The coronavirus outbreak has affected not only every aspect of our daily lives, but also how businesses function globally. The concept of operational efficiency isn’t something new, but it probably didn’t come up too often in team meetings pre-crisis. In fact, many startups are focused solely on capturing market share and bringing in revenue, and not on controlling costs.
This is being fueled by funding from deep-pocketed investors like Softbank and Baidu. The combined losses of 5 of highly funded startups – Uber, WeWork, Amazon, Lyft, and Snapchat – during the 2019 financial year was more than 20 billion USD.
So if you have a lot of funding and a road map to profitability, the startup mantra of “You have to spend money to make money” makes sense. However, if you don’t have cash to burn, it is imperative to ensure your business operates as efficiently as possible. At the end of the day, profit equals revenue minus expenses. If your startup is generating exceptional revenue, but spending a great deal of money to do so, you will quickly realise that the business model is not sustainable.
There are two ways to enhance profit- increasing revenue or decreasing expenses. Decreasing expenses does not mean reducing the quality of your product or service by cutting corners. That may prove to be detrimental to your consumer experience, and could threaten the long-term viability of the business.
In the wake of the recent pandemic, big companies like Google are looking at ways to find operating efficiencies, by cutting marketing budgets as well as freezing hiring. In fact, data collected from 280 startups shows that almost 22,000 employees were laid off from March 11 to April 21 in the United States alone.
Operational efficiency measures the efficiency of profit earned as a function of operating costs; the greater the operational efficiency, the more profitable a company is, generating greater income or returns for the same, or lower costs. One example of this is lean manufacturing. This was adopted from the production system at Toyota. It also refers to the concept of “continuous improvement,” a process that aims to identify and eliminate inefficiency or wastage of resources.
One of its key frameworks, 5S, is named after five activities, which are derived from Japanese words- seiri, seiton, seiso, seiketsu and shitsuke — to sort, straighten (or ‘set in order’), shine, standardize and sustain. Recent adaptations of the 5S framework also call for a sixth ‘S’- safety!
When adapted, these principles can prove to be a useful starting point for startups to consider. Here are some ways you can implement the principles of operational efficiency during this crisis.
1) Review the core business
The first step of 5S is seiri or sort. This refers to the need to remove all unnecessary items, retaining only what is needed for efficient production. Take this time to review all your business activities. Identify areas that are not core to the survival of the business- can they be paused for now?
2) Realign resources to your core business
Once you have stabilized the business, this is an opportunity to realign and focus all available resources to get the greatest return for your business.
3) New opportunities
Take a fresh look at your market, customers, suppliers, competitors, available technologies, and internal capabilities. Our challenge, as entrepreneurs, is to recognize and capitalize on opportunities. A turbulent market offers a rare opportunity to gain significant market share. Old habits and loyalties are disrupted. Acquisition costs plummet. So plan your investments and pounce when opportunities open up.
4) Planned production
To make the most of productivity, every startup needs a thorough production plan. If you have a startup that offers a service, tailor your planning keeping the end deliverable in mind. Production planning should be a balanced approach of management and tools.
Startups begin as small businesses and tend to overload themselves with work in order to cut costs. However, this itself can undermine production. Assigning or taking on tasks that do not fit one’s job description can lead to wastage of time, resources and energy. In this situation, consider hiring freelancers for external work. Technology is changing too quickly for your staff to possess all of the expertise required to compete. Hiring freelancers may also reduce the burden of fixed costs required for permanent employees salary and benefits.
6) Adapt to fit the new scale of business
We can see this across every vertical: fitness studios offering on-demand video workouts; restaurants embracing technology to offer delivery and pickup options. These smart moves not only create new, much-needed revenue streams, but they keep customers engaged — and keep brands top of mind.
7) Review your workflows
This is a good time to review internal processes and operating procedures to make workflow smoother, through establishing specific locations, quantities and order of parts needed for efficient operation. Focus on optimizing efficiency.
8) Embrace digital and virtual technologies
Use social media, blogs, and webinars to support your offerings. Make sure your business has a great website, and consider investing in paid search options. Review the keywords that generate relevant traffic to your site, and how the landing pages set up for conversion? Email Marketing, Search engine optimization, content marketing and referral marketing are just some of the technologies you can use to drive your business.
9) Partner review
Now is when you must proactively and strategically cut costs. You may find that the office supplies you purchase from one vendor can be found at another for half the price. Alternatively, if your space and budget permit, you could investigate buying in bulk from vendors in order to lower your per unit cost.
Take this time to look at your financials. If software tools can be reduced, do it. If snack or water delivery to offices can be paused, do it. And, as painful as it may be, if there are staff positions that are redundant, consider layoffs; Focus on retaining mission-critical roles and high-performing employees until your operation feels more stable.
10) Identify areas of waste
Example- any time spent traveling, particularly by airplane, can dramatically reduce operational efficiency. An IP communications solution that offers rich-media conferencing, such as videoconferencing, helps reduce the need to travel to offsite meetings and training sessions. The time saved from traveling can be better spent on more productive pursuits. Also, reducing travel saves money.