The headline in the Wall Street Journal last week was utterly predictable: “Kraft Deal Fueled by Lean Recipe.” It was only a matter of time after Heinz’s acquisition of Kraft that the business press would refer, once gain, to 3G Capital Partners’ use of zero-based budgeting as something “lean.” This approach, which requires managers to justify spending plans from scratch every year rather than simply modifying the previous year’s budget, is many things, but it is certainly not lean.
Yes, lean organizations relentlessly seek to lower costs. And yes, lean organizations constantly strive to eliminate wasteful expenditures of cash. But the layoffs that accompany zero-based budgeting are most certainly not lean. Neither is the infantilizing, management-directed, and disrespectful (to employees) cost cutting that the Wall Street Journal describes:
After chicken processor Pilgrim’s Pride Corp. adopted it a few years ago, it scrutinized how much paper it used to print documents, how much soap employees used to wash their hands, and how much Gatorade hourly employees at one processing facility drank during breaks.
In my new book about continuous improvement (still untitled, but coming out this September), I draw a parallel between individual physical fitness and organizational “fitness.” You can’t get physically fit simply by dieting—sure, you can lose weight, but that doesn’t make you healthy and strong. Similarly, you can’t get organizationally fit simply by cutting costs. Laying off people and prohibiting color copies doesn’t make a company nimble and competitive. It may boost the share price and profitability in the short term, but it can’t develop the organization’s competitive powers for the long term.
Competitive strength comes from the development of employee problem-solving capabilities and the improvement of operational processes. Zero-based budgeting doesn’t do that. Want to reduce the amount of Gatorade people drink? Teach employees how to attack the “problem” of excessive Gatorade consumption at its root cause, which might very well lead to improvements in ventilation, plant layout, and workflow—and along the way, truly significant cost reductions. Want to cut down on soap consumption (which, honestly, doesn’t seem like a great idea in a poultry processing plant)? Challenge employees to redesign the process in a way to reduce the amount of direct poultry handling. At the very least, having employees figure out how to take costs out of a system is far more respectful of their intelligence and creativity, and far less dispiriting than simply dictating a 30% cut in their Gatorade allowance.
There’s plenty of research proving that cost reduction isn’t sustained in the long run. Just like weight always comes back after drastic dieting, costs always creep back two to three years after drastic cuts, because the underlying processes and capabilities haven’t been improved. As soon as the financial crisis fades, people start buying more Gatorade and making color copies.
Look, I fully support the elimination of excessive corporate privilege. I cringe at the thought of executives flying first class on the company dime while front-line workers fly coach. I can’t stand swanky corporate offices with Persian rugs and fireplaces that serve only to gratify egos and create unnecessary distinctions within an organization. But skinny and starved isn’t healthy and fit, and cost cutting isn’t lean.