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Reasons for and Methods of Exponential Cost Breakthroughs

Jan 30, 2008
Exponential cost reduction allows well-run organizations to grow by reducing customer and user costs by more than 96 percent while expanding profits. What are some reasons for this potential?

Advances in transportation and communications mean that you can quickly access help and resources from unusually remote locations. Rapidly declining electronics costs further aid the replacement of expensive methods for delivering your offerings.

Customers, users, and beneficiaries are also learning how to do more for themselves, which permits even faster elimination of unnecessary costs. Effective outsourcers can increasingly do your most challenging tasks for pennies compared to your costs. What you cannot do today, you may be able to do tomorrow. There are high rewards in such an environment for continuing business model innovation aimed at reducing costs.

Let's think about scale for a moment. The average business serving individuals has fewer than 1,000 customers. The average business addressing the needs of companies has fewer than 30 customers. If you compare those numbers to the world's population (more than 6 billion) and the number of businesses (many millions), you quickly appreciate that there is much untapped potential for the average business to expand.

By comparison, many schools, hospitals, local charities, and town government departments directly serve no more than a few hundred people a week. At those scale sizes, overhead costs are an enormous part of total costs. Simply by adding 20 times more volume, that portion of costs should also decline by a large percentage. If more than a 20 times increase in volume occurs, even more remarkable reductions in overhead costs can occur.

Here is what you need to learn:

First, locate what aspects of what you do today can be eliminated because they are no longer necessary. For instance, if you are able to stop making all but an occasional minor error, a lot of your quality control activities can also be eliminated.

Second, design a better process for efficiently performing the remaining tasks for providing your offerings.

Third, shrink the delay between when your offering is needed and when it is delivered. Most of the current elapsed time in your process simply adds unnecessary costs while conveying no benefits.

Fourth, reduce the number of steps involved in providing your offerings, plus make the offerings themselves simpler to use. For instance, many people don't maintain their cars properly because they don't understand -- and don't want to learn -- what to do.

A vehicle manufacturer might put sensors in the car that send alerts when the car needs routine maintenance. These alerts could be transmitted to the nearest dealer who automatically calls to arrange to pick up the vehicle and leave a loaner.

If the cost of maintenance for five years is included in the purchase price, these cars will receive all the maintenance they need . . . and the owner or lessee will have a better performing vehicle with a higher resale or trade-in value. The car will also need less maintenance, further reducing costs.

Fifth, avoid expensive mistakes by employees, partners, suppliers, distributors, dealers, customers, users, and beneficiaries. In fields such as implantable medical devices, the cost of a mistake can be someone's life and emotional trauma for those who loved and depended on the deceased. In most offerings, errors cost more than properly providing the offerings. Most of these errors occur far away from the premises of the organization that initiates the offering, so the scope of error elimination has to be expanded.

Sixth, explore the best ways to automate whatever offering processes remain. You see such automation every day with those who offer electronic information products and services over the Internet. Once the process is programmed, no human being comes near the process again until it is time to improve the process again.

Seventh, customize offerings to make them more desirable . . . and at a much lower cost to provide. Everyone loves something that's made just for them. A custom item can even make you look and feel better. However, most organizations provide offerings that are essentially one-size-fits-all. The best way to provide such custom delight is to put the customers or beneficiaries in charge of making the offering fit their needs.

Eighth, take the processes that remain and reexamines how those activities can be further outsourced. New outsourcing choices are constantly being added, and others can be quickly developed if you just decide what you want. Learn how to gain productivity by spending more for outsourcing than what your internal costs are now.

Ninth, look at just the opposite situation: reducing outsourcing. Where does your outsourcing cost you effectiveness? For instance, an organization may spend so much time and effort checking on an outsourcing supplier that the net effect is to simply add a new form of bureaucracy. In many organizations, such outsourcing choices haven't been reconsidered in many years.

Tenth, question any certainty you feel about having grasped all of your cost-reduction opportunities. Few organizations have checked out even 1 percent of their best choices for more effectiveness with lower costs. We help you develop the technique of employing special incentives to help better solutions find their way to you.

Eleventh, continually repeating the steps spelled out in the prior ten elements I've mentioned. Otherwise, you will fall behind the potential to gain through cost innovations. And that is a strategic mistake that few will survive during the coming years as most organizations will find for the first time that their most effective competition comes from an organization based in a different country.

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About the Author
Donald Mitchell is an author of seven books including Adventures of an Optimist, The 2,000 Percent Squared Solution, The 2,000 Percent Solution, The 2,000 Percent Solution Workbook, The Irresistible Growth Enterprise, and The Ultimate Competitive Advantage. Read about creating breakthroughs through 2,000 percent solutions and receive tips by e-mail by registering for free at

http://www.2000percentsolution.com .
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