I read an interesting article on the “Fake Savings” problem by Rich Ham.

He talks about an issue which occurs across every area of business change and technology investment.

Businesses plan and launch savings initiatives that are often not implemented properly or with enough “follow through” and then rapidly erode as managers lose interest or move focus to other projects.

How many times have you seen projected savings numbers that don’t stand up to scrutiny?

In my experience, there is rarely any attempt to mislead, rather a lack of deep analysis and understanding of how exactly the savings will be achieved, and by whom and with what actions over what timeframe.

Case studies often encourage us to think that cause and effect is clear and simple, but correlation is not the same as causation.

Barriers to success are rarely explored in sufficient detail, in the main because of concerns that it may appear “negative” or “unsupportive” to dig too deeply into these. There is often the assumption that “someone else” has done that analysis.

The root cause of this “fake savings” phenomenon, Rich argues, is a fundamental one, the “rules of the game”. Incentive plans and the way credit, recognition and rewards are meted out—and the behaviors these rules promote.

As with all performance measures, there is a delicate balance between focusing on outcomes and required behaviors.

We know that behaviors are the driver of performance but they can be hard to measure.

Outcomes appear to be concrete and measurable, but outcomes that are too narrow can be engineered or “gamed”. Consider the, now infamous, example of the creation of millions of bank accounts created on behalf of Wells Fargo clients without their consent, in an attempt to meet “stretch growth targets” set by leadership. More mundane examples include trying to reduce the cost of call center operations by setting targets on call duration and many others that have unintended consequences.  

Broader business process outcomes are harder to measure as they tend to be a balance of factors.

Rich Ham describes 3 big root causes of the “fake savings” problem.

• Reward and Recognition Before Results. It does seem counter-intuitive for “savings initiatives” to be recognized before a single dollar has hit the P&L. Measuring what actually happens is not an easy task. It is not just financial reward at issue, but often even the recognition of launching a “major change initiative” that can create a problem.
• Counting Only the Good. Counting solely the gross benefits and not the net of the positive improvements minus any negative effects and costs creates warped perspective of of progress and success.
• Over-Valuing the Short Term. A dollar in your hand today is indeed more valuable than a dollar in your hand three years from now. Failing to recognize this promotes illogical and counterproductive decision-making. The tendency to view all expenses through a year-over-year lens is one example. On the flip side, where the cost is all upfront and the benefits are likely to accrue over a MUCH longer timeframe means that the Net Present Value of future benefits can be much overstated.

You can read Rich’s article here . . .It is Procurement focused but the parallels to any business process improvement initiative are clear for all to see.

This is another classic combination of cognitive biases, performance measures, and human behavior in business.

We won’t eliminate these issues, but a good understanding of them certainly helps mitigate some of the risks.

Thanks for reading!