Cost cutting your way to success

There’s a story told of a rancher who needed to cut his expenses to be more profitable so he had a real brainstorm one day. His ranch was a horse ranch and the answer was to cut down on the feed he gave out. By reducing the feed to his horses he could save money and that money would end up on his bottom-line.

So he reduced it. Sure enough, his expenses went down. That confirmed that his idea was a good one. So he cut it down even more. Sure enough, his expenses went down even more. He kept doing that for a number of weeks and saw his expenses go down and his profitability go up.

Finally, the horses were down to eating nothing. That added up to zero cost for feed and most everything moving to the bottom-line—a manager's dream, no?

Problem is, a few days later his horses died.

“Well, that’s an obvious one,” you say. “Horses will die if they aren’t fed—duh?” Well, it must not be as obvious as all that because businesses do the same sort of thing all the time. They figure they can cost cut their way to success and profitability but pare to the bone the experience they offer the customer, the experience that is their core product.

What do I mean by this? I mean street sweepers at Disneyland. Disneyland has been one of the cleanest places on earth, even if being one of the happiest might be debated. It was the cleanest, that is, until Eisner got a hold of it. He thought he could cut costs at Disneyland and that the cleaning crew could be pared down to help do it. So that's what he did. The upshot was that Disneyland was not nearly as clean as it was and Eisner was able to claim more profitability.

Problem is that that affected the Disneyland experience. Many shareholders, some of whom led a revolt against Eisner, thought the Disneyland experience had suffered as a result of Eisner. And now Eisner is on his way out. Good result?

And I mean the servers at a local restaurant I liked. They had a change of management and that new management was concerned with costs. So they trained their employees on carefully doling out portions to make sure no one got more than was fiscally sound for them to get. And it showed. From one day to the next, almost, you could see the change. The servers looked like they were measuring in their heads what to serve. This took them away from the friendly service they once gave and also positioned the customer as the enemy. And for a restaurant that prided itself on a down-home atmosphere and menu, this was, shall we say, not good. My attitude toward the place changed after that.

So what does this mean? It means you must understand what is the core product you offer, that is, the core experience you offer the customer and don’t stint on giving it to them. If you cost cut that to improve your profitability, you are starving your horses.