Expense Reduction Analysts Business advice

10 steps to effective cost management

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EVER HAD A SINKING feeling in the pit of your stomach, right after a friend told you he paid £50 less than you did for the latest state-of-the-art titanium golf club? It's called buyer's remorse, and we've all experienced it at one time or another. Chances are, when you made the purchase, you really thought it was the best deal around. You did some homework first called a 'couple of pro-shops, visited the giant golf warehouse and checked some prices on the Net. Better luck next time, you think, convincing yourself that £50 isn't that big a deal.

But apply a similar scenario to cost saving in your company. Ask yourself what kind of profitability impact there would be if you could reduce the company's general operating or non-strategic costs by, say 15% or more. Cost cutting might not seem all that glamorous at first, but let's think of it for a moment in terms of the new business you can generate in the process. If your company has a gross profit margin of 25%, you would have to generate an additional £400,000 in sales for every £100,000 you could eliminate from overhead costs. Now that's a big deal.

Cost management is often forgotten or overlooked, especially in good economic times. The probable reasons are numerous: the process can be difficult to manage; cost-reduction initiatives are not always positively received by staff, and tough-minded resolve is required. Moreover, in today's business world the buyer is generally at a disadvantage. The seller possesses vital market knowledge that the buyer does not have because of a lack of resources, time, expertise or a combination thereof. Consequently, most if not all organisations overspend significantly on business operating costs. Although businesses are aware of the problem and the impact it has on their financial performance, they often do not address it for the reasons just mentioned. Even businesses that are committed to eliminating excess costs and have embarked on cost saving initiatives have probably not achieved optimal results. This is mainly because they lack critical knowledge of the marketplace and, quite often, their own buying patterns and needs.
Maybe you work for a large organisation and you assume you must be getting the best deal. Unfortunately, markets for various products and services do not always perform rationally, i.e. large customers with greater purchasing power do not always enjoy lower costs. Case in point: We recently negotiated with a supplier to obtain a discount rate for a client that purchased £60,000 of goods per year. This discount was higher than the one received by a £10-million account from the same supplier.

In fact, well-managed smaller organisations often outperform larger ones. Whether your business is large, small or somewhere in between, you can still perform at your optimal level and achieve your company's cost-saving goals.

Here are 10 steps to effective cost management.

1. Don't Settle for Mediocrity
Surprisingly, many organisations aren't concerned enough about eliminating overspending and reducing costs. If executives and staff are complacent about financial performance and cost control, there is little chance of implementing a cost-savings project. Caring is a prerequisite to effective cost management.
The recent economic boom will likely have had an adverse effect on your employees' concern for cost control. This may not visibly affect the organisation in the short term, but what will happen at the next economic downturn. The prevailing culture/attitude of "Don't rock the boat" or "If it ant broke don’t fix it" is a recipe for mediocrity and will at best result in ‘status quo’ performance. Developing a Profit Culture were everybody with the organisation is responsible for profit is the key. Start caring about cost management before the situation becomes critical and hasty decisions have to be made.

2. Be a Crusader
Once you have established a caring culture, you need to commit fully to reducing unnecessary costs. Don't be lulled into taking the path of least resistance and settling for the status quo. Be a crusader and demonstrate to employees that you care about saving money, even on the smallest items. Leading by example will highlight the importance of cost cutting and motivate others to take some initiative.
Open up your organisation to scrutiny and examine every cost. Cost management is not a popularity contest so don't be afraid to ruffle some feathers. Your stakeholders will applaud your efforts and your message will be taken seriously. You may find some staff members resisting your initiatives. This may be a sign of apathetic or incompetent employees. Don't tolerate any resistance. If you do, your message will be diluted. Case in point: We recently met with a purchasing director who declined to try our risk-free service, even though he said we could "probably save this company at least £200,000 a year." Sounds sad, but a lot of people just don't care. Be relentless and have the attitude that no cost is sacred.

3. Keep the green light flashing
Instill a sense of urgency and create a Profit Culture in which employees act immediately to reduce costs and maximise profitability. If you don't, employees will see your crusade as "the flavor of the month" and your project will quickly fall to the bottom of everyone's in-tray. Promote cost management and Profit Enhancement as a top priority. Create the motivation to trim costs and people will act. Establish tight project deadlines and stick to them in order to follow through on your commitment to effective cost management.
If you are short on internal resources, consider the use of an external cost-reduction specialist preferably under a no-financial-risk basis. This approach allows you to maintain focus on your core functions as well as reduce unnecessary costs.

4. Always run a tight ship
One of the best ways to prove that your "well-kept ship" is not as leak-proof as everyone is thinking or hoping is to obtain external benchmarking data. You may believe your costs are under control based on historical trends, but what are your competitors paying? Benchmarking data is a useful tool to overcome complacency and instill a sense of urgency.
Compare your cost-management performance to others in your industry and region, or on a national / international basis. Bench marking will highlight areas that have the most potential for improvement and will help you to set priorities. Gather the data from outside agencies, consultants, or benchmarking services. Be careful to ensure that you understand the data as they apply to your situation data are useless unless they are interpreted correctly. Use this information to negotiate from a position of strength with your suppliers.

5. Be market wise
Now that you have benchmarks to work with, you need to understand the supplier market for the costs you are examining and any developments that you may be able to capitalize on. Establish a market intelligence gathering system and update that system at regular intervals. Find out if there are any new technologies or suppliers that can immediately reduce your costs and administrative time. Work with your suppliers and external experts to identify new cost cutting strategies.

6. Caveat Emptor
To have any chance of negotiating favorable arrangements with your suppliers you must have knowledge of the prevailing market prices and practices. Generally buyers are severely disadvantaged because the supplier has superior knowledge of the market and not surprisingly chooses not to divulge it. Track down the prevailing market price before commencing negotiations. Do not rely on the supplier for this information.

7. Don’t take the bate
Determine your product and service requirements. Is there a better way to procure your goods and services? Look at total costs, including item price, inventory holding and administration (invoicing). Don’t purchase premium services unless they are necessary, for example 10am courier delivery if 5pm is acceptable.
Buy what you need and not what suppliers would like to sell you. Suppliers will often use bate-and –switch tactics to move you on to 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.

8. You know what they say about the squeaky wheel
Every year, companies spend millions of pounds on purchasing goods and services unnecessarily. Suppliers price their offering accordingly to what the market will bear. You must let them know that you won’t bear it any more.
Rarely will a supplier volunteer a price reduction (even to its most valuable customers) without some pressure from their customer or from the competition. Let suppliers know that you are reviewing your overhead costs, which have to be reduced without reducing the quality or service standards. Refuse to accept price increases and you will be amazed how many suppliers will back down to keep the business. Noise without knowledge (see steps 4 and 5) will only get you so far.
Do the research before you approach supplies so that you are able to negotiate from a position of strength. During negotiations, present the value of your business to the supplier in the most favorable light. Also, don’t fall for ‘freebie’ relationship building tactics. Are you willing to pay a premium price for the occasional lunch or football game?
Finally, don’t accept the suppliers statements "our prices are higher because we provide superior quality and service" or "our prices cannot be beaten" without doing some comparison-shopping.

9. Set sail without delay
The eight previous steps are fruitless unless you can implement the profit-improvement measures. Reconfirm your commitment and sense of urgency to actually achieving the cost saving and boosting the bottom line.
Be sure to involve key people and get them on board at the out set of the project. Also, get suppliers involved during the implementation to ensure that the process goes smoothly.

10. Keep a Watchful eye
Potential saving are great, but if they don’t mean anything unless they are realised. Monitor the situation after implementation to ensure staff members do not slip back into old habits, the supplier charges correct prices and service standard match the agreed specification. Also remember to review each cost category every year or two, depending on total expenditure and price volatility.
By following these 10 steps, you should be able to significantly reduce your buyer’s remorse and be well on the way to a healthier bottom line.

To contact Expense Reduction Analysts, please click here