Cutting Costs reaches its event horizon
A nice article in the Economist, 18 Jan 07, entitled: “Browne out“, looks at the departure of BP’s boss, Lord (John) Browne. He has been in charge since 1995, and his tenure coincides with some huge changes in the industry. These include massive mergers, the “greening” of Big Oil, and at the same time some big mess ups – “In March 2005 a fire at an American refinery killed 15 people and injured 170 more. Since then, BP has suffered corrosion and spills on its pipelines in Alaska, delays in developing new oilfields and two investigations of its trading arm for price-rigging.”
But the article makes a very interesting point: most of these issues relate to massive cost cutting that has characterised the oil industry in the past decade. Ruthlessly cutting costs eventually strips out the ability of a company to do what it has to do. It stretches staff, and demoralises them as well, often beyond their ability to cope with situations that arise. In oil companies, as in other industries, this can have catastrophic results, in the glare of public scrutiny. But for other companies, especially in the service industries and professional firms, the results can be equally catastrophic – yet unseen until the company teeters and topples.
There are only so many costs you cut, until you and all your competitors are all running on empty. In most industries, we’ve reached that point. Now, I predict, we’ll see competitive advantage coming in the form of “we’re not the cheapest, but we are the best” type approaches, as companies rebuild strategic capacity, and focus on VALUE, not just COSTS.
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That reminds me of something:
“When patent serial number 700,000 was assigned, the Commissioner of the U.S. Patent Office famously recommended that his office be abolished because ‘Everything that can be invented has been invented.’”
It seems to me, ‘The more things change, the more things change.”
Who knows what ideas people will have when it comes to making a company more efficient? Maybe some will run out of gas, but the smarter ones will outlast those who aren’t as smart. Others may not make it because of unforeseen events. But, we adapt, new companies pop up, and things in general, keep going.
Would love it to be true, but after working for a big US company for many years,
my level of optimism is not that high.
Very few CEO’s have the “balls” to tell shareholders to piss off – we are busy with a plan. Unless shareholders (especially US ones) see returns fast they will do all in their power to get rid of the CEO. Only long term plans that are appreciate is to suck cost out of the business… As you say lets kill the business slowly !!
Could it be these big ones are the ones that won’t last, whereas the smaller and medium-sized companies, will? BTW, I’ve heard of several stories about CEO’s who have golden parachutes which cost the company quite a bit of money when they discover they need to get rid of the CEO. Looks like they would learn…