Cutting costs without drawing blood

When looking for ways to cut costs, most managers reach for the head-count hatchet, and the markets usually roar with approval. But a company can almost always create far more sustainable value by rigorously evaluating the small-ticket capital items that often get rubber-stamped. Drawing on his experience as a consultant and providing numerous anecdotes, the author contends that those "little" requests often prove to be gold plated or unnecessary. A disciplined evaluation involves asking only eight questions and conducting postmortems--regular audits of units' capital spending. But the payoff is enormous. Because cutting the capital budget increases cash flow, the author argues that a permanent cut of just 15% in the planned level of capital spending could boost some companies' market capitalization by as much as 30%. The first three questions--Is this your investment to make? Does it really have to be new? How are our competitors meeting compliance needs?--are asked of operating managers as they assemble capital project requests. The next three are asked by senior managers of themselves and their colleagues as they examine proposals: Is the left hand duplicating investments made by the right? Are trade-offs between profit and capital spending well understood? Are there signs of budget massage? At the end of the review process, senior managers ask: Are we fully using shared assets? How fine-grained are our capacity measures? The author's suggestions for the postmortem include searching for systematic problems with whole classes of expenditures and making sure audit teams come up with specific recommendations for change.