How cost reduction activities can destroy your company!!!

Herman is back.

For the ones that follow my work for some years know that Herman is an Agile Coach in Supersoft. Herman is a person with whom I discuss several topics, mainly organisational subjects. Also, you should know that Herman is a fictitious character, so any kind of similarity with reality is a pure coincidence.

I had an opportunity to go for a dinner with Herman some weeks ago. Last time I met him he explained me How Monetary Rewards Destroy Your Minimum Viable Product. This time we went to a very nice restaurant in Munich called “Augustiner” , highly recommended for people who want to try typical German food ;)

We opened the conversation with a nice Weißbier. Because of the European Crisis, the senior management of his company hired a company that specializes in cost reduction, basically reducing any kinds of expenses at any cost! At that moment I just though: “Wow, this will be a funny dinner”.

The part of the job of that company is to look into all contracts of external employees and negotiate the price with them. As a matter of fact, negotiate is not really the term, because what they really do is threaten the people. Herman told me they start the “negotiation” saying these words: “You lower the price to our expectation, otherwise you will not do any more business with this company!”

I was shocked and asked: “Hold on, they are external people, right? They do not even belong to SuperSoft, so how can they threaten people like that?”

Herman could not really say anything, because these guys have the full support of SuperSoft senior management. Then I asked: “But do they at least understand the value of that external person to evaluate the rate in the contract?” Herman started to laugh and told me: “Luis, it would be easier for you to become an astronaut then for them to understand anything about the value. They couldn’t be more clueless…”

Now, my friends and readers, can you please explain how can you create fantastic companies when hiring such useless people? Please explain me, because I cannot simply understand it.

The best of this story is still to come! Until that moment, I did not understand what was the business model of that company, but Herman explained me. They get a percentage, a commission on everything they save.

On everything they save? These guys do not have a clue about the value that people bring and we are talking here about such savings? They will refuse a person who is a real specialist in the area and just because their rates are higher than junior´s rates who does not have that much knowledge and will take 10 times longer to deliver than the specialist.

Herman´s reaction: “Yes my friend and these juniors will screw up ten times more and the company will spend 100 times more € to fix what went wrong.” At this point, SuperSoft cannot get good people anymore, because their reputation on the quality is not important, price is what matters! So great people do not even try to get projects in SuperSoft, because their time is much more precious than rate discussions.

It was so shocking that I needed to order a desert, a tiramisu, after that heavy german food! I know it´s not typical German, but it has a lot of sugar, it is exactly what I needed, to digest such amount of nonsense information. After eating the tiramisu, I asked Herman: “So how do you guys solve this problem?”

He finished his espresso and told me: “Very easily my friend. Now we know how these guys work, so if we want to bring someone in house who we really trust, we tell them to double their rates.” Their rates will be reduce to half, because the external company will push them. However, half of double is the original rate they should get! The external company gets very happy and the external person gets his normal rate”

“Wait a second, I said. You told me they get a percentage on everything they save! This means that Supersoft doesn´t achieve any cost reductions and yet they pay money to the company that helps them with cost reductions. They get money because they reduce the fake rate to half of the price, but in reality, that price is the regular price, thus they do not really save anything!

Herman said: “Of course! And some of our colleagues realized that if you, for instance, get two or three quotes from great gurus and if you put less knowledgeable person in the middle with a higher rate than his normal rate, the company will always chose the less knowledgeable one, even though the rate is higher than in usual case. If you compare all rates directly, his rate is much lower than the guru´s rate, making him the one being selected.

Luis: “So what you are telling me is that in reality SuperSoft is wasting money having these guys!”

Herman: “Yes, they are wasting money and they are creating a very bad reputation. The product quality decreased, because good people did not accept their conditions and therefore they go to work somewhere else.”

Luis: “Well my friend, 70 years ago Deming said: “Give a target to a manager and he will do anything to achieve it even if he needs to destroy the company on the way”. This is exactly what happens here… Senior management most probably had a mandate from the board to reduce costs. And since they try to reduce, they destroy the company on the way…

Even though SuperSoft and Herman are fiction characters, this is based on a true story, unfortunately. If you are a manager and you are reading this story right now, please remember it! This is too serious to be forgotten! Many managers  studied at old outdated business schools where this kind of approach is taught. If you want to be a good manager or leader, you must learn and understand about System Thinking!

You should understand that reducing local costs will improve the whole company and probably will also destroy the whole company. Learn to see the big picture and complete value chain and only then start to act like this. But then again, most of our managers are clueless about the job of their employees and the value they deliver. So how can we ask them to see the big picture? Fortunately, I am blessed to work with fantastic people and a great boss, but not everyone is lucky like me.

Additionally, if you really want to become a great leader and create an impact in your company, please read these two books:

Thank you so much for taking your time to read this post!

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