By Ryan Morrissey, Peter Guarraia, Véronique Pauwels and Sudarshan Sampathkumar
Over the next 12 months, thousands of companies will launch initiatives to make their operations more efficient. In more than 60% of these companies, our research suggests, they will target cost savings of at least 10%—and most of these efforts will start to deliver modest results. But the odds are, before long, many of these initiatives will lose momentum as senior executives move on to other priorities and task-force members shift their focus to their day jobs.
For many leaders, increasing efficiency feels like a Sisyphean task, rolling a huge stone uphill only to see it slip back down. But building efficient organizations doesn’t have to be a start-and-stop process. Some leading companies keep the forward momentum by adopting an efficiency mindset and identifying a few key behaviors that trigger organizational change. That long-term approach helps lock in hard-fought gains and create the capability for continual improvement.
Many companies worry that a corporate culture focused on efficiency strangles growth or degrades the customer experience, but our research shows the opposite result—it is a powerful tool to unlock growth and make profits more sustainable. Companies that embrace continual improvement are four times more likely to say their cost efforts enabled growth rather than hindered it. They also are much more likely to report improved customer experience. Australian telecom Telstra launched a corporate-wide efficiency program that removed A$3 billion in error and waste from operational processes while delivering dramatic improvements in customer experience.
True, it’s simpler and faster to execute individual efficiency initiatives, such as cost reduction in the distribution network, and a focused effort can produce clear gains. But leadership teams taking that approach have difficulty achieving similar efficiencies across functions and maintaining them over time. Why? The organization doesn’t build the muscles to sustain long-term change. Short-term initiatives, by definition, are not conducive to behavioral change.
There is no fixed blueprint for embedding efficiency in an organization’s DNA. In our experience, however, successful companies share a common overarching approach: They make sure their efficiency effort spans five critical areas: strategy, metrics, commitment, behaviors and culture. Tenacity and a sustained investment in these areas create the best chance of success.
Companies that have mastered continual improvement make efficiency an explicit element of their corporate strategy. They talk about efficiency as a big part of “who we are,” as opposed to “what we did.” That’s just as true for companies that deliver premium services or have a strong focus on innovation. In fact, they benefit just as much from an efficiency mindset as companies with a low-cost business model, because efficiency reduces complexity and frees up funds to invest in new offerings and innovation.
Linking efficiency to strategy is an important first step. But soon leaders will confront the challenge of changing behaviors throughout the organization—and measuring progress. Successful companies get the metrics right. They are rigorous about selecting the right ones to track change, they avoid using too many, and they balance measures of cost efficiency with measures of improved effectiveness.
When looking at supply chain performance, for example, inventory turns might seem like an obvious metric to follow, but if it isn’t part of a balanced scorecard, a performance benchmark could be detrimental. Companies seeking to optimize inventory turns may compromise service levels at the expense of customer experience. Pairing measurements of supply chain and customer service provides a more complete picture. Only 50% of the 276 companies we studied balanced cost targets with targets for improved effectiveness.
Embedding efficiency in an organization requires visible and credible commitment from the CEO and the most senior members of the management team. In fact, strong executive sponsorship is the single most important factor for success and the most often cited reason for failure when things go off track (see figure).
Of all the elements that help lock in continual improvement, however, it’s the behavioral dimension that companies most often neglect. Large-scale organizational change requires a new mindset and different behaviors at the leadership level and at the front line. That means developing a pragmatic plan to change how people think and act.
The first step is identifying moments of truth—the moments in time when someone makes a choice to do Behavior A or Behavior B. That helps pinpoint the two or three specific behavioral changes that will generate the most value. Pragmatic plans can reinforce the right choices. Research overwhelmingly shows that reinforcement after the moment is critical for sustaining new behaviors and that the ideal ratio of positive to negative reinforcement is 4-to-1. Reinforcement can include feedback from peers and supervisors, financial rewards and recognition from top management.
Companies that successfully embed efficiency in the DNA of their organization reap great rewards. They manage to break the boom-and-bust cycle of short-term initiatives and gain the competitive edge that comes from a high-performance culture.
Read full report: Building Efficient Organizations
Ryan Morrissey and Peter Guarraia are Bain & Company partners based in Chicago. Véronique Pauwels is a partner based in Amsterdam and the leader of Bain’s Performance Improvement practice in Europe, the Middle East and Africa. Sudarshan Sampathkumar is a partner based in Mumbai. They are members of the firm’s Performance Improvement practice. Follow @BainInsights on Twitter.
This article was written by Bain Insights from Forbes and was legally licensed through the NewsCred publisher network.