The Real, Extraordinary Cost of Misalignment

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Have you at times wondered just how much waste there is in your firm – in particular the extra costs associated with staff misunderstanding, misalignment, missed collaboration – and occasionally even open warfare?

I do, because I see it each and every day in organizations both small and large, niche-focused and broadly diversified, well-run and not so well-run.

Or flip to the positive and consider this: in almost all firms with sustained success, you’re going to find an extraordinarily high level of alignment around the stuff that really matters: mission, vision, values, strategy, and culture.

Here in New England today we’re watching an outlandish case of corporate misalignment play out in the news. Market Basket, a regional grocery chain (with 71 stores and annual revenues of $4B+) is embroiled in a leadership battle for control which threatens to sink the entire enterprise.  Two branches of the family each own roughly half of the business, and one side recently gained the upper hand and fired the long time CEO from the other side. Many employees are now out on strike, supply chains have collapsed, store shelves are empty, and customers are each day (often reluctantly) turning to competitors. How many of these previously loyal customers will return is unclear, but that’s not a gamble that any business should want to take. It’s outrageous that senior leaders aren’t reacting more quickly, and coming to a meaningful consensus and plan. Market Basket isn’t a small business, but it’s getting smaller every day.

Hopefully you don’t have this sort of open, pitched battle raging in your company, but that doesn’t mean you’re in the clear. Almost certainly there is substantive misalignment and lost opportunity in your firm, it’s probably bigger than you think, and it can be addressed and improved.

So, what is the real cost of this misalignment?

Here’s a typical example in a professional design firm. Suppose this company tracks consistently at 65% utilization – about average in its peer group. If the firm’s work is 65% billable to the client, does this mean that the other, unbillable 35% is waste? Indeed, no. About a third of it is probably structurally unbillable, including items like vacation, sick time, administrative effort, and nondiscretionary training. Most all of this is valuable to the organization, and certainly not waste.

Of the remaining two thirds, certainly some of this time is focused on high-value stuff – in marketing, professional development, and firm management. But since this effort is usually concentrated in a few senior individuals in the firm, it doesn’t add up to much.  And so we’re left with perhaps 15% of the total staff time unaccounted for, and quite possibly waste.

Maybe that doesn’t sound like much, but it should. If the firm is currently earning a 15% operating profit, then eliminating this waste (and dropping all of the increased revenue or reduced cost to the bottom line) would essentially double company profits.

But this is only part of the story. The truth is worse, because in most firms a good deal of waste is billed to the client. Our basic assumption that all of the chargeable time is intrinsically valuable is itself dead wrong. This reality is exacerbated of course by traditional contracting methods, like ‘time and materials not to exceed,’ and even ‘fixed- fee’ (without proper internal incentives). Simply put, there’s a good deal of waste today in professional firms because the client (unknowingly) pays for it.

How much of this billable piece is really waste? Uncertain, but my sense is that it’s relatively high – perhaps a third of all billable time, or about 20% of total time. If we add this 20% to the 15% calculated above (from the non-billable side), it’s a big number – more than a third of all company time. [In truth, I think this figure still underestimates the waste – and the opportunity for business improvements in efficiency and effectiveness.]

What would it mean to your bottom line to really get at this opportunity – to radically reshape your business model and organization toward a more efficient, effective, and profitable firm? Could you improve your bottom-line by 50%, or even double it? And if you could only squeeze out a gain of 15% or 20%, wouldn’t that still be worth doing?

What do you think? Let us know what you’re doing, where your improvement efforts are working, and where you’re still wrestling to capture success.

Cheers,

John

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