Smart Cost Cutting

The special section in Monday’s (5/10/04) Wall Street Journal was published under the topic “Leadership” and focused on cost cutting. I have never been a big fan of cost cutting, because I don’t think the right people are involved in making the decisions.

When I worked at GE, there were two kinds of cost cutting. The first involved a GM or VP looking at his budget and saying “I’m not going to make my number.” The next day they all travel was suspended and the office supply closets were locked. That drove me nuts.

The second was planned program that targeted costs. Sourcing and Engineering worked together to find alternate, equivalent materials and services. Production and Engineering would work together on new products and processes that took cost out. I thought that was a great process.

These examples from WSJ fall into the second category:

  • Pittney Bowes is bucking the trend of rise co-payments on all prescription drugs. From the WSJ article “A Radical Prescription” by Vanessa Fuhrmans:

    …Pitney Bowes commissioned Medical Scientists Inc., a predictive modeling firm in Boston, to answer the question, “What is the biggest factor in turning an employee with relatively low health-care costs in one year – usually between $400 and $700-to one with high costs of roughly $10,000 or more?”

    The employees most at risk, it turned out, were those suffering from a chronic condition, such as diabetes or asthma. That in itself wasn’t a surprise. What was startling, though, was that the presence of the condition wasn’t such a risk factor. Rather, it was the incidence of patients refilling their prescriptions for medications such as insulin and inhalers only two-thirds of the time or less.”

    PB reduced the the cost of prescription refills from 50% to 10% for all asthma and diabetes medicine. One drug they mention in the article is Advair. The normal cost of the inhaler is about $125. Under the old plan, patients would pay around $60, and under the new plan about $12.50. This is important because in the past patients were steered toward two separate generic drugs because of cost. The lower premium made it cost-effective to purchase Advair, which combines administers the two drugs in a single use. The really savings came from the fact that patients could more easily take their drugs and relied less emergency room service and rescue medication for severe attacks.

    The cost of implementing the program was one million dollars a year and PB weren’t sure what the results would be. Cost of employee health-care for people with these chronic conditions has dropped between 10%-15%. This year, they are going to save one million dollars as a result of this program.

  • Ryanair is the Southwest of Europe. They decided to trade low fares for less features on flights. They have eliminated seat pockets (or trashbins) and put safety information on the back of the seat. They have also eliminated reclining seats ($2.4 million savings per year) and made all the seats leather (easier to clean and $178,000 per year). These tidbits were from the WSJ article “The Small Stuff” by Audrey Warren.