Saturday, August 1, 2009

Advice for companies hurting in this economy...

In times of economic stress, companies tend to make cutbacks. That's understandable, it's both difficult and risky to grow in a depressed economy. Also understandable is the general strategy of making cutbacks in cost centers and maintaining revenue centers as undisturbed as possible.

The definition of a cost center and a revenue center is the point of this advice. Common wisdom is that Sales is a revenue center, and everything else is a cost. This is based on the thought that if you get a sale, you can find a way to fulfill the order, somewhow.

The trouble is that paradigm requires uninformed consumers. In hard economic times, consumers begin informing themselves to a greater degree. In other words, the harder the times, the more likely a consumer is to see that you've maintained Sales at the cost of Operations. In simpler terms, if you have a product with value, it may not require active selling at all. I can't, for example, recall the last time an advertisement for basic staple foods (meat, fruit, veggies, bread) made the slightest difference to my decision to buy. Price does, but sales does not. The same holds true on entertainment; where costs are equal, I go with the greatest value, no matter the sales efforts made; where costs are inequal, I go with the less expensive option.

The point is fairly straightforward; despite years, even decades of salesmen selling the idea that Sales is the only Revenue center, it's not. Operations is. The revenue center are the folks who Get The Job Done. Sales, Management, HR, Admin are all Overhead.

That said, I'm not actually anti-Overhead. Most of those things are actually multipliers for the revenue generating portions of a business. HR can find the right Operations people and arrange training to make them more effective. Management can ensure that the right people are on the right jobs, and deal with obstacles that aren't within the ability of the Operations folks to deal with. Sales and Marketing can make sure that everyone in your target market is aware of your product, facilitate purchases, and even find entirely new markets for you to enter.

All of those, however, are multipliers. Not additive. If you start with a zero in Ops, it doesn't matter how much you lay on. You still wind up with zero. If you start with too small an Ops division, you wind up with a very brittle organization, where Ops is overloaded; not only will individuals be more prone to failure, but when they fail the effect will be felt far more than in an organization where Ops has enough depth.

Really, the point isn't exactly that Ops is a Revenue center and everything else is a Cost. My point is that everything in an organization costs money, and everything in a for-profit organization should be ultimately directed toward producing revenue. If companies cut back during tough economic times, which can be just as risky as trying to grow during those same times, they need to be very careful to make cuts across the board; ensuring that no portion of the company is cut disproportionately to the others.

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