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Submitted by Bill on Thu, 04/30/2009 - 3:30am

 

Years ago I wrote an article entitled, “The 19% Solution.” It was about how, for a company with costs equaling 95% of revenue, decreasing costs by 1% had the same effect as increasing sales by 19%. My intent was to provide an example of how eliminating the waste in our enterprise software and software-related project portfolios can lead to actual bottom line profits. I also believe that improving the quality of our systems will have a similar effect because it decreases our cost-of-quality.

However, eliminating waste and improving quality take effort. It’s much easier to cut heads. Unfortunately, when you take this route, you’re not only neglecting to address waste and quality issues, but you’re also reducing your capacity to address these issues, as well as future project work.

The 19% Solution
  Current State Increase sales 19% Decrease costs 1%
       
Revenue $1,000,000

$1,190,000

 $1,000,000
Costs (95%) $950,000 $1,130,500 $940,500
Net Profits $50,000 $59,500 $59,500
       
Increase   19.0% 19.0%