Many organizations have engaged in some form of cost reduction at one point or another. Most cost control actions are short term….designed to quickly reduce costs in some proportion to the corresponding decrease in revenues. But once they’re no longer needed, they’re retired and spending returns to normal. So what now? What do businesses do to keep and maintain a reduced bottom line and enhance profitability? What can organizations do differently to improve results, increase efficiency and improve effectiveness going forward?
Most organizations tend to focus on price as the primary lever or strategy they pursue to reduce costs. A focus on price is a fairly typical approach in a decentralized environment when time is short, staffing is thin and results are needed quickly……bring in a new supplier with a cheaper widget or renegotiate the price of the widget with your incumbent supplier.
- Is pricing the only factor that drives “cost” in your organization
- Did your organization leave anything on the table in the past couple of years with a price only focus? Are you leaving anything on the table going forward?
- How can your organization maximize all cost reduction opportunities across the organization to achieve sustainable cost reduction results and enhanced profitability?
I would encourage organizations to think about your current expense lines as untapped opportunities for profit enhancement. Why? Because in our experience, you are probably leaving 15-20% of your expense line on the table each and every month because your expense line is under-managed. Under-managed……not mis-managed, but under-managed. If your management team continues to focus only on price, and is blind to all other expense reduction opportunities, then as we used to say in the military……”this has become a training opportunity”.
Five Levers of Expense Management
The Five Levers strategy is a combination of sound purchasing practices, proven operational strategies, accepted audit practices and a proven method to reduce your costs today, next year and beyond.
The Five Levers approach is an operations management strategy that should replace the current short term tactics of focusing only on price and a few other financial elements.
The Five Levers are explained below using various expense categories as examples:
- Requirements: Key elements = needs, specifications, frequency. If your waste contract came up for renewal, determine your true needs, validate the size (specifications) of the container you really need and the frequency required. While this step takes more work and time….the savings generated from the change in specifications might outweigh any price reduction you achieved on price alone leaving original requirements in place.
- Solution: Key elements = selection, standardization and suppliers. If office supplies is under consideration, consider limiting choice (selection) to the low cost items, standardizing all office supplies under a core list of items that can be purchased without approval and then limiting the supplier base to the absolute minimum in order to maximize leverage. Again….savings here will likely exceed any short term price reductions that can be negotiated.
- Process: Key elements = acquisition, process and payment. If you are reviewing the credit bureau category, you should review the options (acquisition) of purchasing direct or through a reseller. Then, consider how many bureaus are you pulling (process) as a matter of course, and finally, how are you managing payment….invoices weekly, monthly paid by check or credit card. Again…..relatively minor changes could exceed the value of reduced pricing.
- Financial: Key elements = price, delivery and fixed terms. Once all of the items above have been decided and agreed upon, it is time to work on the unit price of the supply, service or equipment. Delivery should be considered on the front end and when possible, at least in this venue, added into the product or service costs. Finally, early payment terms and rebates should be secured and together with price….protected for extended periods of time – 12-24-36 months. This act not only saves dollars, but saves staff time.
- Compliance: Key elements = internal, supplier and core. If you and your team have gone through all this hard work to build a solution that will pay dividends for years to come, it is only reasonable to expect your employees and management to fully utilize that solution and only that solution (internal compliance). Next, supplier compliance is really an audit of invoices against contracts and pricing agreements to ensure the supplier meets their obligations (supplier compliance). Finally…an internal review of employee use of core lists will indicate whether the solutions are being used at the item level.
Cost and Benefit
Clearly the Five Levers of Expense Management strategy is more time consuming and potentially more expensive than spending a few hours on price negotiations….at least on the surface. Most would agree however that if the Five Levers strategy were implemented across one, two, five, ten, twenty-five expense categories, that your costs will decrease. Those costs will decrease near term and will be sustained long term. Is there any long term redeeming value in your team shopping the price of post-it notes every two weeks? It happens all the time. Is there more value in taking the time to execute the five levers approach for office supplies once every year or two years?
Revenues are up…..and if you are not careful, costs will be increasing as well. Now is the time to pull your management team aside and implement some new thinking, some new processes that will transform your expense line and enhance your profitability. The choices are yours…do nothing, continue with the same approach to generate the same results…..or resolve to change your expense line with fresh thinking and new approaches to old problems.
If you are planning to undertake this effort to get your spend management function set up and running correctly, you do not have to go it alone. StrategicSource’s Profit Improvement program help you identify areas for improvement long-term.