For an operations manager, one of the more daunting challenges is getting a project funded. Senior leadership, especially those that grew up on the revenue side of the business in sales or product management, have the tendency to favor revenue-generating projects. Usually this entails an investment in product functionality, no matter how small. While this can be frustrating for back-office staff, it also makes great sense.
The revenue guys are driven by what customers are telling them every day. The pressure that they feel to satisfy customer requests is very real and tangible. This is because most customers are all too happy to apply additional pressure to get what they want from their vendors and suppliers. As a result, corporate strategy will always apply more weight to revenue generating (or preserving) initiatives. This is true even when those initiatives will bring in less value than a purely operational project.
In this context, operations managers must learn to demonstrate that the value of certain projects is worth more to the business as a whole than the potential queue of revenue generating projects. So where does value come from? A proposed initiative’s value comes primarily from its ability to generate an increase in EBITDA[1]. For operations managers, that usually takes the form of lowering the cost basis of the firm on an annualized basis.
Cost savings projects are certainly easy to compare to revenue generating projects in that they both result in increases in EBITDA. On the revenue side, the projects will yield increased sales, less the costs to achieve those sales. Assuming that the cost to achieve the sales is lower than the revenue that is generated, then the project will have a positive impact on EBITDA. A cost savings project similarly has a cost to achieve. The difference is that instead of spending money to achieve revenue, a cost savings project will spend money to save money on a current year and year-over-year basis. This results in a reduction in year-over-year expenditure and improved margins.
Theoretically, a cost savings and revenue project should be measured evenly based on the impact that each has on the bottom line, or EBITDA. The reality is that all things remaining equal, even with the same bottom line impact, the revenue generating project will nearly always win out in the priority rankings of senior management because they will accomplish two things: they will solve specific and named issues for clients; or they will help senior manager show growth at the firm level, which is likely where a percentage of their compensation comes from.
Because of this, non-revenue generating projects to improve a firm’s operations must accomplish something else over and above the cost savings or else they must be self-funding. Adding additional value above the cost savings usually takes the form of mitigating some sort of risk. This can reflect the need to resolve compliance issues, such as those presented by Sarbanes Oxley and similar laws and regulations, or the need to fix something that without fixing puts the entire business at risk, such as investing in infrastructure when the building is about to fall over. However, if an operations manager can demonstrate that there is considerable benefit to the business by not monetizing all savings from a cost savings initiative and reinvesting part of these savings into other value-added areas, then the project’s chances of being funded increase exponentially.
So, what does that look like? A classic cost reduction project is an outsourcing project where some or all of a function is moved either offshore or to an outside firm that specializes in that function. A smart operations manager will not simply outsource but will take some percentage of the realized savings and invest in an area that benefits the business somehow. Typically, I have favored reinvestments that improved quality somehow or otherwise allowed me to take more resources and focus them on serving customers more proactively.
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[1] EBITDA is earnings before interest, taxes, depreciation and amortization. EBITDA is a standard measure of a corporation’s profitability.