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Improving the bottom line: Scalpel or fertilizer?

Efficiency and cost-cutting or increased productivity?


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Leaders who are looking to increase their bottom lines have a choice as to how they do it.

Let’s assume you produce $100 worth of goods or services with $20 of labor input yielding $80 of profit. You can try to cut 25 percent of your labor cost to produce that same $100 worth of goods. If you do, you’ll increase your bottom line by just more than 6 percent.

Nice!

Maybe …

Option 2: Keep labor costs static but try to grow your business. For example, if you produce 25 percent more of your product or service (or perhaps something new), this will increase your bottom line by 31 percent.

Warmer...

Yes, I’m comparing Granny Smith apples to Honeycrisps. But we’re looking for a better pie, and the way you make it has significant impact.

Option 1 is the more frequently selection in my experience. Whether you’re taking a scalpel or a chainsaw to the cost structure, the orientation is “do this with less,” and it’ll most often result in a fairly immediate short-term increase in profits. It also, however, has some unintended consequences that can cause significant problems down the road.

Option 2 requires a different kind of leader – one who believes he or she can spread the right kind of fertilizer on the organization and engage people to do better work by using their smarts and creative juices. This can have some unintended consequences.

Even when done well, the scalpel approach creates anxiety in those left behind. It’ll likely result in a compliant workforce, but not a committed one. Less commitment means less voluntary action that would benefit the business, less creativity, higher turnover, etc.

Most people who have a career in leadership roles are likely to encounter situations in which they have twists and turns constantly.

The unintended consequences of the fertilizer approach are just as significant. You may fail and resort to the scalpel approach. You also must make sure that you actually achieve those growth numbers and are not just avoiding a tough choice. However, you may also increase commitment, enthusiasm and creativity.

Leaders must make difficult choices, and sometimes that means taking a scalpel to the organization – a decision that perhaps only you can make.

However, having your team members shoulder the burden and enlisting their minds in helping you increase performance is a choice you shouldn’t overlook. It requires a significant shift in mindset if you have a substantial need for control.

 

Consider the projected and unintended consequences of both approaches. Sometimes a scalpel is necessary, but other times increasing productivity by leveraging people’s skills can be preferable to efficiency and cost cutting.

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Todd Ordal

Todd Ordal is president of Applied Strategy®. Todd helps CEOs achieve better financial results, become more effective leaders and sleep easier at night. He is a former CEO and has led teams as large as 7,000. Todd is the author of Never Kick a Cow Chip On A Hot Day: Real Lessons for Real CEOs and Those Who Want To Be (Morgan James Publishing, 2016). Connect with Todd on LinkedIn, Twitter, call 303-527-0417 or email todd@toddordal.com.

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