Overhead cuts can save jobs
Regional director for consulting company Expense Reduction Analyst based in Falmouth
When times are tough, businesses have a renewed focus on reducing costs. There are ways to significantly cut expenses without a round of layoffs. If the cuts are focused on “overhead” areas like freight, waste management, office equipment and supplies, telecommunications, equipment leases and insurance, the savings won’t be as likely to affect morale or business performance. Done right, the following measures should yield an average of 20% savings across all categories:
Know the industry: Thoroughly understand the expense category in which you want to make cuts. This means understanding how the particular industry operates. You will want to understand what types of suppliers exist and their individual strengths, how they make money and where the hidden charges are.
Be sure the suppliers know you are serious: Suppliers become more aggressive when they know you might take your business elsewhere. The longer you have used a supplier, the harder it is to make them take you seriously. Going out to bid is one way to create some competitive tension.
Thoroughly analyze your use of each service: Before you can reduce costs, you will need to fully understand your current costs. Look at your general ledger for an entire year and analyze three to six months worth of invoices. This is a lot of work but the effort will pay off. You might also be lucky and find an error from the past where credits can be obtained — it happens more than you might think.
Know the market price and set a goal: Try to figure out what other companies with similar usage pay for their services and use that knowledge to set some goals for pricing and savings. Confidentiality requirements limit the use of this information, but just knowing it increases your power in the marketplace and helps you be successful.
Best practices — worth more than price: Obtaining great pricing on services that you don’t need or others you are misusing aren’t real savings. Rely on industry “best practices” to decide whether you need a specific service. Talk to other companies, read about the expense category and talk to your current and alternate suppliers.
Go to market with a Request for Quote: This formal approach may seem like overkill, but it has huge power. It will make the supplier take you seriously. But also pay attention to the service component in the RFQ — there’s a lot more to supplier selection than just price.
Negotiate: After you have obtained the responses to your RFQ, analyze them carefully. Every supplier is in the business to make money and the trick is to figure out where they hide their profits. You’ll want to ensure that the margin they obtain is reasonable.
Implement quickly: Every week and month you delay implementing your cost-savings project means savings have been lost forever. Since the savings benefit will last for years, don’t shortchange the process.
Audit and monitor: Mistakes happen in contract and pricing changes all the time. Some are minor but can have a dramatic impact on costs. The critical step is to monitor the costs carefully so you get the savings you have worked so hard to obtain.
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