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Tuesday Feb 23, 2010

Cutting Costs: how to find best alternatives

Cutting cost is some time unavoidable and becoming usual in current economic conditions. Here is a rational, computer-assisted strategy to select best cost reduction alternatives.

Selecting best cost (or expense) reduction alternatives is a complex process. Each alternative produces benefits but brings one or more side effect, like compromising employee motivation, client satisfaction, company or brand image and so on. At first seem there is no good choice, like sleeping under a short blanket.

The fact is that this is a typical multi-criteria decision and you shall rationally consider multiple factors for each alternative. Analytic Hierarchy Process (AHP) is the perfect technique for this purpose because it uses a rational approach that checks decision consistency. AHP uses computes factors weights and alternative scores from individual pairwise comparisons.

Here is a complete example of applying AHP identify best cost-cut alternatives using Welldecided that is freely available on the Net.

Suppose we are considering the following alternatives:

#	Title	Expected benefit
1	Reduce PPC budget	$ 200,000
2	Reduce 50% Night Shift	$ 70,000
3	Cancel X90 Project	$ 300,000
4	Suspend 'Help your friend' campaign	$ 190,000

We decide to consider the following factors for each alternative:

Customer Impact: how much each initiative can reflect on our image
Internal Impact: how much each alternative can reflect on employees morale
Growth Impact: how much each alternative can reflect on future growth

To use Welldecided you shall have Java 6 plug-in in your browser (most notebooks already have it, otherwise download for Windows or other operating system). To start Welldecided point your browser at the following address: http://www.cbsolution.net/opencms/opencms/start/welldecided. You will be required to register first time you use it.

Once Welldecided is started, choose Decision > New from top menu. You will get a form that you shall fill with alternatives and factors. This form is used to speedup the process, you can also enter factors and alternatives one by one, or update they later, but the form will do the job with a single submission.

Here is how to fill the form:

As you can see we enter each alternative followed by a '$' character and its expected value as negative. Can you figure why value is negative? Welldecided is prepared to perform Cost x Benefit analysis, but in this case we do not have costs, but saving, this is why you shall precede each value by a minus sign.

After submitting this form Welldecided starts the evaluation process. It will first assess the relative importance of each factor and you will get a form like this:

The form contains a set of pairwise comparison. Comparing factors by pair guarantees a more rational assessment. This also allows Welldecided to evaluate how much your assessment is consistent: if A is better than B and B is better than C, C can't be better than A! You will see later that Welldecided computes the Inconsistency Ratio for each evaluation (that shall be under 10%). Keep anyway in mind that Welldecided can use other (non-pairwise) strategies too.

All sliders are initially yellow, meaning your assessment is still missing. When you move them you will notice that the color of members (left - right) changes from black (indifferent) to green (better) or red (worse) and hint on bottom line explains the score you are assigning like “A is little better than B”.

After comparing factors you will be asked to compare all alternatives for each factor, for example:

Let's skip the following two factors (please see link at the end of this post to use this complete example). Once you have completed assessing all factors Welldecided will produce a “Ranking” tab:

You can see that “Reduce PPC budget” is best alternative (those that has less side effects), but “cancel X90 Project” is the most performing (best saving compared to impact). You will probably use performance if you shall assemble multiple alternative to reach a saving floor.

The different performance is also visible on “Cost x Benefit” tab: you see that Cancel X90 project is well under from average performance line:

“Values” tab let you quickly assess how values were assigned to each alternatives. You immediately see that Customer Impact played an important role. This reflects your factor assessment and is definitely responsible for the high score of “Reduce PPC Budget”:

“Scores” tab compare individual scores for all factors x alternatives without considering any weight:

Relative factor weights, is shown in “Weights” tab, where you can see the importance of “Customer Impact”:

Finally the “Factors” tab shows the factors structure (you have a single level but many decisions have a more complex structure) and you see that all Inconsistency Ratios (IR) are under 10%, otherwise they would be shown in red. In such case you shall review your assessment by selecting and re-measuring it (F5):

To complete, you would possibly like to document your decision, for example for presenting it in next meeting. Welldecided can format a complete and organized report: just choose Decision > Export to PDF from top menu to get a report like this.

This example is available on-line. To try it choose Decision > Open URL and enter paste the following Source URL:

http://www.cbsolution.net/roller/ontarget/resource/2010-02/cost-cut.welldecided.xml

Interested in partnership?

Would like to try or coach this technique with your clients, do you need any additional or technical detail? Please let me know! Component Bases Solutions has great interest in partnership with consultants. We can help you automate your proposed solutions in a very short time. We can also help to increase your visibility through links from many management tools we make freely available on the Web. Please contact for more detail.

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