Saturday, August 4, 2007

Cost of Operations

For a lot of companies, cost reduction is a focus in profitability. For retail merchandisers, cost reduction is a major focus, because while there isn't much control over the per unit margin, there is a lot of control over how much is spent to sell the product.

Online retailers, like Amzaon, are really part software company. We build, deploy, and operate a lot of software. Since we're a 24x7 retail website, every minute that customers can't find and buy product is lost revenue. That means we have a lot of energy applied to ensuring that the website is running in top form all the time.

When cutting costs, there are a number of different avenues to focus on. When I worked for Aetna, pencils were metered and carefully handed out. At one company I have worked for, Ibuprophen was removed for a while from the first-aid stations as a cost-saving measure. Pencils and Ibuprophen don't move the needle. Staff reduction does move the needle. Unfortunately, after you layoff your workforce, your ability to do much of anything is supremely hindered. You may be able to keep your operation running, but forget innovation.

Instead of cutting staff, a better focus would be to focus hard on reducing operational cost and generally increasing productivity. We've been focusing a lot on reducing the cost of operations at Amazon and the result is that we have more developers spending time on developing (and golly, the stock price is up too, go figure). If you consider developers as fixed costs and their value add is new stuff, by increasing the amount of time they have to work on new stuff, you increase their efficiency. By reducing operational cost you get more value from your staff.

What's hard about reducing operational cost is that you usually have to dedicate a good chunk of said staff to that task. By doing that you don't build new features with those folks. So you are basically taking a hit up front to get your house in order. While it can be a bitter bill to swallow -- that you let yourself get so far gone -- the net results are marvelous.

Software developers tend to feel a sense of ownership for their software and services and nobody likes owning some custy, junky, crappy software that always dies and just generally "sucks"! Nobody! Having a smooth running system that doesn't wake people in the middle of the night and handles your peak transactional volume well is something to be proud of and makes you feel good about your job. When your developers are feeling good about their jobs, they tend to germinate ideas at a higher rate and the ideas tend to be better as well. And then... then... since the developers are busy spending all their time fighting fires, they actually have time to explore these cool new features which makes the website that much better.

Reducing operational cost is not something you can usually do in a month or three. It requires a long term commitment AND it requires a culture shift to build software in an operational friendly form -- which also makes it take a little longer to build. The value there is that you spend the extra time in software, up-front, once vs the death of a thousand cuts as you spend countless hours over time dealing with software that is hard to manage.

Spend a little now or spend a lot later.