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Recently, I proposed some performance metrics that included cost avoidance. The idea was promptly dismissed by an VP because it was not a "value added" measurement of the performance of my team.

I am no accountant or financial genius so I must have missed something. How is cost avoidance not adding value? If that's the case, I should resign immediately because I run a service organization that's whole existence is centered around the fact that we are less expensive than outside services (we really are too). We save money through cost avoidance. Every year we get better at it too! I have tons of data to prove this but with a waive of some EVP's hand, I have nothing.

Maybe somebody who has more experience with these things can tell me what this guy was talking about and where should I go next? Was he wrong?

bflynn's picture

The VP has blinders on. He is looking and thinking about revenue, not gross margin. You know that.

I'm not sure of the issue - you have to get metrics approved by him and he rejects the metrics that you're proposing? Perhaps if you rephrased it into increased margin through cost reduction as opposed to just cost reduction, it might work. It still doesn't get to his revenue, but gross margin is where he needs to be anyway.

Brian

jhack's picture

Tool,

Services organizations are often stuck in a strategic bind. Do you work for a services company or a product company that has a services organization?

The company goal might be revenue or market share rather than margin (legitimately). I've worked in a services organization (at a product company) where more revenue with less margin was in fact preferred due to the strategic goals of the firm.

It may simply be that the EVP would rather you put your effort into increasing revenue 100% than reducing costs 4%. No executive minds reducing costs, but there is an opportunity cost associated with your efforts to do so. EVP may simply want you focused elsewhere.

Here's the key: The EVP has goals. Find out what those goals are, then adjust your performance metrics to serve those goals.

John

pmoriarty's picture

Having worked for several CFO's, my experience is that cost-avoidance, unless it is really black and white, is not something that impresses them. It falls into the category of "soft costs", as do things like improved productivity/efficiency, ease of use, short learning curve, etc... Many of these hard-to-quantify metrics are dismissed by senior execs as "smoke and mirrors".

Is being cheaper the only value that your team adds to your organization? To be candid, if that's the case, I'd start looking for a new job. Ultimately, somebody in a lower cost of labor market will figure out how to do what your team does it at 1/4 the current cost.

What you need to figure out is what values does your team provide that cannot be replicated by a bunch of people in Asia.

HMac's picture

Tool -

I've run into this a lot, because there's often a layer in organizations that's focused so much on revenues/top line, and not on margin/profit/bottom line.

Generally this level doesn't have true p&L responsibility, and they're incented and directed on activities that bring in more revenue. The absolute classic example of this role is the Sales VP - someone who's all about making quota, and doesn't have to worry about the expense of delivery.

Above that level, and up into the "C" level, they're much more about bottom line performance and value creation.

Lots of possibilities...

Maybe your VP isn't aligned with the overall organizational goals. Or maybe he's absolutely aligned with the goals for his own job!

Or maybe he's a jerk. Or maybe you proposed something that wasn't really on his radar screen and his first reaction was to dismiss it.

-Hugh

AManagerTool's picture

Thanks for all the replies. I think I was being used as ammunition for something beyond my pay grade. I tried to get more of a description but was told not to worry about it....Stay tuned