Scalpel or Fertilizer? Improving the Bottom Line
Leaders with people in their business who are looking to increase their bottom line have a choice regarding how to do it. Let’s assume you produce $100 worth of goods or services with $20 of labor input yielding $80 of profit. You can try to cut 25 percent of your labor cost to produce that same $100 of goods. If you do, you’ll increase your bottom line by just over 6 percent. Nice! Maybe …
Option 2 is to keep labor costs static but try to grow your business. For example, if you produce 25 percent more of your product or service (or perhaps something new), this will increase your bottom line by 31 percent. Better!
Yes, I’m comparing Granny Smith apples to Honeycrisp apples. But we’re looking for a better pie, and the way you make it has significant impact.
Option 1 is the more frequent choice in my experience. Whether you’re taking a scalpel or a chainsaw to the cost structure, the orientation is “do this with less,” and it’ll most often result in a fairly immediate short-term increase in profits. It also, however, has some unintended consequences that can cause significant problems down the road.
Option 2 requires a different kind of leader, one who believes he or she can spread the right kind of fertilizer on the organization and engage people to do better work by using their brains and creative juices. This also has some substantial unintended consequences.
Even when done well, the scalpel approach creates anxiety in those left behind. It’ll likely result in a compliant workforce, but not a committed one. Less commitment means less voluntary action that would benefit the business, less creativity, higher turnover, etc. Most people who have a full career in leadership roles are likely to encounter situations in which they have to reduce head count, but don’t forget to consider the unintended consequences.
The unintended consequences of the fertilizer approach are just as significant. You may fail and have to resort to the scalpel approach. You also must make sure that you actually achieve those growth numbers and are not just avoiding a tough choice. However, you may also increase commitment, enthusiasm and creativity.
Leaders must make difficult choices, and sometimes that means taking a scalpel to the organization — a decision that perhaps only you can make. However, having your team members shoulder the burden and enlisting their minds in helping you increase performance is a choice you shouldn’t overlook. It requires a significant shift in mindset if you have a substantial need for control.
Consider the intended and unintended consequences of both approaches. Sometimes a scalpel is necessary, but other times increasing productivity by leveraging people’s skills can be preferable to efficiency and cost cutting.
If this struck a chord with you, here are two additional resources. Mankins, M. (2017, March 1) Great Companies Obsess Over Productivity, Not Efficiency Retrieved from https://hbr.org/2017/03/great-companies-obsess-over-productivity-not-efficiency and an oldy but goody book, Stack, J. The Great Game of Business New York, NY: Crown.
Todd coaches CEOs to higher levels of success. He is a former CEO and has led teams as large as 7,000 people. Todd is the author of, Never Kick a Cow Chip On A Hot Day: Real Lessons for Real CEOs and Those Who Want To Be (Morgan James Publishing).