Get ready to run a ‘trim and fit’ race

Having begun to feel the pinch of the West, companies must adopt a tough and lean approach to survive

By Cheranka Mendis

With big markets such as Europe and Japan and those closer to home like India going through tough economic times, Sri Lanka cannot be insulated for too long before feeling the pinch of the global scenario.

However, when the siren for tough times goes off, companies can still look at the silver lining if they approach the dark clouds with what MTI Consulting calls the ‘trim and fit’ approach.

MTI Consulting CEO Hilmy Cader, MTI Associate Consultant and Financial Service Specialist Mano Tittawella and MTI Regional Consultant Middle East and South Asia Yusuf Isaam at a round table discussion noted that the best way to respond to the problem of tough times and crisis is through the ‘trim and fit’ concept.

With local companies having enjoyed a bull run from 2009 onwards, the situation that could arise should not take the companies by surprise and lead them to into hibernation. Cader said: “The way you approach the next year or so has to be very different to how you approached the last three years.”

Two paths to choose from

Essentially, there are two approaches corporates can adopt. One is what he called the ‘chop and cripple’ approach, which is virtually a case of amputating the cost irrespective of how they can perform and the other is the ‘trim and fit’ approach.

“The former is where you discriminately cut cost, there is a disproportionate cost focus, all upsides are ignored, staff costs are seen as first to be cut off, which might not always be the best thing to do.” In short, it is where corporates look for immediate weight loss – looking for the great slimming tea and the herbal tablet to take 10 kilos off. “But that does not exist,” Cader said, “short of amputating it doesn’t work.”

The ‘trim and fit’ approach on the other hand takes a more fundamental look at the situation. Isaam stated that this concept takes the companies to its initial principles. “They need to start with the basic things a company can do. When companies grow they seem to forget the basic requirement that is needed. Going back and asking the question ‘how it that we can identify what is really needed to do things in the best possible way?’ is the ideal. That is the starting point of a rational view.”

Tittawella added: “The mantra is to look at the activity and ask yourself the question, is this required? Does it add value? Is it really needed? And can we do it differently? From that will come a much better foundation to look at cost differently.”

He noted that some of the better companies do this anyway, be it good times or bad. “Good things about tough times are that you can come out cleaner, leaner, fitter and more innovative.”

Isaam also stated that based on the learning curve, companies across the world should ask what the core business is and how do they could add value in that business. With multiple layers going on in some industries, oftentimes keeping the business running needs more energy than actual value addition itself. The question should be how much of it is really adding value, he said.

The better pick

Cader stated that ‘trim and fit’ looks at a cautious, selective, cost optimisation method with the focus on liquidity, which is ideally what could kill a company during a crisis. The focus should be on the cash flow. “If the focus is on cash flow, even at investment decisions and any other initiative, you begin to ask the question ‘where is this cash flow and at what point am I going to see this?’ If you cannot see the returns in a reasonable period of time, why do it?”

‘Trim and fit’ companies also use the opportunity to look for prudent opportunistic investments during these times. While everyone’s cutting off, smarter investment houses see this as an opportunity to pick up. Such companies also realise it’s a good time to get the organisation into shape.

The ‘trim and fit’ companies also prepare to take tough decisions supported by analytics and not by emotions. “Some decisions made in boardrooms are so stupid that even a student could have said it was wrong. But the problem is there was never a student in the boardroom, which shows that mindset is important.”

However, this is something that should not only be done in a tough situation, said Isaam. “It’s a matter of asking how we can do the best things in the fittest possible way. It’s a case of making lemonades out of lemons.”

The reason it is called ‘trim and fit’ is because being trim is the best for health at all times and being fit means there is agility to perform. “At the end of the day being trim is the best option and this is achieved by working on the fundamentals. And fundamentally companies have to sweat it out. Fit is because you maybe trim but can also be feeble and anorexic which will not help. The nimbleness to act upon must be there,” said Cader.

Getting the model right

Speaking of the model of ‘trim and fit’ Cader stated that it starts with looking at a risk assessment, i.e. looking at a PNL at the value chain as opposed to compliance-oriented PNL, which is a lumping of a cost. The value chain then must be looked at.

A typical chop and cripple company looks at vertical costs, whereas other companies look at horizontal costs in the value chain, rationalise it and then look at vertical costs. “This way you are far more focused and that’s a proper risk assessment,” he said.

A sensitivity analysis based on value chain PNL must follow adding a sort of stress test some of aspects of the model. “Having looked at these, look at the strategy and take the fat out of the strategy then take the fat out of the processes, and then off the structure. It will subsequently become very clear where the fat of the organisation is.”

Working capital management must be addressed and companies must look for opportunistic HR investments, realign strategy and process and look at capacity estimation. 

Even during tough times, there are opportunities for companies to grow. On a customer perspective, what changes is the buying hierarchy. There are priority changes. However, one must not adopt a blanket approach and assume everyone’s going to cut down from everything.

Isaam commented: “Buying psychology changes. Today people look at an instant fix and don’t mind that coming at a long-term cost. In the case of consumer electronics, for example, it is more of a psychological need than a necessity. People would opt to have an upgrade in housing at a later point and have the latest in fashion gadgets to be socially mobile.”

Agreeing with Isaam, Cader noted that the good side of the crisis is that it challenges every cent on the value chain. When the going is good, there are all kinds of products which are later seen only as good time decisions. “A lot of inefficiencies get added on during the good times.” He noted that companies should work in line with the popular Walmart saying, “If you can’t make money by selling, make money by the way you buy”.

Companies should create what Cader terms as an ‘upside incubator’. Rather than going into hibernation like a Russian polar bear, use the crisis to create an upside incubator planning what they would do once the crisis period passes on.

“Smarter companies also say ‘what crisis?’ and does not use the period as a fantastic excuse,” Tittawella said. “Crisis is what you create. How you respond to the situation is what is important.”

Being tough

What companies need to do is take the unnecessary layers off, avoid supervision only jobs and have zero slack by identifying and doing away with ‘just-in-case’ persons and generally managing persons who when assessing do not contribute in a major manner to the growth of a company.

When restructuring during tough times, corporates must be absolutely cold when looking at the structure and process. Human emotions should not play any role here. Companies should also have an inclusive and transparent process of getting people involved and use tough times as an ideal opportunity for performance-based pay, a win-win situation for both parties.

Companies must work towards locking in high performers and have a lean culture. “In today’s world the lean culture must be around every day. One cannot wait for a crisis to become lean. Companies must make it feel that lean is smart, cool and responsible.”

“Companies must be tough in anticipation of the tough times,” Cader said on a final note. “The ideal of toughness and leanness must be built in from day one. In times of crisis sugar candy and witchcraft cannot help; surgery might be inevitable. There will be opportunities during tough times. Smarter companies really go and grab them for the upturn. One must always prepare for the good times to roll in.”