With interest rates increasing and inflation stubbornly high, small and medium businesses are experiencing cost pressure impacting profits. So, many are asking how to improve productivity in the work place and improve profitability.
I have learned about two types of death spirals in my business career. Both may be instructive in this discussion. The first was during a cost accounting class in business school. When a company has multiple profit centers and improperly allocates shared costs (e.g. leasehold and equipment), it risks entering into a death spiral. If it starts divesting businesses that could contribute to covering shared costs, the remaining profit centers have to bear more costs individually.
The second example is the reactive spiral of death in small business technology support. This is when all of the resources supporting the technology are allocated to fixing problems rather than preventing them. The results are the same problems recur and as the company implements more technology to support its business, it has an ever increasing impact on employee productivity.
The lesson in these to examples is the the surface level analysis is the least useful. In the first case, looking at business unit profitability in isolation without considering strategic reasons for services (e.g. bank tellers) and the method of allocating shared costs may lead to bad decisions. In the second case, choosing a lower cost IT service provider can lead to a much worse outcome. This one is tricky, because employee productivity does not immediately show up on a profit and loss statement. It may be death by a thousand cuts such customer satisfaction impacts due delayed responses, a bloated work force and security incidents taking people and systems out of commission.
When evaluating your business and technology, take the time to go deep in order to make the right long-term decisions on costs and results.
- Raising interest rates and inflation are driving companies to reduce costs through increased employee productivity
- "Death Spirals" include companies using improper cost allocations that lead them to divest potentially strategic businesses and not investing in preventing technology problems leading to less employee productivity
- Do not settle for the first answer when analyzing business or technology costs; go deeper to understand the true costs which are often hidden and the impact of decisions based on shallow analysis