The external cost of internal optimization

Traditional cost reductions don’t take customers in account

Most organisations do not realize they are imposing significant burdens on their users. Any interaction involves a transaction cost. Organizations competed on cost reduction platforms, trying to drive down the transaction cost as low as possible … for their own operations. Quite often, an important part of the transaction cost is pushed onto the user, especially in situations of market dominance. What organizations often fail to see is that users will integrate the cost of the interaction in their choice. Organizations should therefore strive not to lower only their transaction costs, but to reduce the overall transaction burden, including the burden to their users.

The boundaries of cost reduction

Since the late ’80s we’ve gone from reengineering over right sizing to reengineering revisited. The aim, often rightly so, was to cut the fat out of organizations. This ‘fat’ does not add to the value delivery nor to the internal optimization of activities, and has to be removed. As with any exercise, in some cases we cut too deep. On occasion, this turned into an opportunity for certain companies which provided outsourcing services, hence the sudden bloom of the outsourcing business. After all, whether you cut costs or not, the job had to be done.

The focus on ‘core’ activities

Questions on which activities were ‘core’ to the business were asked more and more often, and non-core activities were pushed away, in order for organizations to focus on their core business. Again, not necessarily bad. However … When reengineering and restructuring, organizations often pushed out part of the requirements they had and put these responsibilities with users. It started out as a fadish project. I remember walking around in Southern California in the late 80’s, being charmed by the ‘build your own teddybear’ shops that sprouted like mushrooms. Teddybear fans built their own, and part of the production process was pushed out to the fans. This can go wrong, and we often find it has. We’ve seen situations where users were asked to provide information which the organization had in its systems, again and again.

User revolts

What a lot of companies do not understand is that users will walk away from a difficult interactions. On the contrary, the easier the transaction, the more often users will stick with the organization.


Let’s look at a couple of internet enabled examples:
* Look at purchasing habits of people owning Amazon Kindles. Their purchasing effort is minimal. The ‘one-click’ system allows for a purchase of a book with only one click. Amazon even offers advice based on their extensive purchasing profiles. People who purchased this book, also purchased …
* look at the recent introduction of the Genius function to the Apple App Store. Previously reserved only for music selection advice, Apple has extended its functionality to advice clients on relevant apps for their iPhone, iPod Touches or iPads.

Make it easier for users to engage with you than with any other organization

Organizations should strive to make the use decision and especially the administration related to the use decision and actual act of using their tools, services, products … as easy as possible. The information to do this is available, often in the organization’s systems. In addition, the technology exists to enable even fysical purchases to be a lot less painfull. What organisations need, and currently lack, is a good, quantified understanding of the cost of the transaction to their users.