Cost Reduction Idea: Costs are Not in Transactions . . . They are in the Flow

One thing you can plan on is when a bad idea catches fire, it is hard to stop.  Outsourcing vendors, public sector consultants, private sector consultants, cost accountants, CPAs, MBAs, CEOs, CFOs, etc. etc. all want to reduce transaction costs.

 I am yet to see any company when we really look at the financials and other customer data gain business cost reduction by focusing on reducing  transaction costs. Total costs always rise . . . eventually.  Why, public sector and private service organizations don’t understand that cost are in the flow not the (transactions) activity.

The counter intuitive truth and management paradox is that focusing on costs always increases them.  My other posts have shown why standardization, scripts and best practices don’t allow the absorption of variety that customers give service organizations.  The number of transaction increases in the form of failure demand (demand caused by the failure to do something or do something right for the customer) increases and the system works against itself to increase costs.

So ill-advised managers march off to lower transaction costs by using outsourcing, shared services, reduced service levels, etc. so they can avoid increasing transaction costs and all these decisions lead to more transactions and more costs.  They are missing the great lever for improvement.

The great lever for improvement is flow.  Flow is improved by designing our service systems against customer demand, end-to-end from their perspective.  When customers get what they want, costs fall because the flow satisfies customer demand.  The counter-intuitive truth here is that when good service from well-designed work happens, costs fall.

The management paradox is that the design of work in almost every service organization inhibits the flow and the measures have nothing to to with customer demands, end-to-end from their perspective.  The opportunity to improve is huge, not 5-10%, but 40-80% or more.  The only question now is are you ready to deal with it?

Leave me a comment. . . share your opinion!  Click on comments below.

Tripp Babbitt is a speaker, blogger and consultant to service industry (private and public).  His organization helps executives find a better way to make the work work.  Download free from “Understanding Your Organization as a System” and gain knowledge of systems thinking or contact us about our intervention services at [email protected].  Reach him on Twitter at or LinkedIn at

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