How can you control costs and still fail to manage the business ?

Copyright 2006 Alastair Dryburgh

In February 2006 Sir Nigel Crisp, Chief Executive of the British National Health Service, retired at the age of 54. It was generally considered that Sir Nigel had retired before he was fired and yet 6 months previously he had been one of the most highly regarded administrators in the government and tipped as a strong contender for the top job at some point in the not too distant future.So what had happened, and more to the point, what does this mean for you as someone who is running a business not a healthcare organisation?

Sir Nigel had to leave because the Health Service was running towards a very substantial deficit – estimated at around £800 million for the financial year as a result of its inability to control costs. At first sight this looks like a clear case of maladministration or simple incompetence, but it’s actually more subtle than that.

The problem arose because the Health Service’s traditional method of controlling costs which had served it well for over 50 years no longer worked. This established method was actually very simple. When the money was spent, even if they hadn’t reached the end of the financial year, they would stop doing work. They would close hospital wards, lay off staff, stop offering services.In this way they controlled costs but at the price of very variable service and very long waiting lists.

This year, it all changed. For the first time the government set the NHS very stringent standards on the length of waiting lists. The fate of hospitals and their chief executives was very closely linked to their ability to deliver on these performance targets. When they found they couldn’t deliver on the targets with existing resources they were forced to go over their cost budgets and that’s where the problem arose.

As a business owner, you should be asking yourself whether you might be in a similar position about to suffer the same fate. You in your business have a large number of discretionary costs which, taking a very short sighted view, you can manage up or down to meet your short term financial targets. But what happens if the market suddenly imposes higher standards on you? Think about for instance about your product development . Think about your marketing spend, your investment in sales forces, your efforts in developing new markets, or your customer service. These are all areas where you can control costs in a relatively straightforward way. The consequences for future performance are far less obvious.

Markets have a nasty habit of suddenly imposing large improvements in performance. What was quite acceptable suddenly becomes substandard as new competitors arrive. If you would like to be sure you are not going to be caught out in the same way as the NHS was as, think about how you are managing these supposedly discretionary costs. Do you know the difference between acceptable and really first rate customer service? Do you know the difference between the cost of product development that more or less keeps you where you are or doesn’t show any decline for 2 or 3 years and product development that would move you ahead? Do you know the difference between the cost of marketing expenditure which will more or less keep you as you are compared with marketing expenditure which will increase your share? Are you even reaching the minimum level? Are you confident that you are doing enough this year to be still where you are in terms of market share or reputation or profitability in the coming years?

Remember, it’s not about controlling costs – it’s about understanding and managing the results that those costs produce.