EBITDA Improvement thru Cost Optimization

 

Engendering justifiable savings and optimizing cost is not about  reducing daily costs (coffee, toiletries , transport) or supplier margins, and much less thru layoffs, what is required is a transformation and a BIG change yet meet the objective.

Often we get caught with incremental improvements and focus on variation or waste without looking at the big picture. I have seen during FY 14 a rush of energy and enthusiasm where every tom dick and harry wares a consultant cap and is giving all the gyan on cutting down costs without a focus on understanding the downstream impact it may leave on employees, suppliers and customers…

We had almost lost sight on looking at the big picture and understand what do we spend on, how do we plan it and how do we control it… the data clearly shows when utility decreases despite increasing sales, it is probably due to increased costs which impacts the EBITDA.

The organization has a clear mandate and the goal set to be having a 0 EBITDA difference with the closest competitor and the objective shared with me and my team was EBITDA improvement thru a cost optimization of $ 60 Million for FY15 and I picked a stretched target of a $ 100 Million optimization.

FY 14 initiatives were around the low-hanging fruits that were picked, and cost savings to quite a good extent found... and for this year it was, in other words, a need for a new, more comprehensive approach to cost containment that looked beyond the obvious and delved deeper into the organization spends and the cost incurred … lessons learnt from FY14 pushed me to think differently and as a first step (you may read in my previous blogs) cleaned up the way we operate and the tools we use to operate… I did swim thru the organization resistance and was successful in incepting an idea to operate in a factory model within our own team and use tools like TRIZ and CAP beyond the traditional lean six sigma tools and focus more on breakthrough projects instead of incremental improvements…. an argument and the ethos of leaders lead to a series of debates and a lot of reluctance on ground in embracing the approach whole heartedly, nonetheless I was able to  build the optimism and resonate the energy with all the leaders and help build the frequency that we vibrate at operate in the same spectrum…  and kicked off in this journey build my sub team owning a target of $ 50 Million from breakthrough improvements and the other two leaders own rest of the cost target following incremental improvements.

The target is big and my very first step was to meet face to face with the top management and key leaders to ensure a ‘dedicated’ participation, budget and sign-offs on implementable ideas. I did plan and hire a dedicated MIS person and equipped with right set of tools and build a robust tracking and monitoring mechanism to ensure systematic implementation and savings accruals.

The very next thing in the line of actions performed were to work very closely with the finance MIS team and build the cost classification table what I call as a CTQ tree… to clearly understand how the cost gets rolled up and where does the maximum come from… once we have this number we will drill down into the processes associated with them to understand WHY the costs are so...  the below image is a sample... a further breakdown with details is recommended to be built which becomes the backbone of the Cost Optimization initiative...



Figure 1 - EBITDA CTQ TREE

 


Figure 2 - Direct Cost CTQ TREE Drill Down

Figure 3: Sales Cost CTQ TREE Drill Down

Figure 4 : G & A Cost CTQ TREE Drill Down

 

As another parallel track I took the lead on pushing for a VOC gathering exercise thru a Focus group of leaders associated with each of the cost CTQ listed above and understand the pain area and also gather suggestions and recommendations from each of the leaders …

The ideas storming exercise will definitely pop up a lot of areas to focus up on which will be both incremental and breakthrough in nature … all the feasible ideas which will be incremental in nature will be run as YB and GB projects and the ones that are larger than life transformation kind ones will  be taken up by special task force for execution…

In the next few blogs as I write will walk thru on the challenges faced in the large transformation journey and how I tackled them to accomplish the cost optimization goal I have taken up…

Going beyond the orthodox approach… for a $ 100 million savings

If you're after big goals, you don't want to settle for the ordinary, extreme success is by definition outside the realm of normal ways of doing things and so I decided to propose something different to accomplish the set goals…I started a dream journey on a $ 100 Million savings for the organization to accomplish the bigger Vision set by the management and solve the problems it encounters during this Mission using tools and frameworks like Lean Six Sigma, TRIZ, CAP, Theory of Constraints etc…

 It’s impossible to get the exact reasons why people fail and others succeed knowing the exact formula to solve problems would have been an awesome state to be in but in vain, we are all human and very unique… so are the problems we encounter are unique in nature…

The organization has hired a set of Black Belts and Master Black Belts and the team is scattered across the organization hunting for small and big projects … a pipeline of ideas from various corners and a DNA building … and so on and so on… not everyone is Jack Welch and not every organization that picks up the journey of Lean Six Sigma has accomplished the monitory results and benefits to the extent they plan for… the challenge for this fiscal year is a big one… savings to a tune of $ 100 Million and will be quite an interesting journey to get this outcome.

While we talk about change and transformation, I did something different…, out of box… and proposed the following model to accomplish the desired benefit compared to the traditional approach where the BB / GB is the only person doing all the things the project requires…

In my approach the phases of a typical projects will be broken such that the team will not be only of MBBs and BBs and they will not be playing the role of a Mentor in getting the GBs do the projects… if at all they do it will be limited to a set of few early and less experienced folks spending time on building the momentum and training GBs and mentoring them on small projects very much in their scope and control… and the rest of the folks will move into a stronger approach to tackle the issue and embrace a factory model…

We will have one team called the IDEATION team who will be responsible to generate and gather ideas from various ends of the organization, this team will be playing a typical presales / marketing kind of role involved in researching industry best practices, building case studies, running champions workshops, conducting trainings, using organization wide tools to generate ideas, talking with people at CxO level and identifying opportunities for improvement.

The second team will predominantly work and focus only on the Define Phase of the project; this team will be assigned ideas from the Ideation team and will connect with the person generating the idea and facilitate the discussion with the people who are the owners of the function… for example if an idea is to reduce energy consumption across the organization this team will facilitate the discussion with the engineering and maintenance team to take it fwd. This Define Team will also be responsible in building the project charter, defining the business case, drawing the problem statement, benchmarking the current levels and  setting the goals in discussion with the champion and key stakeholder, planning, budgeting, initial communications, spending time with the subject matter experts gathering an understanding of the process and draw the as is process maps.

The Third team will be the data analysis team, this team will get the inputs from the Define team and start working on the measures, draw a data collection plan looking at the process and sub processes, perform the Gage R & R studies, get the measurement system right, set the operational definitions in place and perform all the functions of the measure phase, the very important role and function of this team will be to ensure data accuracy and data completeness, prepare the raw data on a spread sheet and draw the initial cuts with some pivots and slice and dice to represent various views of the data as per the data plan.

The inputs form the Team 2 (Define Team) and Team 3 (Measure Team) will flow into the Analysis team, this team will be responsible to come up with inferences post analysing the process and datasets using tools like Minitab and various other analysis tools that the Six Sigma framework offer, this team will liaison with the business leaders, function leaders and all other teams as and when necessary to come up with the inferences based on the analysis.

The final team … or what I call as the real change agents, the momentum builders, the go getters the core execution team will be the one who will use this data, inferences and all the hard work done by the others and play a true consulting role with the function and business leaders in shaping the change and meet the desired outcome. The brainstorming’s, POCs, Pilots, liaising with the internal IT team for rising the change request and building the systems cementing the structures and all other improvement activities. Post implementation this team will also work with the finance to help showcase the savings and benefits to the organization from the improvement project.

Exploring a Roadmap to $ 100 Million Corporate Excellence …

Organizations today have evolved and with all the expertise and years of experience making leaders fascinated to theories of Six Sigma built during 1980’s and try to replicate something similar to knock the door of an overlooked opportunity…

Large transformation and cost optimization thru change projects cannot be accomplished only with incremental efforts although they are very important to build the organization DNA, breakthrough improvement should be the focus and grab all opportunities with both hands wide open…

My objective was to go beyond the orthodox methods and focus on experiments, unless one experiments with various models it’s very difficult to get the breakthrough. Conceptually I found everyone in agreement with my proposal to experiment and hardly anyone agreeing to budget and fund it … alas … have I wished I was elsewhere … nonetheless I did not lose heart and continued to play more of a sales man role instead with a focus to get the budget for experimenting.

With a lot of travels and a series of meetings I found a cloud with a silver lining and the hope grew positive as I finally found one person to invest in my pilot.

Excited with the initial investment and support I set forth with the plans in place just to meet the end very soon and saw the initiative reaching its unexpected failure…, things did not go as planned and money wasted… I almost lost faith and my face value only to find the sponsor is interested in the idea and wanted to fund more … Surprise Surprise … ! … Thank god… my days look bright…

I did find an interesting and matured leader who joined hands to champion the efforts as a co-owned project execution being a strong promoter… we started it all over again and this time all the knots tied with roles and responsibilities not only aligned but tracked … the team members were from lower bands much hands on SMEs unlike the leadership bands who we had on our team previously, we had a very different strategy and focus was on straight forward execution instead of a traditional approach of gathering buy in and selling the idea … engagement etc… it was very clear… either do what is told or look at different opportunities for yourself.., a lot of strong decisions were taken and of course there were people who got irked and watched us with eyebrows raised… three months of the pilot and from the fourth month we started to see the results … overwhelmed we started to dream if this can be extrapolated across the organization we will easily make a savings of $ 23 Million YOY … multiplication is a very good mathematical application and in all practical purposes should not be used loosely… our experiences held us back and reminded it’s only the pilot which is successful … now with this success we should go to the world out there to build momentum  and gather buy in… 

Unlike me there are lot of people bubbling with energy, top leaders with more experience than me and not to be surprised while I find my creativity God’s Gift there are few leaders who consider themselves as God. Manoeuvring thru the egos and ethos proving people with a lot of case studies, Industry best practices and expert transcripts helped me propose a structure to be put in place and projects be picked up which will help accomplish the goal… while traditional Lean and Six Sigma team will continue to focus on incremental improvements and cycle time improvement where the gains are intangible and notional we will need another team focusing on accelerating the Change … the real multi dollar gains will come from large transformational projects using the principles of TRIZ coupled with tools of Lean Six Sigma and change acceleration. The thought process was very simple … address the wants instead of the need…!
 

With the key pillars and approaches identified, I moved on proposing the team structure. This is the most important part of the proposal; while I was clear that each of the pillars be run by a separate leader and roll up to the program there were few suggestions which were of an all-rounder approach… every one doing everything. I don’t deny this approach, but at least in the initial stages it is important to establish clarity and set the right direction and I chose the following team structure.

  

 Once we have the team and concepts agreed approved stamped and communicated and get the house in order … the next step is to connect with folks at the CxO level to brainstorm ideas for larger transformations… while at the downstream similar brainstorming will continue at all levels till the bottom node to identify areas of improvement …

Dilemma of a decision maker

There are no cookie-cutter answers when posed to top leaders who have accomplished the position they today are, most of the success stories are told after they have reached the peak … there is no one leader I have met so far in the last four decades right from my early days of infancy who can predict the outcome of an action to the path of success…

Nonetheless… one thing common I have noticed reading the autobiography of most admired leaders across the world is they knew when to move out … they knew where to stop… they knew when to say no… similar to a good leader is a gambler who knows when to get out of the table when he is on a winning streak…

This is an anecdote I remember right from my early college days… which our professor echoed time and again and emphasised on when exactly one should get out of a situation good or bad…

Human Beings and frogs are the two creatures in nature carrying tremendous power to adapt… Put a frog in a vessel of water and start heating the water...as the temperature of the water rises, the frog is able to adjust its body temperature accordingly...

The frog keeps on adjusting with increase in temperature... Just when the water is about to reach boiling point, the frog is not able to adjust anymore and at that point the frog decides to jump out...

The frog tries to jump but is unable to do so, because it lost all its strength in adjusting with the water temperature... Very soon the frog dies.

What killed the frog ?

Many of us would say the boiling water... and the truth is what killed the frog was its own inability to decide when it had to jump out... we all need to adjust with people and situations, but we need to be sure when we need to adjust and when we need to decide it’s time to when to jump...

The decision making process tends to generate dogmatism … Leaders with superiority often overpower their peer group and the very charisma they carry coupled with biases in making decision and overlooking the facts either delays the decisions or end up making wrong decisions and pay the price for it… fall back and read the history they are filled with consequences bared  and suffered because of delayed decisions… the history of mankind is filled with many examples where monarchs and top leaders have delayed decisions which are catastrophic.

Just like the most fertile soil does not necessarily produce the most abundant harvest the most experienced need not be the best decision makers … the problem is they often delay the decisions especially in the corporate world that I am exposed to have seen the best of the leaders in the top management sitting on matters long enough that the time flies and the opportunity lost… and then the blame game and downstream corrective actions start… the question is why did you sleep over the matter so long without making any decision…

If I fall back and look at the leaders I have worked with in the corporate world between 1999 and 2014… one very common observation is the leadership values seemed to apply in good times when the economy was blooming and the world was optimistic on India reporting a double digit GDP, but all these values seem to dwindle or even disappear during stress post Lehman issue…

I have seen the best of the leaders under stress loosing long term focus and the temporary problem overpowers the senses and the very human nature filled with interference and insecurities takes over… no matter how resilient one is the environment acts such that the leader is unable to give up or move on and goes on taking decisions thru his gut and not the facts supporting which often blow the problem out of proportion.

Another very common issues one ends up adding cycle time to the decision making process is lack of communication, what I have seen in a decade long experience is people tend to communicate less during bad times, when in actuality, they need to communicate even more…, this fallacy leads to grapevine and gossips tend to picture themselves as facts making the employees take decisions which otherwise with sound communication and clarity wouldn’t have…. I have seen fear and greed dominating the human behavior forcing one in a see-saw journey of decision making…

Wait for something good to happen, a very funny things but yes, that’s true… many organizations wait for an economic and business turnaround and wait for quite long a time to make decisions which should be actually other way round… as a leader one should be making sound decisions during bad times so that the opportunity can be grabbed by both hands during good times…

Decision making is one of the remarkable qualities what leaders are identified possessing that sets them apart from others, the decision made may be bad or good… what is more important is to make one…. delaying making decision will attract an end to the person similar to the frog in the boiling vessel

EBITDA and SG&A Improvement… the cash flow story (Part 2)

Every penny of revenue leakage fixed and an invalid cost eliminated has a direct impact on EBITDA… after my early journey working on projects which were of the very nature of Quick fix and implementation of best practices and the organization tasted the success to quite a good extent savings few million dollars the next big project I picked up and built a focused team was to Identify every opportunity of Revenue Leakage and fix it.

We identified all areas both in delivery and support functions the potential candidates of revenue leakage and start collecting data around it. It took more than a couple of months to streamline the operational definition for revenue leakage and a series of meetings with various stakeholders and the user community we finally agreed on the common operational definition  and what finance team will sign off (this was very important step) as savings generated by fixing the revenue leakage.

We defined Revenue Leakage as “Money not recovered on time either from the customer or the vendor or employee. Any outward cash flow as a deviation or exception to the set policy or process in place will be considered as Leakage”

Clear instruction on this project was no notional savings will be considered unlike other projects where cycle time savings were multiplied with a volume number and quoted as notional savings.

We picked up the following three areas to fix in this fiscal where an opportunity for leakage occurs…

1.       Days Out Standing / Accounts receivables

2.       Recovering Advance Payments from employees (ForEx and Travel related)

3.       Leave management in T & M assignments 

As a next step we started measuring to baseline where we stand internally and in comparison with industry benchmark. A dedicated team of data analysts were hooked up with the finance team to conduct a data collection exercise and we engaged with a third party consulting firm to benchmark our company with the competition to understand the variation.

While this exercise consumed time there was a definitive number that popped out, of course it was not easy to gather consensus from all and again a series of brainstorming sessions following with what is in scope and out of scope, what should and should not be a part of the data and the further debates took about a few fortnights to finalize. In this entire endeavour while the support from the senior management continued to exist it was a herculean task to gather the support and time from middle management and build the momentum. Mobilizing commitment looked very bleak at the very beginning of the exercise and we had to struggle to get the information from all sources and plug into an excel tracker before coming up with a baseline number … The irony is that the very people you need on the ground hands on are already overburdened with so many activities and tasks that often makes it very challenging to accomplish some simple tasks…. Nonetheless we did it…

The next step that we took based on the inputs from the subject matter experts and the inputs provided by the third party consulting firm who did come up with initial recommendations after the bench marking exercise was to look at the entire set of events and classify them into three broad categories and established role / process clarity to address the situation…

1.      Risk Management : The role of this group was to look at every opportunity and map it with the existing processes and identify possible risks and then address them appropriately as per the risk matrix

2.      Leakage Management: The very role of this team was to constantly look at all opportunities in the existing mechanism the possible leakages and overcome them. Under the umbrella of leakage management we had a couple more sub teams formed to strengthen governance and compliance especially around the SLA Clarity and automation. A separate operations team looked at contracts, warranties, and entitlements. We strengthened our internal interdependencies and raised the need to connect them together… data always exists but is difficult to access… by connecting and overcoming the dependencies and the strengthening the online repository which connects the business operations, sales, compliance, finance, and the delivery with PMO and Governance team working hand in glove was quite a challenging tasks that took sometime to shape up quite well and now we have a strong recommendation in place to have a team of dedicated and focused group of experts who look at wing-to-wing service life cycle

3.      Leakage Prevention: The very challenge we faced in this situation is educating the folks on the difference between customer satisfaction and billable assignments… while it’s important to address the needs of the customer, it’s important to educate the customer the services offered will come at a certain cost especially in a T&M mode where every minute is billed. When brainstormed further we discovered the root cause is the contract document availability and access to the engineers on the field onsite with the customer who are unable to understand if the piece of work they are doing is covered under the terms and conditions or the post maintenance activities or not… there was a huge cry on confidentiality and other such stuff during the arguments which many initially made a noise and finally agreed on the sharing the contract knowledge to ensure things fall in place…. What the very human nature filled with unknown insecurities stops the CRM software’s help the folks onsite with the customer and a very learning we discovered is having access to critical customer data helped cross-selling and upselling thus helps the revenue stream...

Very strong and stringent monitoring of advance payment collections and associated tools which connect the pay-outs and collections were put in place and the IT Team started working on the tool enhancements

Inputs were shared with the HR team on the leave management policies to be revisited which can help the revenue leakage, a set of senior department heads with the HR team coupled together to come up with a policy around the same, addressing employee related sensitive areas need extra time and caution on the roll out of the policy and so measures and steps were put in place to ensure the communication is seamless…

Analytics with dashboards showing Red , Amber, Green (RAG) status are in place, the team will continue to monitor the progress periodically and few months down the line I will again engage with the team to see if the controls put in place are adequate enough or additional things are required to be done…

In a nutshell my learning out of this episode can be summarized as below…

1.       Human nature is the most important one to focus up on; we already know all the solutions but lack action to accomplish it… processes have to flex with the business when ever business and the people running the business demand it

2.       My facilitations skills matured further working with folks from various teams and getting them all together in sync and signing off an agreement on the new process

3.       Digitizing the solutions and cementing the structure using an IT Tool is the only way to strengthen the control… nonetheless we live in an excel based world and exceptions are a part of it, no matter what controls one puts in, someday the exceptions and ad-hoc processes will overcome the discipline and one needs to revisit for continuous improvement that is incremental in nature…

A potential cash flow greater than USD 5 Million year on year is the initial estimate with the recommendations and process changes put in place…

EBITDA and SG&A Improvement… the cash flow story (Part 1)

26^th June 2013, the day two giant IT Companies merged officially and the market stopped tracking Mahindra Satyam and the only entity continued to exist is TechMahindra.

This was the day I took over a role as a Sr. Consultant in the business and process space to contribute towards driving continuous improvement projects to enable free cash flow thus improve the EBITDA (earnings before interest, taxes, depreciation, and amortization) … one of the most critical measure of the company's valuation tracked in the capital markets by the financial experts.

As a first step we spent time with the business leaders who looked to maximize the return on investments evaluate impact of operating the business on free cash flow. In an environment of maximizing value, it was important to review all business expenses and conduct a profitability analysis across all the projects. In so doing we discovered at the project level the contributors who impact EBITDA, which increases the value of your business and the ones who are pulling it down. As a next step I and my team lead by the best of the leadership worked hard to help understand sales, general, and administrative (SG&A) and look to maximize those costs as a percentage of revenue.

 It’s a known fact that High operating costs lower your EBITDA… one of the things that I have done in the past is to quickly identify all value enabling activities and digitize them those that will need people involvement outsource them to low cost channels. I carry a very strong philosophy from my past experience that my people will work only on the value added tasks and process rest all value enabling tasks be outsourced and kill the non-value add. The first few suggestion made people hesitant to entertain the idea of lowering operating costs because they immediately equate it with lying off employees. It took quite some time to educate the crowd that there are a lot of other ways to lower your operating costs without reducing staff. Could be as simple as turning off your machines and lights to save energy, wastage of food and the network usage to start with the journey of Lean following the principles of HoShin KanRi and go with the policy implementation.

Ideas and best practices picked up from the experience of the past helped spin a quick fix just do it kind of projects around Cycle time improvement that directly impacts billability. Two teams were given tasks to build the six sigma culture as a DNA in the organization.  8 – 10 leaders in a consulting role attached themselves with each business group.

I owned the entire set of support functions and kicked off the improvement path by checking for areas of inefficiency that can be corrected with new policies and procedures … focus was to be lean and quick on the solution front without spending a lot of time on data collection and data analysis, because it’s a known issues to all just an as is process / value stream map is good enough to identify waste and eliminate it strengthening policies and procedures.

Wing to Wing financial analysis of each support function opened a wide set of opportunities to focus up on… Cab usage, arrival pattern and employee commutation costs were identified to fix asap and then engaged a team from facilities to pull down the power tariff and work towards improving efficiency on energy usage. Companies like GE and Philips were consulted and engaged in the solutioning and implementation of ideas.

Visa Cycle time and Air Travel was another big ticket item that was looked at. No doubt that a growing company will have a growing spend on the travel and the ticket prices are equally volaitile, but there were a lot of opportunities like blocking the ticket 6 hours in advance, reducing approval cycle time w.r.t. travel request, choice of travel class (Economy / Business), Travel mode like Air, Road or Train, effective use of technology like telepresence and video conferencing, strengthened planning to reduce the last minute cancellations, overcome date changes in travel. Policies governing around international travel and the per diems associated etc… accounted a good round of savings.

Infrastructure spend was another big-ticket item on the list which owned a lion’s share of the budget, with growth comes the overheads related to network and datacentres, storage and spend on TSP. Reducing the call volume and number of service requests was another area that improved productivity, reducing the approval cycle time and simplifying the approval matrix made the operations lean.

Projects were spinned around DSO… days out standing … the accounts payable and receivable cycle time, employee reimbursements, finance ERPs, invoicing defects and delays and wing to wing cycle time at the collections front added more savings and directly impacted the bottom-line which was an icing on the cake resolving quite a good amount of issues related to the cash flow.

Optimizing the wing to wing resource supply chain and hiring cycle time, enabling ease w.r.t. joining formalities made life more comfortable adding at least 35 days of additional billability and improving the revenue stream added a new flavour all together to the program.

While you have read the positives and the things done we encountered a situation where like any other company the execution looked bleak, as long as there was focus things were moving and as the focus shifted there variation crept in. IT Systems and structures did not help much. Performance targets were poorly defined we lacked insights into the long term levers, while the near term picture looked great there were concerns around the sustainability and long term results were questionable.

This is a time when we looked like being exhausted with the ideas and best practice picked up from the market and most of the things already implemented, there was nothing new to identify from a cost optimization whereas there were a lot of opportunities around cycle time improvement that will lead only to notional cost compared to hard savings that could impact the bottom line.

It was a time to rethink on what I was actually doing, initial enthusiasm and quick fix projects from the past experience will not help in the long term and I need to now strike the right balance between targeted reductions, re-allocation and re-investment in areas that can driver higher overall expense productivity over time. It was very important to establish benchmarks that are truly “apples-to-apples” and start looking at highly-granular spending breakdowns; more importantly clear understanding of the strategic, tactical and organizational “drivers” of world-class cost structure performance is something I started to focus up on.

Days passed by and a series of brainstorming session threw light on prioritizing the strategic goals, relooking at the degree of centralization and empowerment to local teams, funding mechanisms, vendor rationalization, realigning roles and responsibilities, hierarchy … head to tail ratios, opportunities of outsourcing as a new set of projects to focus up on in the coming year….

While the first year was a cake walk with quite a good amount of savings making the bottom-line healthier and reaching the set goal, it’s in this coming fiscal that a lot of people in raising eyebrows to ideas being brainstormed and extending surface level … people involved at middle and lower management feeling insecure as soon as talks w.r.t. outsourcing and role rationalization were being discussed … nonetheless a lot of support from the Sr. Management is adding a lot of confidence to the program and the determined will and focus is helping me overcome all hurdles and moving forward to accomplish the goal…  truely a great expriance and awesome company to work with :-)