Exactly what is a principle in this context? It is a rule that places a limit on—or sets a goal for—a definable aspect of the institution, such as the number of organizational layers separating the CEO from the lowest echelon of employees or the productivity of the sales force compared with benchmarks. Forging and articulating these principles helps cut through organizational clutter in a way that some other cost-cutting methods have not always been able to achieve.
Another aspect of PBCR is that it involves the participation of what we call discreet insiders—a small group of senior managers picked by the CEO or project sponsor. These insiders are aware of the endeavor and help facilitate it from the beginning. This group, which expands in a tightly controlled manner as the exercise evolves, represents the institution’s core project team. The organization at large should not be aware of the impending cuts until they are imminent.
Phase One. During the initial step in Phase One, we perform a full-scale outside-in diagnostic—using data provided by the company concerning overall costs, organization structure, and FTEs—in order to deliver a preliminary view of projected savings and where FTE reductions should come from.
Next comes the critical moment of deciding on the precise principles to be applied—a task we carry out in close collaboration with the company’s project team. Although typically the same areas are targeted for most institutions, the principles can vary according to each company’s size, geographic footprint, and particular “DNA.” It is crucial, however, for all parties to reach agreement on the exact principles to be applied at the beginning of the process.
For example, at one company we worked with, the average span of management control had narrowed to four and the number of organizational layers had swelled to 12. More than 40 percent of the company’s employees worked two or three degrees removed from the customer. Other problems included low productivity in a variety of roles and many redundant and non-value-adding activities. The principles we forged with this company, aimed at setting specific limits and goals in areas such as these, were typical for a PBCR exercise. (See Exhibit 1.)
The process of forging the principles can be a delicate one. Indeed, it is not uncommon for one or two members of the institution’s project team to point fingers at business areas other than their own, saying in essence that the PBCR exercise “is a great idea that we need, but it doesn’t apply to my people.” In our experience, however, this type of assertion rarely reflects the true situation. In fact, unlike some other cost-cutting approaches, PBCR makes it difficult for senior managers to “protect their own” in an inequitable way because deviation from the principles, once they are hammered out, is highly transparent.
Phase Two. In Phase Two, using our initial cost diagnostic along with the newly forged principles, we conduct a reality check with the institution’s project team to review and refine head-count and savings targets on the basis of what feels truly achievable. This effort leads to the development of commitment packages—highly precise cost and FTE targets.
Phase Three. The commitment packages are then delivered as direct challenges to the leaders of specific business and functional units. These leaders, unaware of the PBCR initiative until this point, are given a period of weeks in which to respond with a detailed action plan to meet or exceed the targets under their purview. Often, they are allowed to choose one or two additional colleagues as collaborators. At the end of this phase, these managers bring their strategies back to the overall project team for ratification.
Phase Four. In Phase Four, the implementation of the ratified action plans is designed. This stage includes drawing up the details of FTE displacements and severance payouts, and constructing new organization charts. No organizationwide announcements are made until all implementation plans are ready.
What kind of results can be expected from a PBCR exercise? In the example described above, the result was typical and included the following: Average spans of control were increased from four to seven. Organizational layers were cut from 12 to 6. Activities deemed to be redundant were eliminated, and resources devoted to activities and products considered to be of low value were significantly reduced. Some work streams were shifted to lower compensation bands. Ultimately, the overall management head count was reduced by about 25 percent, and the total annual savings from the exercise amounted to about $300 million—$200 million in compensation and $100 million in benefits. (See Exhibit 2.) This figure represented roughly 15 percent of the company’s total FTE costs.
In some projects, we have witnessed FTE cost savings of 20 percent in IT activities and 16 percent in operations—all, as in the above example, implemented within six months.
To protect client confidentiality, this is a composite example based on our PBCR work with a variety of financial institutions.