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The cost crisis-ratio: averaging 33%

Date Released: Fri, 30 September 2011 11:35 +0200

By Ron Weisennberg, Non-Executive Chairman at Micronized SA Ltd


This ratio averages 33 percent.  Simply, if more than one third of input costs relate to a particular regulated, monopolistic, controlled or unpredictable human overhead, a business has the makings of a sustainability crisis.  Examples of cost crisis-ratio components include parastatal electricity and utility tariffs, railage rates, port charges,  regulated costs,  state royalty levies and a militant labour force. They combine the ills of inefficiency, political expediency and unpredictability.

Allied to the cost crisis-ratio is an emergence of what can be described as a rising complexity crisis – those businesses facing increasing levels of complexity and compliance without being able to absorb or pass on the additional costs. Left unchecked, a rising complexity crisis may well sound the death knell for even the most differentiated and robust of organisations. If a cost crisis-ratio or complexity crisis exists, the choices seem to be between automation and innovation, or stagnation and obliteration.

Negative theories abound and are of informative value.  But this is about positive solutions. It starts by legally managing a business toward self-sufficiency and as much independence from government regulatory influence, inputs and processes as possible.  Additionally, it obliges the executive to apply lateral thinking and interrogate every cost and complexity process of their business.

Whilst maintaining respect for and acknowledgement of existing law, commerce is compelled to create and nurture its own environment, using cooperative ventures, innovation, resourcefulness and simplified methodologies. Leadership, vision, strategy and sustainability starts and ends with the business operator.

In these extraordinary solutions, the State (and its myriad structures) must be considered an observer and competitor rather than an enabling participant.

Here are some suggested solutions and models for businesses experiencing cost-ratio and complexity crises:

  • Industrial Cooperatives and Self-sufficiency structures. Where utility supplies are unpredictable and mired in open-ended  rate hikes, there should be cooperation between companies to install power generators, private refuse handling, water collection from roof feeding rain tanks, photovoltaic (solar) installations for critical power requirements and septic  tanks for water-borne sewage
  • The more apparent Cadac gas cylinder and the Cobb Cooker examples, where a local innovation is no longer manufactured in South Africa.  Labour costs, human unpredictability and disenabling legislation pushed both companies into a cost-ratio crisis. Production outsourced to the East.
  • Negating SA port charges (currently, the highest in the world). Using feeder vessels from SA ports to Maputo, Beira or Walvis Bay. Alternatively, relocating to investment friendly destinations with good infrastructure such as Namibia or the East.
  • The Capitec Bank example, where about 20 percent of overall banking services attract 80% of the complexity, regulatory and high entry barrier constraints. Capitec Bank’s operational model is delivering the 20% with elegant simplicity. Customers like it. So do shareholders, pushing the share to double the price- earnings ratio of its main competitors.
  • Unskilled and Semi-Skilled Labour Substitution. Retaining automation specialists as an integral part of company strategy should be considered, as should using production technology able to be integrated onto online electronic maintenance, where specialised diagnosis and remedy is outsourced to the equipment manufacturer. For retailers and distributors,  this also includes e-tagging and scanning systems replacing inter alia tellers, packers and warehouse staff.
  • Home employee Solutions. Discovery Life Medical Aid is a good example of specific task-outsourcing, where claims are dealt with in real time in a home office environment. Compare Discovery’s model of simplicity and lifestyle offering to the state of medical aid offerings in general.
  • Reinventing litigation. Formal legal redress and resolution is largely unaffordable, lengthy and mired in complexity. The litigation industry has been hoisted on its own petard by complexity. Rather consider informal dispute resolution or arbitration and enforce the concept in contracts. Often, those with wisdom and experience in human nature provide a workable outcome and they need not have a legal background.
  • Critical Future Assessment. Essentially, if it can be done better, cheaper or with less statutory complexity elsewhere in an investment hungry global economy, why is it not being done?  Is the business prolonging the inevitable and does it really need to be located where it is?

Critical commentary without solutions is the sanctuary of the philosopher. The challenges facing business in a Post-rational South Africa may be stuck in layered complexity, but the solutions are mainly straightforward and simple.

In the new World Disorder, the greater challenge for today’s businessperson is to understand the mind shift process and personal transformation stages of learning, from unconscious incompetence  to unconscious competence.

Paradigms will need to shift and perceived limitations will have to be abandoned. The process may be fraught with self-doubt, overwhelming feelings and the mystery of unchartered territory, but once the positive decisions become commitments, as Goethe remarked,”Providence flows….”