Cost Cutting vs. Cost Optimisation

Rail Neer in Vande Bharat Express

Written on Sat, 23 Nov 2024 17:17:05 +0530

by: Staff writer

I recently travelled onboard Vande Bharat Express. ¹ Catering charges are part of the ticket price, and there is on-seat food and snack service. Soon after boarding, a bottle of drinking water is provided, like in other premium trains of Indian Railways. Usually, (as in my previous experience in Tejas Express, for example) a one-litre bottle of Rail Neer ² was served. This time, however, a half-litre bottle was served instead, which is clearly insufficient for an eight-hour journey. It set me thinking, is this the dreaded “MBA-driven cost-cutting” we keep hearing about? No, as it turned out. It is a brilliant cost-optimisation instead!

Not the train I travelled in, but similar.

Cost control is an essential part of business

Costs must be controlled in any business, and especially so in a publicly-funded one like Indian Railways, where every loss is replenished out of the pocket of the Indian taxpayer. The bottom line is simple—every rupee reduced in cost directly translates to an additional rupee in profit, which is exactly the same as increasing a rupee of revenue. Increasing revenue requires investment in money and effort, whereas cost-control requires pruning out inefficiency, and is thus “free” in a monetary sense.

Cost-cutting: a blunt instrument

Many beginners, and indeed seasoned executives who should know better, fall into the trap of assuming that cost-control being “free” in a monetary sense means they can go full steam ahead ripping and tearing out what they can. This is called “cost-cutting” (or “austerity”). And it is anything but “free.” Cost-cutting, while ostensibly removing inefficiency, can compromise intangible assets of the organisation, such as robustness and customer experience. The value of these assets cannot be quantified in rupee terms, but they’re extremely valuable for overall success in the long run. Destroying them is like eating the seed corn—it destroys the organisation in serious, non-recoverable ways, which is a lesson that many organisations learn the hard way.

Cost-optimisation: a surgeon’s knife

The key to cost-control is recognising the intangible benefits of a certain “inefficient” practice. It must then be modified so that the monetary efficiency is increased with ideally no harm to the intangible assets. Like a surgeon excising a tumour while preserving nearby vital organs. This is cost-optimisation—increasing efficiency while maintaining vital assets like robustness and customer experience.

Back to Rail Neer

So is the replacement of one-litre bottles of water by half-litre ones a blatant cost-cutting? Will it leave guests thirsty and feeling ripped off because they paid the same ticket price that used to get them a full litre of water, and now gets them half?

No!

It was announced that any guest wishing to have more drinking water would be provided with another half-litre bottle by the coach attendants, free of charge! Effectively, the quota of water per guest is still one full litre. I would love to see the internal study Indian Railways did on this, but they probably realised that the vast majority of guests did not drink the whole litre of water that was previously provided. Many even left the bottles untouched. Due to historically poor availability of clean drinking water in India, our elders instilled a tradition to carry one’s own water for journeys, and many travellers do bring their own water on-board. Others don’t feel as thirsty, and consume only part of the one-litre bottle, while the rest has to be disposed by the cleaning crew. A horrible waste all around!

The business requirements can be specified thus:

1. Provide every guest with a bottle of drinking water, so that no one is left thirsty.

2. Minimise the waste of drinking water, given that most guests don’t drink much, if at all.

3. Minimise the monetary cost of drinking water to be served.

It is evident that the first two requirements are intangible, with only the third having a monetary cost. However, they have a huge impact upon customer experience—a thirsty guest is likely to have a very bad impression of the service and refrain from travelling with it in the future. Hence all are equally important.

Indian Railways’ solution is simple yet elegant: provide a half-litre bottle initially, which reduces upfront monetary cost per guest, and reduces wastage of water given that many guests will be sated with that amount itself. For those guests who don’t have their own water and/or wish to drink more, provide another half-litre bottle at no cost to them—they quench their thirst and feel happy, and drinking water is not wasted. Win, win! This is a cost-optimisation at its best.

Conclusion

Cost control is necessary for any organisation. It must not be done in a way that harms intangible assets like robustness and customer satisfaction, which is how “cost-cutting” is usually done. All impacts must be taken into account, reducing monetary cost while maintaining intangible assets. This is a successful “cost-optimisation.”