Cutting costs without drawing blood

When looking for ways to cut costs, most managers reach for the head-count hatchet, and the markets usually roar with approval. But a company can almost always create far more sustainable value by rigorously evaluating the small-ticket capital items that often get rubber-stamped. Drawing on his experience as a consultant and providing numerous anecdotes, the author contends that those "little" requests often prove to be gold plated or unnecessary. A disciplined evaluation involves asking only eight questions and conducting postmortems--regular audits of units' capital spending. But the payoff is enormous. Because cutting the capital budget increases cash flow, the author argues that a permanent cut of just 15% in the planned level of capital spending could boost some companies' market capitalization by as much as 30%. The first three questions--Is this your investment to make? Does it really have to be new? How are our competitors meeting compliance needs?--are asked of operating managers as they assemble capital project requests. The next three are asked by senior managers of themselves and their colleagues as they examine proposals: Is the left hand duplicating investments made by the right? Are trade-offs between profit and capital spending well understood? Are there signs of budget massage? At the end of the review process, senior managers ask: Are we fully using shared assets? How fine-grained are our capacity measures? The author's suggestions for the postmortem include searching for systematic problems with whole classes of expenditures and making sure audit teams come up with specific recommendations for change.     

Downsizing administrative staff without causing burnout

In sum, the most direct route to avoiding burnout in downsizing is to change the philosophy of the department and organization. Narrowly defined jobs cannot persist when positions are being eliminated. Managers need to find ways to accomplish the goals of the hospital within the available financial resources. To gain the staff support and commitment for doing that, the hospital must become much more receptive to seeking advice from the employees themselves on how it can be done.     

Preventive medicine for hospital costs.

The reality of soaring health care costs has hospital administrators facing the prospect of mandatory state regulation or voluntary restraint on their financial expenditures. In either event, whether formulated and implemented through external rate setting or internal cost containment, managers should be preparing to adjust their hospitals' management control systems to the emerging requirements of tighter budgetary limitations. The authors discuss the implications such cost-containment programs have for hospital control systems, identify the five cost-influencing variables that must be monitored, and consider the critical importance of incorporating attending physicians into the management control effort.     

Cutting costs in your own backyard: opportunities in financial services

Hospitals looking to reduce cost and improve performance in financial services should focus on these areas: Treasury banking services costs and fees. The possibility of a revenue-generating vendor payment solution. The accounts payable process.     

Mergers and marginal costs: New evidence on hospital buyer power

We estimate the effects of hospital mergers, using detailed data containing medical supply transactions (representing 23% of operating costs) from a sample of US hospitals, 2009–2015. Pre‐merger price variation across hospitals (Gini coefficient 7%) suggests significant opportunities for cost decreases. However, we observe limited evidence of actual savings. In this retrospective study, targets realized 1.9% savings; acquirers realized no significant savings. Examining treatment effect heterogeneity to shed light on theories of “buyer power,” we find that savings, when they occur, tend to be local, and potential benefits of savings may be offset by managerial costs of merging.     

Transaction costs, quality, and economies of scale: examining contracting choices in the hospital industry

This study examines make or buy decisions for 196 hospitals in the United States using transaction costs as the basis for analysis. We examine the potential effects of quality and economies of scale on these decisions. We find evidence to support the view that transaction costs, quality and economies of scale play an important role in the integration decision and that this role depends on whether the transaction is industry-specific or generic in nature. This study examines the contracting choices of many firms across multiple transactions with a significantly larger data set than previous work in the area.     

Inventory-driven costs

In the 199os, Hewlett-Packard's PC business was struggling to turn a dollar, despite the company's success in winning market share. By 1997, margins on its PCs were as thin as a silicon wafer, and some product lines hadn't turned a profit since 1993. The problem had everything to do with the PC industry's notoriously short product cycles and brutal product and component price deflation. A common rule of thumb was that the value of a fully assembled PC decreased 1% a week. In such an environment, inventory costs become critical. But not just the inventory costs companies traditionally track, HP found, after a thorough review of the problem. The standard "holding cost of inventory"--the capital and physical costs of inventory--accounted for only about 10% of HP's inventory costs. The greater risks, it turned out, resided in four other, essentially hidden costs, which stemmed from mismatches between demand and supply: Component devaluation costs for components still held in production; Price protection costs incurred when product prices drop on the goods distributors still have on their shelves; Product return costs that have to be absorbed when distributors return and receive refunds on overstock items, and; Obsolescence costs for products still unsold when new models are introduced. By developing metrics to track those costs in a consistent way throughout the PC division, HP has found it can manage its supply chains with much more sophistication. Gone are the days of across-the-board measures such as,"Everyone must cut inventories by 20% by the end of the year," which usually resulted in a flurry of cookie-cutter lean production and just-in-time initiatives. Now, each product group is free to choose the supply chain configuration that best suits its needs. Other companies can follow HP's example.