If the goal of an organisation is to maximise profit it needs to be efficient. Many firms think they already are but in reality, efficiency isn’t a characteristic they possess. Only those who have removed inefficiencies completely can truly claim to be so. Inefficiencies are found everywhere. They’re in business models, in organizational design, and in individual operational processes. Don’t believe us? Read on.
If you delve into economic theory, read dictionary definitions, and examine the output calculations of a production process, efficiency means reaching a goal with the least amount of effort. Whether that effort is energy, cost, materials, or time is unimportant. Efficiency can only be achieved through minimum expenditure (and by minimum, we mean absolute minimum, even though they are both the same thing).
In the financial services industry, the Cost / Income Ratio (C/I Ratio) is a common measure. It uses financial performance to determine efficiency, i.e. how much the firm needs to spend to generate its revenue. It allows comparison between providers for investment purposes and can show changes in sales or operational performance. Regardless of the figure reported, examination will show where it can be improved.
Simplicity Vs Complexity
The first area where efficiency can be gained is difficult to quantify. However, it’s a fundamental reason why efficiency isn’t minimal. It lies in the complexity that exists in the overall design of the firm, or in the ‘red-tape’ that exists internally to operate it. Regardless of the products and/or services you offer, the more complicated you make them, the less efficient your firm is likely to be.
No matter how simple your business model, complexity will creep in through expansion and growth, which bring meetings, regulations, multiple suppliers, perhaps cross-border operations and so forth, each impacting your efficiency through the complications that occur or are embedded in your firm as a result.
The second area is in the design of the organisation – in its structure. No company can be efficient if it is carrying out each and every task that contributes to its products and services. You have suppliers because it’s more effective to acquire goods than make them yourself and of course, using the expertise of others will likely strengthen your own output beyond that which could be achieved in isolation.
Efficient companies find the right balance of functions to operate ‘in-house’ and functions that are either outsourced completely, or operated in collaboration with others. Typically, tasks that are strategically important should be kept in-house to ensure control is retained. Tasks that are required for operational necessity but have little or no relevance strategically should be outsourced, and strategically important but operationally insignificant tasks are good candidates for partnerships and alliances with expert suppliers.
A third area lies in the processes the firm runs internally. Whilst they need to be designed to ensure they’re as efficient as possible, human elements bring with them a degree of inefficiency, because although their output level might be assumed, it cannot be guaranteed. Workers have complicated objectives, numerous priorities and are not active anything like 100% of the time and so again, the effort that feeds a process is not minimised. Efficient processes minimise human input, through digitisation, or through the best achievable blend of man and machine.
Efficiency however, isn’t just about a metric or pride in streamlined processes. It’s about space. Efficiency gives you the space to offer better, deeper and more relevant products and services to your clients and frees up time for further growth and development.
Regardless of your C/I ratio or managerial claims, it is impossible to be efficient unless you’ve done all of the above and absolutely minimised effort throughout your entire firm and we’d make an educated guess that there is no organisation in the world that’s achieved it. We call it Untrue Efficiency.
Get the full paper here.