How to Overcome Internal Obstacles to Cost Reduction Troy L. Coleman Director Ralph W. Owens Director
How to Overcome Internal Obstacles to Cost Reduction? Who are Expense Reduction Analysts? Why focus on reducing overhead expenses? Approaches to procurement Opportunities for expense reduction Obstacles to cost reduction Overcoming organizational resistance Action plan to overcome organizational resistance
Expense Reduction Analysts 750+ Consultants in 30+ countries negotiate terms and pricing with hundreds of suppliers every year. Our world-class category experts specialize in dozens of common overhead cost categories. We ve completed more than 15,000 cost-reduction projects in the last 20 years with average savings across all categories of about 20%. www.expensereduction.com
Why all the focus on reducing overhead expenses? Current economic conditions continue to present challenges for companies Profit margins are continuously under pressure Difficult for many companies to increase product sales in the current environment It can be very profitable
Lowering Non-core Costs Can be VERY Profitable Column1 Today 20% Cost Reduction Equivalent In Sales Revenue $ 100 $ 100 $ 140 Direct operating costs $ 35 $ 35 $ 49 Labor costs $ 35 $ 35 $ 49 Non-core indirect costs $ 20 $ 16 $ 28 Net profit $ 10 $ 14 $ 14 A 20% cost reduction = 40% increase in Net Profit $4M in expense savings = $40M in revenue
Recently reported cost reduction initiatives The Boston Business Journal reports: 9 out of 10 companies have put cost-cutting strategies in place 50% of companies have made what they believe to be permanent workforce reductions Unemployment hit double digits and continues to be there in many areas today Direct and indirect costs are coming under the knife
Expense Reduction Results Personnel Expertise Time Good Request written bids Know suppliers Know your needs Understand the items being purchased Great Know alternative suppliers Understand how to bid a category Know pricing other companies receive Know where to focus negotiations Create competitive tension Exceptional Understand business model of each industry Access industry benchmarking data Know the difference between can t & won t Use sophisticated procurement tools Employ category experts Know industry best practices Capture savings quickly Audit to ensure savings
Expense Category Opportunities Logistics Small Package Freight Domestic Freight International Freight Insurance All types Services Equipment Maintenance Payroll Processing Temporary Labor Uniforms Records Management Utilities and Energy Janitorial Services Waste Management Copiers Supplies Chemical Cleaning supplies Laboratory supplies MRO/Factory Consumables Packaging and Shipping Stationery and Office Telecommunications Data Mobile Voice Banking Services Merchant Card Fees
Typical cost reductions by expense category
Surmounting the internal obstacles to cost reduction initiatives
In your opinion, which of the following are the greatest obstacles to improving cost management at your company? Organizational resistance Lack of time, attention, and resources Lack of a standardized approach to cost management Lack of tools, frameworks, and decision-making Lack of communication among finance, operations, Lack of benchmarking data to evaluate vendor Incomplete knowledge of key vendors' pricing strategies Lack of robust reporting Incomplete knowledge of vendors' competitive market Highly complex sourcing arrangements Other None of these 2% 4% 19% 17% 16% 14% 12% 11% 11% 29% 37% 42% Percentage of respondents Note: Respondents were asked to select up to three answers.
Expense management challenges Senior financial executives most frequently cite organizational resistance as the greatest obstacle to improving cost management Companies also report a scarcity of resources, time and attention for these projects Incomplete knowledge of vendors competitive position in the marketplace Lack of benchmark data to evaluate vendors
Overcoming Organizational Resistance Resistance is an expression of fear
Fear of Change Supplier change Old vendor relationships will be lost Loss of incentives and perks Relationships with new vendors must be built Process changes Lots to learn Status quo Couldn t things go bad?
Overcoming Organizational Resistance
Overcoming Organizational Resistance 1. Communicate the Business Case 2. Ensure Impartiality in the Implementation 3. Meet with Stakeholders 4. Document Requirements for each Expense Area 5. Use RFPs to Create Competitive Tension
1) Communicate the Business Case
2) Ensure Impartiality in the Implementation 18
3) Meet with Stakeholders 19
4) Document requirements for each expense area
5) Use RFPs to Create Competitive Tension
Scarcity of Resources, Time and Attention There is never enough of anything to satisfy all those who want it. ~Thomas Sowell
Scarcity of Resources, Time and Attention Create a positive and supportive environment Employees are doing more with less Increased day-to-day responsibilities Increased stress Not enough hours in a day Lack of focus Not a priority
Lack of Benchmark Data What you don t know can hurt you
Incomplete knowledge of vendors competitive position in the marketplace What you don t know can hurt you
In your opinion, which of the following business benefits (in addition to monetary savings) is your company most likely to realize as a result of its cost reduction efforts? Percentage of respondents Note: Respondents were asked to select up to three answers.
Action Plan to Overcome Organizational Resistance 1) Communicate the business case for the cost management project. 2) Assign an impartial project leader for each cost category to ensure an unbiased and objective review. 3) Meet with stakeholders, define what a successful outcome is and confirm their support for the projects in those categories under their management. 4) Thoroughly document company s past and future spends for each category under review. 5) Use a formal and unbiased RFP process to create competitive tension and reinforce the objectivity of any changes to internal stakeholders.