Is your business costing you?

Citation

Allison, R. (2009), "Is your business costing you?", Strategic Direction, Vol. 25 No. 9. https://doi.org/10.1108/sd.2009.05625iaa.001

Is your business costing you?

Article Type: Viewpoint From: Strategic Direction, Volume 25, Issue 9

Keywords: Cost reduction, Profit

Strategies to unlock hidden costs

It is no great revelation to say that the global downturn demands companies review their financial strategies.

However, agreeing that it must be done and identifying the means to do it are two very different things.

Of FDs, 69 per cent report they are under pressure from other Board colleagues to cut costs and viable businesses are going under every day as customers and suppliers alike hoard whatever cash they have (Financial Director, 2009).

So, continuing as before with heads in the sand is clearly not an option, but how do business leaders navigate the best route through the recession to ensure their organization not only survives to see the upturn but is also stronger and better placed to exploit it when it comes?

The default option for many is to target headcount – an understandable choice, given it is one of the largest overheads for most businesses, but often a false economy in practice. For example, recent research from the Chartered Institute of Personnel and Development (CIPD) estimates that the cost of making an employee redundant can total £16,000 (www.cipd.co.uk/pressoffice/_articles/050108Costofredundancy.htm?IsSrchRes=1).

Another natural reaction is to instigate a sales drive to increase revenue. However, when considered strategically in terms of cash flow, a company working on an average profit margin of 8.1 per cent would need to increase sales by £125,000 to realise just a £10,000 increase on the bottom line.

A third way, often overlooked by company directors because of the perceived resource and expertise required to address it properly, is to undertake a strategic programme of cost reduction to target those areas of expenditure which are vital to the running of the business but are rarely reviewed or benchmarked to ensure best value is being achieved.

In a climate where cash is more king than ever, a thorough and forensic review of the arrangements you have in place with your printer, caterer or telecoms provider, for example, can reveal savings of up to 20 per cent which had previously been hidden deep within the terms and conditions of a supplier agreement or lain unidentified within the general operating costs of your business.

Consider the following tips to manage costs more effectively.

Create a cost conscious workplace 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 organization 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 and make staff aware that savings go straight on the bottom line.

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. Do not book the most expensive flights and hotels when you are asking your own management teams to take the budget option in both cases.

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.

Be marketwise

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. A current example might include the fact that energy prices are going down and paper costs are on the up. Establish a supplier market intelligence system and update that system at regular intervals.

Do not purchase things you do not 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?”

Let suppliers know about your cost 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 or suppliers’ statements that “our prices are higher because we provide superior quality and service” or “our prices cannot be beaten”.

Establish key supplier performance indicators

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 only add to the cost base.

Jettisoning suppliers should be the last consideration

Reducing costs is not just about going to a cheaper supplier. 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 do not mean anything unless they are realised. After implementing a culture of cost consciousness, appoint cost champions to drive the programme forward.

Robert AllisonRobert Allison is Managing Director, Expense Reduction Analysts UK, Southampton, UK.