Reducing Costs is a Short-Term Tactic, Not a Long-Term Strategy

Cost-cutting is like an energy drink

Senior managers must have a grasp of pertinent financial data. Financial reports are so important that many managers fall into the trap of letting them drive their strategy. “Management via spreadsheet” is especially common during times of poor performance. When times are tough, some managers become obsessed with cutting costs in hopes of boosting performance. When managers initiate a cost-cutting campaign, they often score early victories. These early victories usually come from plucking the “low hanging fruit” and reducing obvious waste and overhead.

This “low hanging fruit” is usually more like an energy drink than an apple or a banana. It provides a fast buzz that fades away just as quickly as it arrived. One or two energy drinks might be appropriate for someone who really needs to stay awake and focused, but binging is very unhealthy. A long-term strategy focused on cost-reduction is just as unhealthy for an organization, as binge-drinking energy drinks is for the human body.

Where is the bottom?

In the early 2000s, the US nuclear power industry was focused on reducing costs. Since labor makes up approximately 75% of non-fuel O&M costs, it was often the focus of these cost reduction initiatives. Many best practices and optimization initiatives were developed, shared and implemented.

Average plant staffing kept dropping until 2007, when the industry reached the bottom. Since 2007 average staffing has been increasing. Several factors (“cumulative impacts”) has driven this increase. Many of these factors are outside the control of managers. But ultimately there was only so much cutting that could occur. People are still required to run a plant. Some managers have been taught this lesson through cost-cutting decisions that resulted in nasty, unanticipated side effects.

The side effects are worse than the problem

When someone has been drinking energy drinks all day, they should not be surprised when they can’t sleep and are walking their dog around the neighborhood at 2am. Similarly, managers at power plants should not be surprised if they aggressively cut staffing and experience some of the following nasty side effects:

More plant trips
Decreased equipment reliability
Longer outages
Diminished morale
Greater regulatory scrutiny

The pain associated with these side effects usually ends up costing more than was saved in the first place. A significant re-investment will be needed to get back to equilibrium. Making the right investments to improve performance requires looking at more than just cost data.

What is the right way to look at costs?

Like any investment, better returns are more likely to result from wise and informed choices. Industry staffing benchmarking data can support wise choices by suggesting the best places to invest, maintain or divest. Assessing staffing by headcount instead of by cost also removes the uncertainty associated with different labor rates and overhead burdens. Instead it emphasizes having the right number of people in the right place at the right time. This approach is healthier and more sustainable. Like switching from energy drinks to water.

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