Cut Costs Starting at the Core

At least one person I know says that God created consultants on the eighth day so someone could tell us that there are bad ways to do good things.

Cutting costs in business is a good thing, but there are bad ways to do it. Cost cutting is like mopping a floor: If you mop yourself into a corner, you have to walk across the wet floor and mess it up.

With the certainty of reimbursement cuts that are mandated by the Medicare Modernization Act (MMA), many providers are working on cutting costs. They can look at two general areas to cut costs. The first and most often considered is goods purchased. The second is the processes that consummate obligations to customers, payers, employees and other stakeholders in the business.

With regard to goods purchased, it seems logical that manufacturers must be getting close to their lowest price. Think about the prices your company paid for equipment in the mid 1990s. Concentrators, for example, cost about 30 percent less today than they did then. At the same time, inflation has increased the cost of doing business at the rate of about 2.5 percent per year.

Some of our research indicates that about one-third of the cost of goods at the manufacturing level is for imported components and imported finished goods. So if your company pursues price concessions on purchases as the sole means of dealing with reimbursement cuts, it is unlikely this will reduce your costs as quickly as reimbursement cuts occur.

Therefore, it seems that the only prudent action is to reduce the costs of processes simultaneously. There are two ways to go about this. One is to reduce the labor rates and benefits given to your dedicated employees, but any company that does that deserves to fail.

The other way is to make the processes your employees perform more efficient. This choice offers huge opportunity for providers. Some providers are even pursuing 20 percent improvement in productivity, and they are making good progress at achieving it.

As your company reduces costs by improving processes, keep the following points in mind:

1. Look first at what drives all processes in all companies. The soul of a business is the solution it offers and the customers that are offered the solution. All other processes and all costs are influenced by these two elements of business. For example, a provider might include in its proposition to its market that the company will deliver more quickly than all other providers. This will have an effect on all other processes, from intake to collections.