In the book, Bare Bones Change Management: What you shouldn’t not do, Bob Lewis explained the seven must-have elements for any change management effort to have a chance of succeeding. Here are my takeaways from one of the topics discussed in the book.
Bob outlined some tactics to consider when working with the fixed and incremental costs.
The two most common tactics used to reduce fixed costs for supporting a business change are eliminating expensive infrastructure and centralizing dispersed resources.
When organizations reduce their infrastructure and fixed costs, they inevitably increase their incremental costs elsewhere within the organization. The reason is that investments in infrastructure generally help to reduce the incremental costs. When the infrastructure scales down or eliminated (outsourcing for example), incremental costs rise in the organization to compensate for the adjustments.
Centralization and consolidation can also help achieve a reduction in fixed costs. Centralization can generally compensate the increase in incremental costs that usually accompany reductions in infrastructure spending. Centralization can also contribute to quality due to its ability to increase consistency and standardization.
Centralization does carry a few trade-offs. One trade-off is the loss of ability to customize, which is generally required for achieving excellence. Another common trade-off from centralization is longer cycle times.
Incremental costs are the mirror image of fixed costs, and, as a result, decreasing incremental costs require investments in infrastructure, which increase fixed costs. The trade-off of ramping up infrastructure investment is the loss of agility for ramping down. If volume decreases, shedding fixed infrastructure costs can be quite difficult.