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James Young

Some very good thoughts. I have lost count of the number of times i have worked for companies where high level percentage cost reductions have been demanded which have restricted revenue growth. Of course the problem is sometimes it is quite difficult to measure.

Saria Nadeem

Through analysis of organizational structure to cut cost while preserving profitability

Kevin Brady

Actually, I have a big problem with this whole way of thinking about human activities. Even if I did share the fetish for profits that underlies this kind of analysis, I still would note that when an organization cuts everything down to the minimum, it also eliminates its ability to survive any kind of disaster or sudden change.

With JIT manufacturing, if one supplier goes down, the whole system crashes. With lean operating principles, if one person goes out of the mix, the whole organization is affected.

Slack is necessary for both resilience and innovation -- something that Ev Rogers noted when he realized that big organizations were more innovative than small ones. You need slack for creativity.

Finally, I saw in the Coast Guard that on a fully crewed ship, there were three "watches" -- that is, three complete crews. In peacetime, we rotated watches, and in tough conditions, we all were on standby. That way, if you lost one guy, it didn't doom the enitre ship.

This is another one of those lessons that our grandparents understood and that we have willfully forgotten, at a significant price to ourselves and our economy.

Michael P. Gusek

"These are powerful and revealing questions, yet few companies today are able to answer these questions given the way their accounting and information systems are set up."

This is an incredible problem! If we could lower the barrier to entry for direct management interaction with the data you could most definitely see system-wide "information gentrification" (to coin the term). In one way this would strengthen executive decision making in situations like this, but at the same time could cause negative employment impacts within the firm.

I'd have to examine more to come up with a balance...

vinnie mirchandani

John, I am in the technology efficiency business - to your formulas add one that says find the vendors and items with most margins. Software maintenance at 90+ gross margins, offshore vendors with 45% gross margins, printer ink at $ 5,000 a gallon should be pretty high on any one's target list...

Rebecca R

I work almost exclusively on intensive cost-reduction, and in my work in multiple industries it is remarkable how often I see companies fall victim to the exact pitfalls you outline. Too much focus on the less sensitive support services, avoidance of areas perceived (often incorrectly) to be profit centers, and resistance to the question "what business are we really in?" leads to short-sighted, non-sustainable cost savings.

The problem may be that cost reduction is often delegated to Finance or Operations departments for execution. These departments don't have much influence over the revenue-generating side of the business, and so cannot effect the strategic refocusing that can really generate lasting results. Faulty systems are partially to blame, as you indicated, but also the absence of key players is a fundamental barrier. I'm curious what your thoughts on this are.

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