Operating Cost Hidden in Plain Sight.
It is without a doubt that the pandemic has changed the operating landscape in most businesses; whether this change is short-term or has longer-term implications is yet to be seen. However, the pandemic cannot take all the credit for the extent to which high operating costs are hidden within the business’s daily operations. As businesses ride the tail end of the pandemic as well as enter into a new year plagued with uncertainty – a war threatening Europe, unstable economies in most countries around the globe – it is highly recommended that leaders become more mindful of the high operating costs hidden within the business operating activities; and manage it.
This article will look at a few examples of ‘operating costs hidden in plain sight’ and provide recommendations to better manage them.
“Action & Consequences” .
“How we do Anything is How we do Everything”.
We were raised to believe that action has consequences. If we do what we are supposed to, we are rewarded; if not, we forego the reward. Then life became more complicated, and rewards were no longer linearly linked to our actions but to a series of actions executed successfully, in a particular sequence, over a period of time. Still, we were able to see the link between our actions and rewards; we will persevere, learn and grow.
However, when we make poor decisions, waste time, procrastinate, do shoddy work, or avoid doing what we know we must do, the results are less than favourable, we are disappointed, we are disciplined, and we are not happy. This is quite simple to recognize and isolate in our personal lives. “I dear you, try forgetting your significant other birthday and see what happens. The consequence will not be favourable.”
“Action & Consequences in Business”.
“Everything is Connected”.
Similarly, in business – Action or Inaction has consequences which can be difficult to identify, quantify and forecast; because business is a complex web of interconnected and interrelated activities. An example of this is extracted and demonstrated in the diagram: “How do Product Defects Increase the Business Operating Cost?”
Inaction: It is understood that businesses – Managers and Leaders – have limited resources, are busy, and seldom have the liberty to redirect limited resources to immaterial, low-priority items. So what is the long-term consequence of inaction? A subtle yet noticeable trend of unexplained increases in the business operating cost. What can be done about it? Let’s start by looking at two examples of how high operating costs can be hidden within normal business activities to better understand what actions can be taken to manage it.
Examples of Operating Cost Hidden in Plain Sight.
Example 1: Tardiness.
Tardiness is an acceptable cost to running a business, is quite common and comes in many forms. Such as arriving late to work, leaving early, having extended lunch and taking multiple long breaks during the work day. Managers accept that their staff will sometimes arrive late and take an extended lunch or require more frequent breaks when undertaking stressful tasks; they would account for these exceptions when planning their budgets. However, when tardiness shifts from normal to abnormal, from budget to excessively above budget, it becomes an extra cost to the business—becoming in excessive operating cost hidden in plain sight when its flexibility is abused, misused or allowed to continue unchallenged or corrected.
What do the Numbers Say?
Scenario: Arriving 10 minutes late to work consistently.
- Assuming the annual average salary is $50k, the operator is a billable staff who bills over 80% of their time.
- One person arriving at least 10 minutes late daily increases the operating cost of the business by over $1080 a year.
- Two persons arriving at least 10 minutes late daily are estimated to cost the business over $2160 annually.
The opportunity cost of inaction is $1080 for one person or $2160 for two persons, and the risk that other employees within the organization will soon follow suit. Also, it is worth mentioning that the greater the staff’s annual salary, the greater the cost of tardiness is to the business. Further, increasing the operating cost of the business simply because it increases the number of people required to get the same job done, increasing its headcount without an equivalent increase in output.
Caution: I’m not recommending that leaders clamp down unreasonably on every minor tardy infraction. No! Absolutely Not! That will be cruel and brutal, and before you know it, you will have created an unhealthy work environment filled with underachievers. The recommendation is to be mindful of any changes in tardiness, understand the reason behind it and act. Either adjust the employee work arrangement so there is win-win agreement between you and your staff or reinforce the business employment policies.
The Purpose of this example is to connect the dots between deliberately abused tardiness and the operational cost to the business, and increasing leaders’ awareness of the consequences of inaction against tardiness to the business. If tardiness is becoming a noticeable issue, SMBs leaders are encouraged to work with their staff to better understand what is causing it and find win-win solutions. Solutions that benefit the organization and the employee without inadvertently allowing tardiness to increase the business operating cost.
Example 2: Meeting Distractions.
It is not surprising, that meeting distractions made the list of activities, unnecessarily increasing the business operating cost. In a 2019 article by Chuck Murphy, which stated, “We’re bombarded by distractions every day. Whether a notification on our phones, a ping on our desktops or a vibration on our Apple watches, endless distractions shift our daily routines.” The article continued, “In fact, a study by Microsoft concluded that the human attention span has dropped to eight seconds – shrinking nearly 25% in just a few years.” He cited in the article that one of the main reasons for this drop in our attention span is the need for instant gratification.
This need for instant gratification is front and centre in the meeting room. Attendees regularly checking their messages, email, and not-so discretely scrolling through social media while someone else is speaking. Justifying their inefficient practice with the increasingly popular excuse of having to stay on top of things. Gone are the days when most meetings were short, concise and successfully concluded with minimal disruptions – conducted efficiently.
So what are the consequences of today’s meeting distraction?
- One possible outcome of meeting distraction is longer meetings.
- One reason meetings are longer is because attendees spend time rehashing information previously discussed while they are distracted.
- A second reason meetings are getting longer is because the meeting organizer is catering to distractions without, realizing that the reason for the long time is because of distractions.
- Another possible outcome of meeting distractions is more meetings.
- One reason for having more meetings per subject is because most attendees do not have the luxury to stay in meetings longer than scheduled, and as such additional meetings need to be scheduled to complete the items on the agenda.
- A second reason for having more meetings per subject is because the attendees cannot spend more than a certain amount of time in a meeting without disrupting their day, or having to push other items on their agenda.
- A third reason for having more meetings per subject is because of reworks, changes or incomplete work. When attendees are distracted during a meeting, important information is missed and this can impact the completion of any action items assigned to them.
What are the Numbers?
Example one provided context on how inefficiency increases the operating cost of a business. The same applies for the additional time spent in meetings. Regardless of whether that additional time is spent due to additional meetings or longer meetings, the opportunity cost of the time spent in meetings is time spent on other productive items.
A rough estimate to calculate the additional time a team spends in meetings a year is equivalent to:
- Number of additional hours a month spent in meetings:
- * average hourly rate of all attendees
- * number of attendees
- * 12 weeks
As part of a business case I once prepared for a medium size company with a relatively large leadership team, the hidden conservative annual operating cost embedded in the business management meetings was over $70k a year, and this excluded the other unquantifiable impacts on the business.
The Purpose of this example is to raise awareness of how easy it is for businesses to burn cash in meetings. In an increasingly digital world, with the increasing demand for a person’s time, it is quite easy for leaders not to question the amount of time meeting attendees are distracted during a meeting when the only reason for their attendance is their attention and contribution. If this is a concern, then encourage practices that minimize distractions during meetings.
There is an argument to be made; if all staff is salaried, then the examples discussed above bear no additional operational cost to the business. This, despite being simplistically true, is not entirely correct because of the Opportunity Cost of doing business. The opportunity cost of time spent unproductively or inefficiently is time spent productively executing revenue-generating activities for the business.
Leaders don’t have to be cruel slave drivers to run efficient organizations; efficiency doesn’t always have to cost extra in the form of a business process improvement project. There are cost-effective strategies a business can implement if it is aware of where inefficiencies lurk within the normal operating activities of the business.
Inaction & the Real Consequence.
As a Consultant, Project Manager and Growth & Transformation Specialist, I’ve seen how micro-inefficiencies accumulate over time, compounding and increasing the operating cost of the business. I’ve also seen how micro-inefficiencies can morph and spread within a business. How one small indiscretion encourages other minor indiscretions to develop, compounding over time into an ineffectively run organization with high operating cost, low profitability, building competitive disadvantage and a diluted brand. The long-term effects are even more detrimental to the business than anticipated.
We may assume that these problems only apply to medium to large organizations because they hire more expensive staff; and the average hourly cost to the business is material. Whereas in SMB, the average hourly cost to the business may not be significant enough for the president to invest the time necessary to correct small insignificant infractions.
The consequence of this ill-advised-thinking is that it prevents the SMBs from developing a growth environment.
All actions, regardless of how small have consequences. Sometimes the consequence in isolation is not material to the operating viability and profitability of the business. However, compounding over time can be the silent killer that may just cost you the business.
Contact Us to find out more about other strategies tips and insights to help you transform your business for growth; or just to figure out those hidden challenges camouflaged within the normal operation of the business, eroding your profitability.
Written by Nallanie Manick!
“You know when a business isn’t performing as expected and the leadership team hasn’t quite figured out why, this is where we come in. We can help with affordable solutions even SMBs have the capabilities to execute.”