Courtesy of the Lean Six Sigma Academy, I am reading the Guide To Lean, by Ron Pereira. He notes three ways to express how a company turns a profit:
1. Price – Cost = Profit
2. Profit = Price – Cost
3. Price = Cost + Profit
All the same? Perspective counts here. The following is a summary of what’s in the Guide.
Formula 3 is the way government might approach setting a price on something. You figure out the profit you want, add it to your cost, and you end up with the price.
Formula 2 is a the way a producer who cannot reduce costs views things.
Formula 1 “Lastly we come to the lean formula (Price – Cost = Profit). This formula is arranged in such a way as to say that costs exist to be reduced, not to be calculated. The thinking here is that the market sets the price and the only sure way we can increase profits is by reducing costs.”
I found this interesting because while law firms have worked hard to reduce their costs (mostly by firing people), I have seen very little which suggests that firms are reducing their cost to produce that which the sell to their client. So, for example, you may have less lawyers in the firm because there is less work, but are you staffing cases differently? Managing them to produce results for the client that costs less? Firms that bill by measuring time still exist in a cost plus environment.
This is not a new debate, but I did think the discussion in the Guide to Lean provided an interesting perspective.