Thursday, 1 May 2014

Is your Cost-Orientation a hindrance to Company Growth?

Research reveals that brain at any given opportunity does try getting into the comfortable zone, what makes our Habit. If the same theory is applied on organisations which are considered living entity, brains of employees try doing routine, controllable activities.

Every organisation – for any activity, big or small does follow the Principle of Planning to undertake an activity. But deep down every activity being undertaken is seen under the lens of cost. Therefore, planning, invariably turn out to be a ‘Cost Planning’. Reason, cost planning by & large is under the control of the company. In other words, cost planning makes a company becoming its own customer. For example, decisions pertaining to how many employees to hire, how many machines to procure, how much raw material to purchase, how much money to spend on capex etc. This nature of the organisation displays the peculiar traits associated with a customer and like any other customer, the organisation decides to stop buying a particular practice or service. Focus therefore remains the cost. However, as always, there are exceptions to it where company has no control over some of the costs, as it may be imposed on it under some laws. Bust such costs as imposed on a company by others make up a relatively small fraction of the overall cost. Primarily, most of the costs are derivative of company controlled costs. Do agree with me on it, Reader?

But very axiomatic question comes to mind, why companies get into such thinking mode? Simple reason- it is very easy to plan controlled costs with relative precision. It is this tendency of organisations which turns out to be anti-growth for them.

Mind it, I am not saying cost planning should not be done, but one must ensures that those costs which can help organisations grow further, should be undertaken. Strategy oriented costs should not be seen under the lens of Cost Planning.

 Second obvious question comes in mind is when learned professionals know flip side of this approach, why then does it happen? To my understanding, it is due to ‘planning-oriented-mangers’ tend to apply familiar, comfortable cost-side approaches to the revenue side as well; treating Revenue Planning as virtually identical to Cost Planning. But that does not in fact work for Revenue Planning. Revenue Planning is in the hands of customers and not under the control of organisation except in case of monopolistic markets.

“Bottom-line for ‘Bottom-line-obsessed companies is predictability of costs, is fundamentally different from the predictability of revenue.”

I can very well say, if companies want to grow, they must apply different principles to Cost Planning and Revenue Planning, or otherwise they will become redundant one day, as cost whatever one does will be having spiralling effect. No one can cut every cost. Revenue be given more importance to cost without blinking on cost under control approach.

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