Busting the business crash diet myth

Family businesses have focused on creating a leaner cost base as a means of boosting productivity, but slimming down in the short-term will only work if there’s also long-term sustainable change.

According to the 2013 KPMG and FBA Family Business Survey, 72 per cent of family businesses reported they felt they were outperforming their competitors in the area of productivity. This may be attributed to their entrepreneurial nature and constant drive for innovation in an effort to compete against larger players. While it’s great news that family businesses feel they are succeeding, productivity is an area that needs constant attention to ensure changes can be sustained as day to day operations evolve.

Many firms struggle because they equate productivity improvement with cutting costs. Simple cost-cutting is a short-term response that concentrates on doing things cheaply, not better. It’s akin to a crash diet that fails to deliver a lasting reduction in weight. True productivity is about changing and refining how things are done and ensuring they add the most value, with the least amount of resources. Sometimes the change may even cost more initially, but will ultimately deliver more value to the business.

Slowing top line growth and pressure to sustain costs is a common challenge across almost all industry sectors and I’ve seen many organisations embark on productivity programs to create a leaner cost base. In many cases these programs are once-off, or targeted at isolated areas, rather than undertaken as an ongoing organisation-wide initiative.

Family businesses need to turn their recession-induced crash diet into a sustainable lifestyle change. Sustainable productivity improvement requires cultural change and for everyone in the organisation to view their role from that lens.

Six levers of productivity can help businesses identify where the greatest gains reside and develop a tailored approach to realise those improvements and achieve sustainable change.

1. Do less – Focus only on short and long-term value adding activities

A significant amount of unproductive time is often evident in many organisations. Recognise the difference between ‘adding value’ and ‘being busy’.

Family businesses can benefit from investing in the future and not becoming distracted by ‘doing business with yourself’. As companies grow, they can tend to start creating resources that are not always necessary and direct significant amounts of effort to activities that a customer would never pay for – recognise the advantage of being smaller and leaner to begin with.

2. Use less – Reduce the amount of capacity invested in the production process (including fixed costs).

Constantly question where your money is invested and how it could be re-directed. This may include reducing working capital, stopping overproduction and compressing lead times, reducing floor space, enhancing plant and equipment availability, smaller/cheaper facilities, lower staff turnover. Also consider reducing inventories to free up cash and consolidating production footprints to free up real estate.

3. Pay less for inputs and by-products

Consider reducing the unit cost of inputs such as labour, raw materials, plant and equipment as well as rent. This can be a very broad area and includes procurement risk exposure and insurance costs, employment agreements, rent, financing, reduced emissions and waste disposal costs.

4. Get somebody else to do it for you

Remember your core business? Know it well and give the responsibility for non-core business processes to other people who can do it better and/or cheaper than in-house. Just make sure you retain control and agility and that you create an incentive structure that promotes shared productivity dividends.

5. Get somebody else to cover some of the costs, delay costs, get revenues sooner

This can involve investigating eligibility for rebates, R&D concessions, incentives, government grants and so on. Also review your leases and purchasing agreements, payment terms and collections.

6. Get more for your output

In 2013 family businesses felt they were outperforming their competitors with their product and service quality. However, more can always be done to improve the return on inputs by driving up the revenue per unit. This involves improving customer value, removing the need to compete on price. This can be done through differentiation and can also include reducing need for discounting and revenue leakage.

It’s time for family businesses to move beyond one-off initiatives and adopt a lifestyle change that lasts – one that delivers a leaner and more customer focused way of doing business in which continuous improvement becomes the norm and adding customer value is everyone’s primary goal.

Dominic Pelligana is a KPMG Private Enterprise partner and leads KPMG’s Family Business Services.

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