Cost Management Formula

Episode 21 - The Magic Formula for Cost Savings

[00:00:00]

James: hello, I'm James.

Jimmy: Hi, I'm Jimmy.

James: Welcome to A Job Done Well,

Jimmy: the podcast about the world of work and how to improve the daily grind

Jimmy: I'm doing well.

James: So what riveting subject are we going to talk about

Jimmy: today, we are exploring an often dreaded subject of cost savings,

James: a bit of cost saving.

Jimmy: but we are doing it in a more positive way. Everyone faces this challenge at some point in their career,

but we will be showing you some ways that you can unlock cost savings and become a hero without damaging your staff, your customers, or your performance.

Good.

James: performance.

Very good.

Jimmy: You have the magic formula

James.

James: I followed your sagely

Jimmy: Well, , I followed your sagely advice on contacting Virgin Media to get my [00:01:00] extortionate bills reduced.

I spent half an hour mostly on hold and then got one call back. With the wrong answer, then I got promised another call back. I'm waiting for the call back, and then the , messages come up inviting me to fill in a survey, which indicates the person has closed the

James: She didn't want to talk

Jimmy: to talk to me again, closed it down, fill in a survey.

So you can imagine, well done Virgin Media, my survey results will be absolutely shit as ever.

James: will come back to our conversation of cost saving very shortly. My story also very cost saving related. This is the third time we've recorded this episode. Because we managed to record it twice without switching on all the

Jimmy: record it twice without switching on all the microphones.

Yeah, but I'm now going to play

James: times.

 Now we know the sound's working. Talk to me about cost saving.

Well, I

Jimmy: I think it is a [00:02:00] challenge that we all face at some point in our career. So rather than get on the back foot , we can help you get on the front foot and understand the levers that you can pull.

Often in organizations, it's all about shuffling deck chairs with the infamous target operating

James: I like a bit of Target Operating Model Review. Yeah. If there's one phrase that makes , my eyeballs roll to the back of my head, it is Target Operating Model.

Jimmy: Keeps our HR colleagues in a job.

James: Huh.

Jimmy: just the top down, 20 percent slash and burn methods.

James: Which I think is actually the same as Target Operating Model Review. It's just not quite as they don't dress

Jimmy: It's the exact version

James: version.

Jimmy: Anyway, another way of looking at it is, why wouldn't you want to do it? If you can make your organization run more efficiently and run cheaper,

and have a better financial performance, why would you not want to proactively do this?

James: do

Jimmy: And most importantly,

James: in our introduction, good service costs

Jimmy: [00:03:00] good service costs less.

Reduce wasted effort works for teams and for customers.

Now that you're compelled to do it, James will tell you just how to do it.

James: to Alright, now in the Dim and Distant past I used to run a capacity management team

and when you are sitting there working out how many people you need there's a little formula you go through.

This is, you know, keep your eyes open, this won't be too painful for too long. What you need to do when you're working out how many people you want is You say to yourself, well, what's the volume of work I'm getting?

And multiply that by the handle time. And then that gives you the workload you've got to deal with.

Are you still awake?

Jimmy: of work, how long it takes you to do them, workload.

The other

James: The other side of the equation is, how efficient are my staff, i. e. how much time of what I pay them, are they sitting there waiting to do work? So that's a percentage number. How occupied are my time? We'll talk about occupancy a little [00:04:00] bit more but really it's sort of structural waste. How many, so when they are sitting there waiting to take work, how busy are they?

And if you multiply those two numbers together, you get utilisation.

Now here's the magic. If you divide your workload by your utilisation, that will tell you how many hours you need, and you multiply that by your labour rate, and that will tell you how much money you need to spend. Got it. There will be a little handout on our website so you can get that, but really what that tells me is if you want to save money, there are only five levers you can pull.

Jimmy: And they are.

James: First of all, you can reduce the volume of work. Secondly, you can reduce the time it takes you to handle the piece of work.

Jimmy: So that reduces your workload. Yeah.

James: You can look at how efficient your staff are, so what proportion of the time are they ready to take work? When they are working, you can say, well, how occupied are they?

, and those two together equals

Jimmy: the

James: how you were paying [00:05:00] attention. And then the final thing is you can find somewhere cheaper to source your labor from. And those are the only five levers you've got if you want to save money . Yep. What most organizations do is they jump up and down on the easy stuff.

So the obvious thing to do is outsource everything.

Jimmy: It just looks, very obvious, , I am paying my people x, I outsource it and I'll pay them y. Yeah, Easy to see.

James: absolutely. So you've got a nice big sexy project and you save a load of money. Why wouldn't you do that?

Jimmy: that. Yeah,

James: The

other thing that people jump up and down on is agent efficiency. Yeah, absolutely.

So make your agents work harder.

Next thing is handle time. Two ways you can do that. You can shout at your agents to make them work faster.

Or you can automate it. So you've got a machine working.

Jimmy: So sit at your desk and work more. Or

James: Yeah. Or alternatively, you can do the [00:06:00] old, , target operating model review. So that's the standard approach. and on the whole it's a bit clunky so let's just talk through those and we'll give you our view of where you really should be going on this

Jimmy: Okay. So,

James: so outsourcing

the upside as we said is it's really easy to get past the accountants

Jimmy: would you

James: yeah right so why would you not want to do that and the cost savings will come through

because you sack a load of And then you've got a contract instead, which costs less.

Jimmy: And you can negotiate the contract and you'll see every month you will bill through from your outsourcer and , you might be paying by person by call, but you get a bill and it's quite transparent.

James: Yeah, and so it fits quite nicely in the all costs and no values side of management.

Because it's really clear where your costs have gone. But it doesn't really address the value side of things. So some of the downsides are, If you're [00:07:00] going to do it It's really quite difficult because you've got to think through things like training and systems access and even you know accent what will your customers think if all your work has been outsourced to a call center in

Mumbai or wherever it might so those are some of the downsides The other big con and this happens really quite often is that you just create more volume How do you do that?

Yes. And again.

Jimmy: Yes.

James: like

Jimmy: and again

James: was saying earlier um, the

Jimmy: well, , , like I was saying earlier the agents closed down my call. She's completed that call, they get paid for that, and I'll call back.

James: And actually, when you think about it, most of these outsourced contracts are set up on a cost per call. So it's actually in the outsourcer's [00:08:00] interest because they'll get more volume and therefore they can say, well, therefore you need to pay us more money.

Jimmy: The fact is, that as a customer, I am, A, pissed off, and B, as soon as I have an alternative to Virgin Media, I will be off.

And by the way, I'll tell anyone who I can find how shit Virgin Media are. Those sorts of things are less transparent in your monthly bill you get from your outsourcer.

James: And then the other couple of

things which is well linked I suppose is you just run the risk of losing a whole load of knowledge from your organization because Frank does whatever job it is Frank does on a Friday afternoon with his macro. When Frank's gone nobody knows to do it so it will create a load of rework that way .

And because you've lost the knowledge, then you lack the capability to do the work.

Jimmy: lack the capability to do the work.

We need to do more of these. How do we scale up? No [00:09:00] one in our organisation knew how to settle this type of claim because the only people that knew how to do it were at the outsourcers and the outsourcer was incapable of at that time of ramping up so we were stuck. We had no knowledge.

James: I was once in a situation where we outsource some stuff, and they promised us blind they could do it, and they couldn't, and we ended up with a queue which was a year long, because they couldn't do what we were expected

Jimmy: I think that's the other thing you have to bear in mind how some organizations work, , you'll have a sales team whose job it is

James: to Promise the

Jimmy: well, their job is to

win new contracts and in winning the new contract, they often do promise the world and then somebody else has to deliver it.

Right. And, , further down the line,

you've overcommitted and we've both worked many times , with organizations, both

James: seen you over promise numerous times, you

Jimmy: But we have both been overpromised

James: outsourcers

Jimmy: outsourcers onshore and offshore.

James: said all of that, Yeah, we [00:10:00] should,

we

Jimmy: we should, we should balance it out , there is some work that I've experienced in the past where our, our outsourcers did it way better than we could internally.

. What I found worked best is , if the work was quite stable and quite rigid and structured and well understood, then they could do it way better .

Yeah.

James: Yeah. The lot of the work you're talking about here, this stable, rigid, well understood work,

Jimmy: frankly a

James: a bit dull. Yeah. And you struggle to find people who want to do it

Jimmy: you know, had teams in the UK who thought they were too good to do all that sort of stuff, so they used to do it really badly.

Whereas teams we had Out in India, did it fantastically and took a massive pride in doing it. So I think it really does depend on the type of work.

James: Where that takes us is if it is stable, rigid, and you really understand what you're doing, then outsource away.

But it is a big if because if it's not. You'll just [00:11:00] create a load of extra work and a little extra volume come back into your organization and it'll end up costing you more than you started with.

So that's the first one. Second one then, handle time. So I always like handle time. So this is the one that's beloved by the NHS. When you go and see a doctor, I'm not sure what the target is. But is it something like they have to see you in eight minutes?

Well, you know diagnose faster that's always or in a call center talk faster. Yeah, so Handle time is really quite a tricky one

Jimmy: , I think the reality is it is important to know how long a call is taking and if it is taking a long time, what does that tell you about how that person's handling the call? It could be that they have a training need or it could be they found a good way of solving the problem. But if you don't look, you don't find out.

But I think that the big sin that most operations make is Yeah, very easy to [00:12:00] get short calls. But if

James: Yeah, very easy to get short calls, but if you do, of course, the customer need isn't met. And so they call back, which then comes back and hits your volume.

Jimmy: and so they call back, which then comes back and hits your body. But you will be with someone else. And when you call back, having waited 20 minutes to get through in the first place, you're going to be pissed off.

You're going to be

James: Then the other way of reducing handle time and reducing handle time effectively down to zero is you automate things. So a lot of money being spent recently in robots. And again, this one of these things which sounds really, why would you not do it? There are two downsides to automating .

First of all, you end up paving the cattle path. So if it was a meandering sort of call, and now you've just automated meandering, that's not necessarily a great thing. [00:13:00] More importantly, though, is you do tend to lack flexibility. So products change or services change, and then you've got to go and rewrite the whole thing.

Jimmy: And there is a whole episode about automation at some point. We'll come back to robots and AI on another day, but there definitely is a big place in improving organizations performance.

But again, a little bit like outsourcing used in the right way.

James: the question of handle time, so are we saying squeezing handle time is a waste of time? Absolutely not, but it needs to be done in the right way. One of the most powerful things I ever saw was somebody sat down and rather than just doling out a target, he looked at variation in handle time between different agents and different members of staff, and he saw that some were taking a huge amount of time and others were going through things really quickly.

But that forced him to ask the question why. , then he sat down and listened to what the agents were doing. Then he could see exactly who was doing it properly. And he wasn't and [00:14:00] that gave him huge amounts of information that he could use them for training.

So he upskilled and got everybody to the same level as the best.

Jimmy: The

thing is, though, James, you're right, looking at variation in performance, whether it's handled time or anything else, is. One of the richest ways of looking at data, I think the challenge is organizations, , often are fundamentally lazy in general, and by that, I mean, it's easier just to say, handle time is currently five minutes, I want to target everyone I'm making it for, and then just give everyone on mass a target four

James: four minutes.

Jimmy: them until they get to that average of four minutes it's simple easy lazy and fundamentally flawed

James: Looking at the [00:15:00] average and beating people. Right, number three then. Agent efficiency. , but before we go into that, let's have a word from our sponsor

James: We cover a whole host of topics on this

Jimmy: Purpose to corporate jargon.

James: but always focused on one thing, getting the job done well.

Jimmy: Easier said than done. So, If you've got Unhappy customers or employees Bosses or regulators Breathing down your neck

James: of control and your costs are spiraling and that big IT transformation project that you've been promised just keeps failing to deliver. So

Jimmy: Can help if you need to improve your performance, your team's performance, or your organization's.

Get in touch at jimmy at jobdonewell. com

James: Or james at jobdonewell. com. So what exactly do I mean by efficiency? So of the time that you are paid, what proportion of that are you available to do work? So that's taking [00:16:00] things out like training time, development time, lunches, loo breaks, all that non productive time

Jimmy: Okay. I was gonna say if you're paying, if you're paying me, surely I'm, I'm available 100 percent of the time, aren't I?

James: No, you're not. Yeah. So depending on the organization you work with, a proportion of your time is available to work, and a portion of it isn't. You can jump up and down on this number and make it a lot higher. So do you really need all that?

Training time. Do you really need to do all that development? You can start to manage people's lube breaks . There are a whole host of things you can do,

Jimmy: whole host

James: but there again, it depends what sort of organization you want. Now a lot of the outsourcers are pretty strict on this stuff and they will run much hotter it will come back and buy you. Okay. Because if the agents get unhappy or your staff get unhappy, you just end up with a sickness and morale problems, which will push it down the other way. Yeah.

Jimmy: you're going to make me work harder, I'm going to go [00:17:00] sick, and presumably sickness is time that you're paying me for, that I am not available to work.

And,

James: you're off sick, then everybody else has to work that bit harder, which means they're going to go off sick as well. So you can get an horrible downward spiral on this one.

Jimmy: you can get an horrible damage spiral

James: Well, I think the question here is Yeah.

Yeah. So I think, yeah, no, I get

Jimmy: and is that appropriate?

It's a balance effectively, isn't it? You know, don't try and push people too hard, but equally, you know, you're running a business, not a holiday camp.

James: Yeah. But make a decision on where you want to be and stick at that.

Jimmy: And then when you've made that decision, I'm presuming apply a similar theory to handle time, which is look at the variation in

James: Oh, absolutely.

Jimmy: and understand that variation and work with that variation to find How you manage it to the right level. Okay?

James: Totally agree. [00:18:00] Next. one then is occupancy. So let me just explain this. So occupancy is structural waste. So it is time you need to build in where people aren't busy.

So a good example

Jimmy: example That's a very technical term, James. Structural waste. Can you tell us in plain English what the fuck do you mean by structural

James: So if you imagine you're running a taxi firm, you need your taxi drivers to be sitting, waiting a lot of the time so that when a customer turns up, yeah,

Jimmy: the

James: because that's the type of business you run.

If, however, you're running a bus company, it's the customers who wait, not the buses. Yeah. So that's what I mean. Now, why is that important? Anywhere where you've got a queue of people or customers, and they arrive randomly. You need to sit down, there was a very clever man called Erlang, and he worked through all the maths, but you can find this out.

But if you're running a call centre, or you've got live chat, or you've got a post office counter, and you've got a [00:19:00] queue, you've got to sit down and work out how long do I want my customers to wait, on average, . And therefore, what level of occupancy can I build into the system.

Jimmy: when I am off studying Nottingham Forest's latest

James: Yeah.

Jimmy: You are getting excited over Erlang's theories.

James: I do know it's fantastic. I do like a bit of algebra.

But the point here is

you make a decision on how much time you want your customers to wait.

and therefore how much free time you're building into your staff's

schedule.

Jimmy: I think that's a key point for all of this. Is you're talking us through the different levers that you can pull to reduce cost but equally How you manage these levers will also dictate how you deliver service to

your

James: to your

Jimmy: So if you want to deliver good service Or you want to reduce cost These are the things you should be looking at And are the levers that you pull [00:20:00] in order to improve performance or efficiency?

James: Yes.

But, anybody who says people should be 100 percent occupied

Jimmy: occupied

James: a clown.

Right? Because if people are 100 percent occupied, and things go wrong, you will end up with the mother of all

Jimmy: and things go wrong, you will end up with a mother of all kids. The next person who rings up is going to have to wait an age.

James: And just another thought there, if you have got people sitting about waiting, you can always reinvest that time in something like an improvement project.

Just a

Jimmy: Okay.

James: All right. Now then, come on. The big one. Volume.

Jimmy: The money maker.

James: moneymaker, absolutely right. So if you want to take serious amounts of cost out of any organization or any service organization, [00:21:00] standing back and looking at what your customers are calling you about

Jimmy: calling you,

James: and how often they're calling you and whether or not you actually fulfill the need that they are calling you about will just open the floodgates in terms of cost you can take out of your organization.

Well

Jimmy: back

to my Virgin Media. Yeah.

James: You

Jimmy: , I am now. Yeah. Yeah. Another case in point. Yeah. want to

James: Alright, another casing point. Yeah. To book a appointment at my doctor's. Yeah. Yeah. They've got this thing which they only take in day appointments now. I don't know, obviously they're trying to hit some sort of

Jimmy: Yeah, my, my doctors do the same thing.

James: Right. So now, instead of phoning them once, I phone them three times to get an appointment, which they could have handled and given me an appointment two days henceforth.

Two days henceforth. That's very good, isn't

Jimmy: very Very

James: do you like? [00:22:00] Give me that appointment henceforth. But you take my point.

Jimmy: appointments. I henceforth need an appointment for my ingrown toe nail.

Can I have that today?

James: have that today? Yeah, maybe not.

The other thing here is if you can hit this lever, then what you're really doing is you're taking a load of the waste and stupidity out of your organization. It gives better customer service, but also gives a real buzz in the organization and a huge positive hit to morale.

Jimmy: The other thing about cost saving that you have to remember is, you actually have to win the battle twice.

James: go on.

Jimmy: So what you've talked about is, , reducing work or making people more efficient. And a lot of those don't actually hit the bottom line in terms of your cost.

Until you take another action. In other words, reduce your capacity.

James: capacity.

Which is a colloquialism for get rid of someone. Yeah.

so how do you go about

Jimmy: Well, there's a few ways of reducing your capacity. , [00:23:00] attrition. So people leaving will naturally do that. , you and your brethren of capacity managers have hugely important levers at your fingertips in terms of understanding how you manage recruitment and attrition.

So you can manage that. There is redundancy. You can reduce the number of contractors you have. You can enable growth. So in other words, Bring more value work in To grow without having to spend more money Or you can as you touched on James you can invest that capacity in either extra training or extra Improvement projects.

So there are a number of ways but if you don't reduce the capacity in your system It will naturally disappear, so don't expect to look around and see loads of people sitting there doing nothing. They will find

ways of

James: they'll find work, yeah. And I think, I mean, my personal favourite here is, if you can, just manage it [00:24:00] through attrition, and then always make sure you've got people who've got a little bit of spare time reinvested in more and more improvement projects to take the volume out, because then you can get into a lovely sort of

virtuous spiral.

Jimmy: Is just taking people out. You've always got a little bit of space, people always working on improving the system. People that, you know, shouldn't really be there. They don't have the capability, they don't have the right attitude, don't want to be there.

Often, a well run redundancy program can help you move those people on that has a win win in terms of reducing capacity and getting rid of some of the people who shouldn't be there. But back to my point about if you don't reduce that capacity, when you've taken the work out, you've become more efficient.

It will occupy itself on perhaps some of the things you don't want to do, want them to do, or you don't need them to do. So I've seen two examples of that. [00:25:00] One the money got reinvested in longer breaks. So when we looked at where the capacity had gone, we could see that everyone was taking a lot longer on their breaks.

So that's where it disappeared. The other time I remember talking to one of my regional leaders, And we had looked at the numbers and it said that he had about 25 percent capacity. He walked me around his office and said, Where, where's the capacity? Show me where there's people sitting there doing nothing.

And there, there wasn't. But, when we looked at what work they were doing, they were absolutely gold plating all of their work. . That isn't how the organisation or the customers would want to spend their money at the end of the day. I

James: it comes back to the point you go and understand what's going

Jimmy: I think another way is reduce supplier spend.

So do you have it built into the contracts with your suppliers? So you might see the reduction come through on there , but make sure that you fight the battle that you [00:26:00] talked about James in terms of improvement, but then you do actually realize or reinvest consciously that that saving.

James: might

Jimmy: few other things that might help as well is get your teams involved in those opportunities. Yeah,

James: Oh, yeah, so that whole was it episode four that we were talking about

Jimmy: the one. Go back and listen

to episode four. Great examples of how you do improvement work. And that can apply to any of the things that we've touched on today in fairness.

 Also you can get your, , suppliers to help you. Quite often people think that, , , their suppliers, their partners. Won't help because it will reduce their bills. So why would they want to help? Well, often I find if you have the right conversations with them, they know the answers, they'd see the work, they've got lots more experience of improving efficiency than you

Jimmy: have.

James: have.

Well, and there's,

Jimmy: their help.

And

James: there's also the fact that, you know, you're running [00:27:00] a system here, not a business.

And so the work will flow from your suppliers into yours. So there's always trade offs to be made. So understanding the trade offs is really

Jimmy: And I do think that's another episode we'll come back to. Bye. I see very few organizations really partner up with third parties really well and leverage them and get the best out of them.

.

James: In summary. Let me go through that.

You've got two options. You've got fast and loud, yeah, which is all about outsourcing, restructuring, and investing a huge amount in automation. Or, you can be where the smart money is, which is really understand what is going on in your system, mitigate the work.

When you mitigate it, then go away and think about automating, and then when you've automated it, go away and think about outsourcing.

So I'm not saying outsourcing is bad, but you need to be very stable before you start doing that.

Jimmy: didn't want to say that, but

James: Sage advice.

Jimmy: but I think, you know, we've talked today about the levers that you pull, and how they sit together, [00:28:00] and as you said, James, you're,

It'll cheat sheet will be on our website, but I do think that, , placing your bets on the smart money and getting rid of the work all together first before you automate it and then outsource rather than jump to the last bit is it is the way to go on these things.

James: So today's episode really focuses a lot on.

large

service organizations with lots of people. However, you can apply a lot of this logic to any other

Jimmy: Yeah, . It applies to back office, legal operations, HR teams, finance teams, you name it. I think your thinking applies.

And if you can't see how to apply it. Then give us a shout and we'll, we'll help you.

James: Absolutely.

Jimmy: So get in touch. We're at Jimmy at a job done. Well. com.

James: com or james at com.

Jimmy: everyone.

James: Cheers now.

Jimmy: [00:29:00] If you'd like to find out more about how James and I can help your business, then have a look at our website at ajobdonewell.Com.