By Bill McIntyre
The spending review to be published in October 2010, will probably reveal that the cuts in public service budgets are the most severe in living memory. In the private sector many businesses have been through this experience much more recently. The author describes how some businesses cut budgets in a controlled and more structured fashion, whilst others don’t and make it more difficult to deal with the effects. This is the lesson for the public sector.
The budget was certainly a wake-up call for most and a harsh reminder that as a country we are about to enter a period of great austerity. Organisations in both public and private sectors will be forced to address the issue of lack of funds as well as obtaining strict control over any money that is available to spend. Regardless of sector, financial management will need to change but the outcome will very much depend on the approach taken. Many businesses will indeed make harsh but necessary budget cuts and as a result will find themselves out of control or unable to cope with the impact. Others will cut budgets in a controlled and more structured fashion making it easier to deal with the effects.
Cutting budgets and being out of control
This situation usually arises via blanket edicts that are delivered from senior management; often these involve sweeping statements such as “All costs must be immediately reduced by 10 per cent”. The problem is statements like this are often unrealistic and unachievable because they may be delivered without logicality; as a result, they have little impact on the business. This attempt to regain financial control is completely unstructured and is probably set at a level that is far too high to enable real improvement to actually happen.
The likely outcome is senior management find it difficult to explain why the required reductions have not been met. This situation is worsened when some areas of the business have achieved the expected result but other areas have failed. The danger here is the implementation of more random budget cuts. These more dramatic reductions usually come very suddenly and without warning which can lead to bigger problems.
Despite best efforts, or well-laid plans to set budgets and work towards achieving them by the financial year end, in reality things change, new goals are set and budgets are cut. The consequences of cutting budgets shortly after they’ve been set can be severe and very hard to manage effectively. This is because budget cuts are often unscheduled, they will happen mid-year and as a result will impact on current activities. In some cases the affect won’t be detrimental, but in others such changes can mean huge problems.
Because budget cuts are normally symptomatic of reactions to short term pressures, they can also happen on several different occasions throughout the year (particularly when businesses are struggling to meet targets in a short space of time). This type of response will invariably have serious repercussions on the management of individuals within the organisation. Namely, because it’s usually these individuals who collectively deliver positive change for the organisation rather than the management of the organisation operating in isolation; ignoring this matter will only further alienate these people. To ensure consistency of successful implementation, organisations must include the people that are expected to physically deliver the change, in the process.
Senior management need to recognise that the attitudes displayed by employees are largely determined by the way that they are managed. These attitudes then translate into the way that the individual behaves. If people are managed well, the rest will undoubtedly follow.
Ultimately businesses must begin to understand that cost reductions cannot be dragged out of an organisation. On the surface, these organisations may not appear to be out of control and instead might exude strong leadership and forceful decision -making. But if the actions are in response to a worsening situation and the business is simply reacting to past problems on demand, how can they respond to situations arising in the future?
Cutting budgets and retaining control
The successful implementation of any cost reduction exercise is dependent on the commitment of senior management. If the people at the top of the food chain are not serious about improvement, expecting the individuals that work for the business to be serious about it is hardly realistic.
Implementing lean management and learning principles such as Six Sigma will help those organisations that want to retain control of their businesses even in an unstable economy. This approach aims to adopt a more logical and structured approach to management for the future. When businesses are faced with having to make dramatic budget cuts they need to be ahead of the game so that they can be responsive to change before it happens rather than continually playing catch-up. Organisations that are looking ahead five years are less likely to be panicking about the next six months.
There is no doubt that lean management and Six Sigma can provide answers to all of these out of control scenarios. As well as a structured approach, both have a common fundamental definition – the elimination of waste. These principles will not only eliminate excess costs but will use a process that has been developed and adapted to meet the changing needs of the business.
Some of the key methodologies of lean and Six Sigma are to:
1. Identify what performance levels are needed to ensure that the organisation can survive and grow in today’s world.
2. Identify what is limiting the ability to achieve the performance levels required in today’s world.
3. Determine what needs to be changed to achieve the required performance levels.
4. Determine which methodology fits best with the stated performance levels and the changes determined.
5. Be bold and decisive in introducing the methodology chosen.
6. Drive the methodology through the business.
Lean and Six Sigma are still very much a part of continual improvement in any progressive organisation. Businesses and public sector organisations need to establish which of these methodologies best fits with their current demands. Once this has been decided upon, it is vital that senior management is committed because half-hearted attempts seldom work. The truly successful organisations in the public and private sectors are those that live and breathe it through thick and thin.
There are differences between the public and private sectors because survival for a business is not guaranteed. But for all organizations it is crucial to take the most effective steps to ensure that when cuts have to be made the impact is planned, controlled and as pain-free as possible.
Bill McIntyre is Technical Manager at BSI Training.
BSI Group is a global independent business services organization.
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