t just tweak existing product lines
- Learn to market and sell across a larger variety of channels
Recent research from McKinsey has found that more than 70% of offshore delivery centers have narrowed their global operations to India, China, and the Philippines. This lack of differentiation has introduced new risks including abrupt currency fluctuations, intense competition among the workforce, and regulatory limits.
The locations are chosen for the availability of highly skilled labor and low labor cost. While lower cost may result in the outset, the McKinsey research finds the overall risks to be higher than most understand them to be.
It seems offshore service providers largely have ignored the traditional investment rule of diversification. The McKinsey paper is arguing for an investment by BPO providers to make a portfolio approach. Countries such as Romania, Egypt, Russia, and Brazil are quickly on the rise of building a capacity comparable to China and the Philippines as a new choice.
A next-generation strategy for offshore operators should focus on the added benefits that come from multiple sourcing locations such as improved governance, process standardization, workflow transitions, and contingency planning. Combined with development of specialist skills to enhance innovation and IT project delivery, over the long term it is an investment in lower costs and improved performance.
A recent paper by McKinsey proposes a new way to measure innovation.
Assumptions the paper makes:
- most metrics fail to connect innovation to company performance,
- innovation can be tracked against competing firms,
- if a company is out-performing the market, it must be innovating,
- the impact of innovation can me measured over the long-term.
These assumptions roughly comprise their new innovation performance score (IPS) which shows the compound annual growth rate for a specified period (multiple years) that can be attributed to innovation. It measures excess company growth.
Mistakes the paper makes include:
- seeing investment into a particular technology as innovation,
- that culture and agility can be measured as part of the metrics,
- revenue growth can be compared to the overall market.
The lessons McKinsey reports includes:
- ‘strong’ innovators do consistently well,
- top innovators continued to perform well through economic downturns,
- product, process, and business model innovation in particular are necessary for superior innovation impact, there may be optimum levels for achieving innovation.
This is a bold attempt by McKinsey to get into the market of measuring and influencing investment in the future growth of companies. What it does well is begin the conversation around formalizing the idea of innovation as an investment to determine growth.
Necessity breeds the saying goes, so too for innovation in organizations looking to find new survival skills. Video conferencing reduces travel costs, the Web enables decentralization of resource, opportunities to collaborate blossom. It is through tough economic times, argued by McKinsey’s August publication of “Using technology to turbocharge innovation in a downturn.”
Recession has historically given way to an increase in technological advances for multiple reasons. One being that during economic downswings only major innovations become successful, the kind capable of shifting the paradigm of existing business models and establishing new growth areas to excel into the economic upswing.
Over a dinner last week I was talking with friends about how so many organizations make the mistake during a downswing to go into crisis management unaware that market positioning is underfoot. McKinsey researchers found that nearly 40 percent of leading US industrial companies tumbled from the top quartile of their sectors during the 2000-01 recession, as did a third of leading US banks.
The report states there are two areas of innovation currently taking place. First is the “Internet of People”, in short people are integrating with each other, the market, and workplace. The second is the “Internet of Things” in which micro devices on wireless networks become more interactive and intelligent capable of transforming business models.
The coming paradigm shift here is that the new logic of paying for value will determine the success of your business model.
The McKinsey August China report brings into focus the coming paradigm shift that will transform China from a servant to a master on the world stage.
The article argues a more consumer-centric economy allocates capital and resources more efficiently while simultaneously generating more jobs and expands growth equally and rapidly. This is a major transformation opportunity for China in addition to the market demands and influence of the empowered Chinese consumer.
Point 1: China needs to immediately raise rates of consumption
Point 2: Chinese consumption relative to GDP is lower than other countries
Point 3: Households account for the lowest end of total spending
When the US market collapsed millions of Chinese migrants in Chinese factories lost their jobs. The Chinese government responded with a $600 billion stimulus package and new lending opened up by state-owned banks. The Chinese government is now adamantly focused on stoking Chinese consumption to match its stimulus.
Provided China can mend the social safety net and encourage savings accounts currently stored between mattress covers to be invested back into the economy. Balance will be restored with the creation of more jobs and higher wages.
The opportunity for US companies is to uncover new ways to unleash the spending power of Chinese consumers.
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