Professional Updates: Management
Managing the small costs
to increase profits
By Fred Marfleet, Chairman, Expense Reduction Analysts Australia
Cost reduction management
Six major considerations
Calling in the experts
C
ost cutting. Could there be two less
glamorous words in the English
language?
Now try ‘profit adding’. Much better.
The truth is that cost management and
profit increases can amount to much the same
thing, if handled correctly. Cost cutting does
not necessarily mean the slashing-and-burning
of budgets on a ‘let’s-see-if-this-works’ whim,
nor does it mean the intense scrutiny of
entertainment expenses in September, before
reverting to three-hour lunches in December.
But what if a company could save 20% a
year on its stationery spend? Or 26% a year on
its courier costs? Or 76% annually on its
printing bills?
Wouldn’t that represent real savings — and
an increase on the bottom line?
The truth is that a significant cause of poor
business performance in Australian companies
is the lack of attention given to the cost of
running the business. The reasons for this lack
of attention are many, but three stand out:
• the process of cost management and review
can be difficult to manage
• tough minded resolve is usually required
• cost-reduction initiatives are not always
positively received by colleagues and staff.
Any executive who chooses to undertake a
program of cost-management, then, is probably
going to find himself or herself out on a limb
and needing to show true leadership skills. And
he or she is going to have to do it in today’s
business world, when the buyer is often at a
disadvantage.
The seller, or supplier, possesses vital market
knowledge that the buyer, or company, does
not have because of a lack of resources, time,
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KEEPING GOOD COMPANIES
expertise — or a combination of all three.
Consequently most, if not all, organisations
overspend significantly on their business
operating costs.
Experts estimate that 90% of Australian
businesses are overspending on day-to-day
expenses, by as much as 75%!
How does a company know if it’s one of the
90%? The Expense Reduction Analysts (ERA)
web site (www.expense-reduction.com.au)
suggests that if it can answer ‘yes’ to any of the
following there’s a good chance a company can
reduce its business operating costs and free up
profits:
• YES/NO There is no centralised purchasing
system. Each department seems
to have its favourite suppliers and
its own purchasing processes.
• YES/NO We always seem to be purchasing
in an ad-hoc, as-needs, manner,
instead of benefiting from bulk
purchases.
• YES/NO We seem to stick to the same
suppliers and trust that they’re
giving us value for money.
Where to begin?
So how does a company implement a plan
of effective cost-management? Consider the
following:
1 Caring is a prerequisite to effective
cost-management. If company staff are
complacent about financial performance and
cost control, there is little chance a costsaving project will succeed. Executives must
find the time to take an interest in reviewing
expenses and reducing costs — staff
generally mould their behaviour to match
that of their leadership. Taking the ‘if it ain’t
broke, then don’t fix it’ route will produce
mediocrity and will become a problem in
times of economic slowdown.
2 Cost-cutting should not be allowed to
become the ‘flavour of the month’.
Remain motivated to keep costs in
check on a regular basis. If a costmanagement ‘culture’ is not
established, employees will quickly
allow your ‘push’ to fade away. It’s
important to instigate measurable
strategies for cost reduction.
3 Over-confidence can be a
killer. Companies that assume
their costs are under control based
on historical trends, or assume
their market knowledge is
watertight run the risk of
overspending through arrogance.
You know what you’re paying, but
do you know what your
competitors pay for the same
products? Never assume you know
the market as well as your suppliers
— and never assume they’re doing
you the best deal possible.
Compare your cost-management
performance to others in your
industry and region. Gather the
data from outside agencies,
consultants or benchmarking
services. Be careful you understand
the data as it applies to your
situation — data is useless unless it
is interpreted correctly.
4 Understand what you’re
buying. Determine your product
and service requirements. Don’t
purchase premium services unless
absolutely necessary. Sales people
will often use bait-and-switch
tactics to move you on to their
higher margin items. You end up
buying unnecessary extras or addon services such as maintenance
agreements. Also watch for
relationship-building tactics — do
you really want to pay higher
prices for the occasional lunch or
rugby game?
5 Talk to your suppliers.
Companies that buy the same
product and the same quantities
year in, year out, are probably
paying way too much. Suppliers
will price their offerings according
to what the market will bear.
Having done your research,
inform suppliers you are reviewing
your costs, which have to be
reduced. Then prepare to
negotiate and to comparison shop.
6 Stay alert. Monitoring your
cost-management strategies is
vital. You need to watch that staff
members don’t slip back into old
habits, the supplier charges
correct prices, and service matches
the agreed specification.
Phew! Yes, the projected savings
might look great, but the amount of
work involved can be enormous. It’s
about this time that many executives
might consider calling in a
consultant.
Management
executives are under
pressure to increase
revenue and grow the
business, not to ensure
the marketing
department is getting
the best deal on its
stationery.
Calling in the experts
Most Australian companies do not
have the staff resources to be able to
regularly review expenses and reduce
costs. Neither do they have the staff
resources to put aside time for
monitoring the market place and
their suppliers. Management
executives are under pressure to
increase revenue and grow the
business, not to ensure the
marketing department is getting the
best deal on its stationery.
So a company might consider
using a cost management consultant
to expertly manage the situation.
The question that executives might
ask themselves, however, is whether
or not the savings will justify the
sometimes substantial fees that may
be charged.
MARCH 2002
Choosing the right consultant for
the job is important, and the fee
should not be the only criterion. ERA
suggests the following checklist for a
company considering the use of cost
management consultants:
• Does the consultant have a
demonstrated track record of
achieving cost reduction?
• Does the company have the
resources to deal with your size of
company?
• Is the consultant completely
independent, with no payments
being received from suppliers?
Then there is the question of the
fee and how it will be paid.
Arrangements can range from a fee
for service to a contingency fee (a fee
that is based on results). A
consultant who receives his or her
fee entirely from the supplier cannot
be assumed to be independent.
Where a contingency fee is
charged, it is generally expressed as a
percentage of the savings obtained
over a period of one year, although
shorter or longer periods can be
involved. Percentages vary. The usual
figure is around 50%, although lower
percentages can be found.
While 50% might seem a large
figure, it pays to examine exactly
what is being received for that fee.
Remember, from the consultant’s
viewpoint, he or she is bearing all
the risk in proposing a contingency
fee. If no savings are found, he or
she does not receive any payment,
and, even so, he or she will need to
undertake a lot of work ‘up-front’
before being entitled to any fee.
As an example, the steps a
consultant might need to undertake
where a change of supplier is deemed
necessary are as follows:
1 The company’s spend in a
particular area is analysed in
detail to form the basis for
selecting an appropriate supplier.
This ensures that suppliers asked
to quote do so with a full
understanding of the company’s
needs.
KEEPING GOOD COMPANIES
113
Management cont.
2 The preparation of tender
documentation aimed at ensuring
there is full understanding of
what is required from suppliers
and that suppliers have sufficient
information to be able to offer the
most favourable rates.
3 A detailed review of tenders received
to enable a decision to be made.
4 Actively working with the
company through the
implementation process, which
typically takes 6–8 weeks.
5 Checking bills, once the new
supplier is in place, to ensure the
correct rates are being applied,
and helping to resolve any other
‘teething’ problems.
6 Working with the company and
the supplier, over a period of one
year, to ensure the company
receives all that it expects from
the new arrangement.
7 Finally, helping the company to
understand movements in prices
over the one-year period so that
prices can be re-negotiated with
the supplier in accordance with
general movements in the market.
It’s important the consultant
chosen is totally accountable,
keeping the client fully updated at
every step and sticking to agreed
deadlines where possible.
Checklist for fees
The following checklist for fees is
suggested:
❏ What is the fee structure to be
charged? Is it a contingency fee
or a fee for service?
❏ If it is a contingency fee, what
percentage of savings will be
claimed as a fee and over what
period?
❏ Is any proportion of the fee to be
paid ‘up-front’ and, if so, how
much?
❏ Has the consultant demonstrated
to your satisfaction how savings
will be calculated?
❏
Is there a clear understanding of
the services that the consultant
is to provide and over what
period?
While there is no doubt that
where significant savings are
involved — for example, savings in
excess of $1 million — a 50% fee
may well be excessive, it will
generally be found that consultants
will be prepared to accept a lower fee
in those circumstances, provided that
it is negotiated in advance.
Whether Australian businesses
choose to undertake a program of cost
management under their own steam
or choose to call in expert help like
that provided by ERA, the benefits to
their bottom line can be immense.
After all, when you know exactly
where the money is going, it’s easy to
tighten the belt a notch, if necessary,
to weather an economic downturn,
and to know how far to let it out
when the good times return.
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