In 2014, activist investor Starboard Value identified a cost savings opportunity of $216 million at Darden Restaurants. The restaurant operator owns such iconic brands as The Capital Grille, Yard House, and Olive Garden. Starboard's management felt Darden was underperforming.

One of the more interesting conclusions in Starboard's analysis was that Olive Garden wasted $5 million annually on breadsticks.

Olive Garden is famous for giving customers free, unlimited breadsticks. It had a procedure to keep the breadsticks fresh, since they taste best within the first seven minutes of being served. Servers were supposed to bring one breadstick per customer, plus one additional breadstick per table. Customers could always request more.

What Starboard discovered was servers did not follow the procedure 57 percent of the time. They would instead give guests a large basket of breadsticks.

This resulted in a few problems. Breadsticks were wasted. Guests became full on breadsticks, so they bought less food. And servers had less guest contact since they needed to refill breadsticks less often.

All of this came from simple observation. Here's how you can save money and improve service by observing your employees and customers.

Observing Employees

One of the best ways to fix a problem is to first verify existing procedures are followed.

Starboard's solution to the $5 million breadstick problem at Olive Garden was to get employees to follow the current procedure more consistently.

A contact center leader I know reduced calls directed to a more expensive outsourcer by 50 percent. He did this by spending time with his employees and observing that many were not using the phone system properly. Agents would inadvertently mark themselves as unavailable to take calls, which caused calls the agent otherwise could have handled to get routed to the outsourcer.

Sometimes, employees are following the existing procedure, but that procedure is not sufficient to solve the problem. Observing your employees can still reveal solutions.

I once worked with a contact center that responded to customer questions about the company's products and tried to convert those inquiries into sales orders. A short time spent observing employees revealed that many would rush through calls when there was a large queue of customers waiting on hold.

The problem was the contact center's schedule didn't match call volume. When the schedule was re-aligned to better match demand (without adding staff), the team improved its sales closing rate by 36 percent.

If you want to save money and improve service, invest some time in observing your employees.

Observing Customers

You can often improve customer service and reduce waste by observing your customers.

I first learned this lesson when I worked in a retail clothing store in high school. My manager explained that paying attention to every customer yielded two benefits. The first was customers were likely to buy more if I was there to help them. The second benefit was being observant reduced theft.

One day, a coworker wandered away from her department and left it unstaffed. Within just a few minutes, a team of shoplifters stole approximately $5,000 worth of clothing.

Restaurants like Olive Garden can save money by observing what customers eat, and don't eat.

My wife, Sally, and I recently saw an example while dining out. Sally ordered a taco plate that came with two heaping scoops of guacamole. She ate about 25 percent of the guacamole, meaning the rest of it went to waste. A quick look around the restaurant revealed Sally wasn't the only one who left a mountain of guacamole behind on their plate.

An observant restaurant manager would notice the large number of plates coming back to the kitchen with a mound of guacamole still left. Guacamole is expensive, so the restaurant could easily save money by serving less and bringing more to the occasional customer who requests it.

Here's another simple example.

The next time you visit Starbucks or another coffee shop or fast food location at a busy time, observe how customers react when they enter and see the line. People entering the store will turn around and walk out when the line gets to a certain length, costing the company revenue.

Take Action

There are aspects of the customer and employee experience you probably won't capture in a survey. That's why it's important to observe and listen.

Here's a summary of what to look for:

Verify employees are following procedures.
If employees are not following procedures, find out why.
Look for obvious obstacles that get in the way of service.
Watch customers to see how they naturally behave.
Investigate when you see signs of waste.

Note: Lessons from The Overlook is a monthly update on lessons learned from owning a vacation rental property in the Southern California mountain town of Idyllwild. It's a hands-on opportunity to apply some of the techniques I advise my clients to use. You can find past updates here.

This time of year is budget season for many companies.

Many customer service leaders find themselves under pressure to keep costs flat for next year, despite expected growth in support volume. Or worse, expense reductions are required for an operation that's already lean.

The Overlook is no different.

Sally and I are looking for ways to reduce expenses in 2018 while providing a consistently good guest experience. Here's how we manage that tricky balancing act.

The Overlook after a winter snow. Photo credit: Jeff Toister

Avoid Bad Cost Cuts

A bad cost cut is something that reduces the value proposition for our guests. Let me give you an example.

Snow makes Idyllwild a more attractive destination for Southern Californians who don't often experience cold climates. It can also be a danger, especially for people who are inexperienced with wintery conditions.

Our property management company keeps walkways shoveled to ensure our guests' safety. We also pay to have the driveway plowed. Other rental owners pass the snow plow cost along to their guests but we decided to pay for snow plowing ourselves.

The rationale is safety. Sally and I would not want a guest to skimp on snow plowing in an effort to save a few bucks and then get into an accident. That makes the snow instantly less interesting.

Another example is our dishes and glassware.

At the Overlook, we recognize that having a full, matching set of dishes and glasses creates a more welcoming experience. Our maximum number of guests is eight, so we've stocked our kitchen with ten of everything.

We also bought extras, so when one breaks we can quickly replace it with a dish or glass from the same set.

Does it cost a little extra? Yes and no.

In the short-run, it does cost more to buy extra dishes and glassware. In the long-run, it is cheaper to buy dishes and glasses by the set rather than individually.

The immediate benefit is our fully-stocked kitchen is consistently mentioned in guest feedback. That little extra expense has become a point of difference that will hopefully contribute to more word-of-mouth referrals and return guests.

If you're planning your 2018 budget, consider the impact that any cost cuts will have on your value proposition.

Will the cost cut hurt your customers' experience?
Will service quality likely diminish?
Will other costs arise as a result?

Making Smart Cuts and Investments

We have generally used three criteria when trying to save money.

The first is the impact on our customer service vision. Our vision at The Overlook is welcome to your mountain retreat. We don't want any cost cut to take away from that.

The second consideration is the impact on our basic promises. For example, a clean and well-maintained cabin is clearly expected. So we have the cabin cleaned and inspected after every guest and immediately address maintenance issues. Trust me when I tell you not every vacation rental owner does this.

The third consideration is how our cost-saving measure will impact long-term costs. This often leads you to making a smart investment rather than an immediate cut.

Our propane bill provides a good example. Last winter, we spent $531.85 on propane over four months to heat the house. We received a 50 percent new customer discount the first time our tank was filled, so the same amount of propane would cost $676.98 assuming a constant per-gallon rate (it actually fluctuates).

It gets fairly cold in the mountains and we want our guests to be comfortable. What we don't want to do is heat the cabin when nobody is there. The Overlook is typically a weekend rental, so the cabin is often unoccupied three to four days per week.

Our regular observations revealed guests did not always turn down the heat when they checked out. The house cleaners or our property manager might do this, though they might not visit the cabin until a day or two later.

To fix this issue, we installed an ecobee3 Lite smart thermostat.

We can control the temperature settings remotely, so it's easy to lower the temperature when The Overlook is unoccupied. We project the thermostat will cut our propane bill by 40 percent, which will pay for the thermostat in less than three months.

It has also improved our guests' experience.

Our old thermostat had a confusing array of buttons. The ecobee allows guests to adjust the temperature with a swipe of a finger, making it easier for people to adjust the cabin's temperature to a comfortable level.

And, every guest who has stayed at the cabin since we installed the ecobee in October has remembered to lower the temperature when they checked out!

Conclusion

It makes sense to find ways to save money while creating your budget for next year. Be sure to set some criteria for making smart cuts. Those same criteria can help you determine when an investment is worthwhile.