Robert Allison, Managing Director of Expense Reduction Analysts, the world’s largest cost reduction consultancy, believes that organisations can make savings in the region of 20% on average through putting the spotlight on a range of non-core operating costs.
Here Allison provides 10 top tips to trim business expenditure:
Create a cost conscious culture
The economic boom over the last ten years may have affected your employees’ focus on cost control. Develop a culture where everybody within the organisation is responsible for challenging costs, from the receptionist booking a courier to senior management reviewing their nationwide logistics provision.
Celebrate cost reductions as you do business wins. Even create an internal awards scheme for cost reductions made by employees.
Make staff aware that savings go straight on the bottom line. Also use powerful and simple monetary examples to educate your workforce regarding the quick and significant impact that cost savings can have on profitability. For example, based on a typical 8% profit margin, for £50,000 of savings a company would have to increase sales by £625,000 to have the same positive impact on the bottom line.
It is critical to start caring about cost management before the situation becomes critical and hasty decisions have to be made. Also get your suppliers involved during the implementation of the cost reduction programme.
Lead by example
Business leaders need to set an example by demonstrating to employees that they care about saving money, even on the smallest items. Don’t book the most expensive flights and hotels when you are asking your own management teams to take the budget option in both cases.
As a business leader you will need to open your organisation to scrutiny and examine every cost.
It is critical that you are aware of the constantly changing supplier market for the costs you are examining and any developments that you may be able to capitalise on. For example the fact that energy prices are currently going down and paper costs are on the up. Establish a supplier market intelligence system and update that system at regular intervals.
To have any chance of negotiating favourable arrangements with suppliers, you must have knowledge of the prevailing market prices and practices. Do not rely on your supplier for this information.
Also don’t waste time and energy on looking at individual item costs from different suppliers. By enhancing your knowledge of the supplier market place you will increase your confidence of using one supplier for a number of items and gaining from a ‘basket’ cost rate.
Don’t purchase things you don’t need
Buy what you need and not what your suppliers would like to sell you. Suppliers will often use bait-and-switch tactics to move you onto their higher margin items or will try their version of the fast food pitch “would you like fries with that?” Many suppliers make much more money from supplementary services or add-on services such as service or maintenance agreements. Be sure you understand what you are buying and whether you really need it. For example, do not purchase premium services unless they are necessary, such as a 10am courier delivery if 5pm is acceptable.
Establish your costs
You may believe your costs are under control but your perceived ‘well kept ship’ may not be as leak proof as you thought. Forensically examine and benchmark your costs line by line. It is often our experience that this is where the barrier to making cost improvements lies as this demands significant resource. Therefore it could reap significant dividends to look at using outside agencies, consultants and benchmarking services to establish your costs by getting comparisons against competitors and other suppliers.
In doing so you will highlight areas that have the most potential for improvement and will help you set cost saving priorities.
Keep the green light flashing
Instil a sense of urgency and create a culture of cost consciousness where employees act immediately to reduce costs and maximise profitability. If it does not remain high on the boardroom agenda, employees will see the directors’ crusades as ‘the flavour of the month’ and the drive to cut costs will fall to the bottom of everyone’s in tray.
Let suppliers know about your cost review
Rarely will a supplier volunteer a price review. Let your suppliers know that you are undertaking a review of all overhead costs. Also refuse to accept price increases during these challenging times as well as suppliers’ statements that ‘our prices are higher because we provide superior quality and service’ or “our prices cannot be beaten” – remember it is a buyers market and you will be amazed how many suppliers will back down to retain the business.
As highlighted above do your research and comparison-shopping before approaching suppliers so that you are able to negotiate from a position of strength. During negotiations present the value of your business to the supplier.
Establish key supplier performance
In addition to reviewing prices look at establishing key performance indicators, which are appropriate for your business. Set them higher than required and this will add to the cost base. Conversely set them too low and this could affect the quality of your service to your clients and business relationships in the longer term.
Make sure you obtain management information from suppliers relating to any cost increases/decreases, otherwise these could be easily be hidden, and therefore missed, in an invoice incorporating a large number of supplied items. This both helps avoid overcharging and ensures a transparent relationship with the supplier. Finally constantly monitor the performance levels and adherence to the contract.
Jettisoning suppliers should be the last consideration
Reducing costs is not just about going to a cheaper supplier. Indeed good relationships in any line of business are fundamental and the one with your supplier is no exception. By following the tips above and working in partnership with your suppliers to identify cost cutting strategies you can in the majority of cases generate savings without affecting or disrupting standards of service through changing suppliers.
Create a long-term cost-management programme
Potential savings are great, but they don’t mean anything unless they are realised. After implementing a culture of cost consciousness, appoint cost champions to drive the programme forward. Constantly monitor the situation to ensure staff are not slipping into old habits; suppliers are charging correct prices; and that service standards match the agreed specification. Also remember to frequently review each business cost category whether it be logistics, property, banking, telecommunications, property costs and many more.
By following these ten steps you should be able to guarantee return on your cost reduction programme.