Published In:
BRW Date Published:
7th February 2002 Author:
Kath Walters
When cutting costs is necessary - as it is in this economic downturn - managers and their financial staff normally turn to the big items to find savings, such as firing staff, closing offices, cutting marketing budgets, or moving to cheaper premises. But smaller costs - such as printing, telecommunications, stationery, couriers, travel and finance - are often overlooked and left unmanaged, according to Stanley Zets, a director of Expense Reduction Analysts (ERA), which specialises in helping companies reduce such costs. As a result of this neglect, some companies are overpaying for such products and services by as much as 75%, Zets says. Cutting the small costs can lift profits, improve productivity and save jobs.
In the Adelaide office of the accounting firm Hall Chadwick, controlling costs recently was a factor in a falling-out among the firm's three partners. One partner left, and one of the remaining partners, Ian Swan, spent the Christmas break clearing out piles of unnecessary, but expensive, photocopies and printouts, and reclaiming cabinet-loads of stationery. Swan says: "I reckon we won't need another manila folder, lever-arch file or paper clip for years. We normally spend $2000 a month on stationery. So far this year, it is $3."
Swan is reviewing the firm's expenses, looking at everything from courier charges and travel to stationery, marketing material and Friday afternoon drinks. He says: "You wind up being busy, concentrating on the big picture if you are an owner, but all these little costs add up."
A dollar saved
Where Expense Reduction Analysts' clients spent the most money over the 12 months to October 30, 2001 and where they achieved the greatest percentage savings
Area of expense
Ranked by $ savings
Ranked by % savings
Telecommunications
1
6
Travel
2
8
Insurance
3
9
Document storage
4
2
Stationery
5
5
Couriers
6
7
Printing
7
1
Electricity
8
10
Photocopying
9
4
Cleaning
10
3
* Based on $32.8 million of savings achieved for 442 clients during the 12 months to October 30, 2001
Source: Expense Reduction Analysts
The Australian operation of the United States recruitment company TMP Worldwide introduced a cost-cutting program
24 months ago.
Working with ERA, TMP's financial operations manager, Ross Kirby, analysed four areas - couriers, travel, stationery and printing, and telecommunications - and achieved net savings of $1.47 million in the year to December 31, 2001. Kirby expects further savings of $2.4 million by December this year, a reduction of 23.6% over
24 months.
ERA charges clients a percentage (up to 50%) of the savings it finds over a 12-month period. After the first year, it charges a consultancy fee. In TMP's case, Kirby estimates that ERA's fee represented 18% of the savings. As the dollar value of the savings rose, ERA's fee as a percentage of those savings went down.
Kirby says the savings that ERA found were beyond his expectations. "I wasn't expecting that much. I thought if we could find 10-15%, we would be happy. In service industries like ours, after people costs and rental, you are left with a whole bucket of odds and sods. Nothing jumps out, but cumulatively they add up - in our case, to $12 million."
In the 12 months to October 30 last year, ERA investigated costs totalling $180.3 million for 442 clients, and claims to have found savings of $32.8 million, or 18.2%. Zets says cost control tends to be forgotten in boom times, and revived when the economy turns down.
He says: "It saddens me. The perception is, 'Oh, our businesses is down, we need to cut costs'. That is the wrong approach. Finance teams have an obligation to manage their cost structures. Ultimately, that is about delivering bottom-line results, protecting employment and directing skills within the organisation to optimum efficiency."
The problem, Zets says, is that managers and financial controllers frequently lack the time and specialist knowledge to tackle smaller costs. When TMP's Australian operation began cutting costs
24 months ago, TMP Worldwide's total annual revenue growth was 43%. (Figures for the Australian operation alone are not available. Growth figures for 2001 have not been released). Kirby says: "We didn't have the skills or the time. The stock price was booming, sales were booming, there was so much opportunity with acquisitions and new business. We didn't have the resources and we wanted a partner with the experience."
A partner with the accounting firm Hayes Knight, Greg Hayes, says the first step in tackling costs is to pinpoint areas in which savings could be made and analyse the current spending. ERA lists 10 areas that are worth examining: telecommunications, travel, insurance, document storage, stationery, couriers, printing, electricity, photocopying and cleaning.
The general manager of card and financing products at Commonwealth Bank, Nick Kennett, says companies can also reduce their cost of financing. Hayes adds advertising and technology costs to the ERA list.
Most companies reduce the list to four or five areas of immediate concern, according to the deputy managing director of ERA, Robin Dunlop. "We develop a financial model of what they are spending, who they are buying from, and we talk to the stakeholders who are making the purchases," he says. These people include purchasing officers, the managing director's personal assistant or other staff making travel arrangements, receptionists ordering couriers, and employees making individual purchases.
ERA presents its analysis of the costs and makes broad recommendations. Dunlop says: "At this stage, typically no more than a month after we start, we will say, 'We think you should look for a technological solution' or 'we think you should tender some supplies'."
ERA compares its clients' expenses with those of companies of similar size and in the same or a similar industry. Kirby says: "They brought important knowledge about the market. We might have been happy with an 18% drop in stationery costs. They could say, 'We know there is another company buying your volumes that pays another 20% less'."
Hayes points out that benchmarks are an average, and companies and accounting firms should aim higher. "A benchmark is where the best meets the worst," he says.
The next step is to select suppliers. If the supply goes to tender, ERA will cull the list of potential suppliers to two or three, prepare the tender documents, and sit with the client through presentations. "Our objective is to get the client to select a supplier," Dunlop says. "During presentations, we remind them of what they wanted, and which needs were most important. We take the emotion out and get it down to fairly objective criteria."
The cheapest supplier might not always be the best, for several reasons. For example, a more expensive supplier might provide better service, the supplier may also be a client of the company, or there might be a personality clash between the supplier and the company's employees. Centralised purchasing might be a disadvantage if branch offices are made to buy from one supplier when there is a cheaper supplier locally.
After the selection is made and contracts are signed, companies can monitor the process by checking invoices and holding quarterly meetings with suppliers to discuss problems or improvements.
To sustain cost reductions, companies must establish new buying and monitoring systems, Kirby says. "There are a lot of companies that will come in and drive costs down for you. Then they leave and in the next couple of years, the costs creep back up. We wanted process improvements."
New technology is also helping to cut costs. Commonwealth Bank's Kennett says one example is online banking, which allows instant monitoring of account balances to better manage cashflow. Outside banking hours, customers can take control of financial management processes such as payroll and superannuation payments, and can park money in short-term accounts that have better interest rates. This removes the need for the direct involvement of bank staff, and reduces fees and charges.
Shifting from cheque books to credit cards can help companies analyse their costs, Kennett says. "Companies get a single itemised statement, with a number of people on it, so you can see what is going in and out, and who is spending what."
Hayes says his firm, which reviews costs every year, is saving 30-40% by using the internet to book accommodation and travel.
Kirby says TMP has retained ERA as a consultant to reduce its mail costs, which were $1.4 million in 2001. TMP, which handles about 1.5 million pieces of mail a year in-house, will outsource its mail handling. TMP will e-mail items such as invoices, statements and pay slips to the supplier to print, fold and post. TMP will provide financial and other information to its suppliers over the internet, rather than by post, and will use e-mail for direct advertising. Kirby expects the new mail system to be introduced in March.
At Hall Chadwick, Swan plans to keep costs down by closely managing every expense. He says the firm will consider using an external consultant to review its information technology systems, which cost about $50,000 a year.
