Published In:
CFO, Australia Date Published:
5th March 2005 Author:
Simon Segal
Few companies fully understand how to save money on telecommunications, travel, insurance and printing
As cost pressures continue to build in the economy - the prospect of an increase in interest rates this year, rising oil prices and growing wage inflation all contributing their share - chief financial officers are tightening their grip on expense management. Organisations usually have better controls on direct costs then on indirect costs or overheads, which is where most CFOs see scope for savings.
The focus has moved beyond pulling the obvious levers - slashing payroll, consolidating suppliers of direct materials and streamlining processes. Michael Byrne, CEO of the consultancy Expense Reduction Analysts (ERA) breaks overhead costs further into human resources and goods and services.
"It is in the area of overhead goods and services that most businesses have common costs. There is significant fluctuation in the amount of overhead expenditure from company to company. However, the most common appear to be telecommunications, travel, insurance and printing," he says.
Another expense management adviser, NUS Consulting, says utility costs, such as energy and telecommunications, can make up as much as 25% of an organisation's overall operating budget. The firm's production manager, Harry Perry, notes that Australia offers far fewer opportunities for savings in energy costs that in telecommunication costs. "Since the energy sector was deregulated, energy relations now concentrate on retaining business rather than aggressively pursue new business. The converse is true for telcos, where fierce competition has led to complex pricing options. Knowing and negotiating around the myriad pricing models can lead to savings of up to 35% of telco costs. One has to delve for savings and ought not to take pricing offers at face value."
Perry is "amazed" at how many financial managers are reluctant to move from the existing option. "Shareholders ought not to be impressed with how many companies are paying premiums to remain with their service providers. Mindsets of many financial managers have not shifted from the days of fly-by-night telco resellers. Those days are long gone - the vast majority of telco service providers are well run and stable."
An ERA telco specialist, Graeme Cox, believes telco services should be treated as a commodity rather than a service. He says there are numerous ways a company can reduce the average call price without necessarily changing supplier. "What it comes down to is understanding what you're paying for and making sure that you're only paying for what you need. Then negotiate to reduce call charge costs and the rental of associated services."
On the travel side, the report Maximising Expense Management Services, prepared for American Express by Accenture, finds the average travel and entertainment budget of companies to be 3.5% of revenue, although this varies widely by industry. Travel and entertainment spending is dominated by air travel (43% of overall budgets) and hotel spending (21%). According to the report, "traditionally, organisations have devoted most of their focus to controlling these costs. However, companies are increasingly targeting other types of travel and entertainment spending for savings gains.|
The report adds that conventional travel industry purchasing channels have changed radically, in particular via the growth of third-party internet services and direct online purchases of airline fares by corporate travellers. "As a result, many companies now attach greater importance to capturing air spend from all channels that employees may be using," says the report. "Global and regional air travel agreements are becoming more common, particularly for companies in markets where longer-haul sectors are prevalent. For these global deals, organisations tend to leverage greater spend to win higher discounts."
An earlier study by American Express notes that travel management has moved beyond old-fashioned techniques, such as negotiating discounts, to other tactics, such as net fares (commissions are transferred to the company in the form of discounts), volume-based discounts with low-cost carriers, guaranteed fares (price caps for specific routes), pay-as-you-fly, and corporate charters.
In the case of hotel costs, the report's authors suggest cutting costs through negotiating annual agreements during the low season when rates are cheaper, prepaying blocks of rooms (this can help address market-specific rate increases and sold-out space) and using extended-stay properties. Byrne finds business travel is a critical expense because people who do the most travelling are often those who most influence the bottom line. "So their needs must be carefully considered."
Ken Armstrong, director of ERA Insurance Services, says companies can save an average 30% of their annual insurance costs and improve their cover. "They can do this by benchmarking premiums and fees, ensuring accounts are properly marketed by their incumbent broker, and by focusing beyond premium reductions to improve insurance cover, service levels, risk management and financial security."
He feels businesses are constrained by insurance broking "fee fixing", "market service agreement", "contingent commissions", "steering" of business and the "shielding" of insurers. "Does the broker 'market' for the best arrangements, declare commissions and fees including any contingent commission she may have received, compare premiums and fees against industry benchmarks?"
Armstrong says the key areas in which general insurance expenses can be cut are:
Investigating renewal policy terms and conditions at least three months before the expiry of the current policies.
Determining more precise needs, which may not be met by packaged policities produced by brokers and underwriters under binders or similar programs.
Matching these needs with the appropriate underwriters, who may change from year to year with changing market conditions.
Establishing benchmarks for premium cost and fee (commission) cost, and comparing the renewal premium for similar companies and against industry benchmarks.
Identifying initiatives that support the risk management framework.
Looking at printing costs, ERA analyst Gary Wilson finds "few companies are awre of the changes that continue to take place in the printing industry. These developments can reduce not only the time and effort involved in managing printed material but can also significantly reduce the annual costs associated with these products."
He suggests that firms rationalise forms, combining several items to achieve a common result; look at more economical print production in terms of stock, number of colours used and the production method chosen/increase batch size or print items together, and try to do the entire job with one supplier.
Depending on the business, its industry, size and management, many other indirect costs can be trimmed and have a substantial effect on the bottom line. Examples include workers' compensation, freight, mail, merchant card fees, cleaning, waste disposal, office supplies and payrolls.
Of the latter, PricewaterhouseCoopers research, commissioned by the global outsourcing and payroll specialist ADP Employer Services, found hidden costs account for about 50% of the total cost of producing the payroll in an organisation.
ADP's managing director, Scott Doyle, says: "Apply these figures across your computer headcount, and suddenly, the simple act of paying your staff takes a lot of money and resource support - and all the this expense for a non-core part of the business."
A report on medium-size companies prepared by the US- based CFO Research Services in collaboration with American Express Corporate Services found that, although there are a range of tools and techniques available to manage indirect costs, relatively few mid-size companies take advantage of them. Only half the respondents were "somewhat satisfied" or "very satisfied" with the way their companies manage indirect expenses. Twenty-six per cent said they were dissatisfied.
The report states: "Companies have traditionally neglected these lower-cost, high-volume purchases when looking for ways to save money. Managing indirect expenses present a significant opportunity for finance executives. Such spending typically comprises 10% to 15% of a company's spending ... Controlling indirect expenses ranks alongside new-revenue creation and cutting direct costs as the top strategies CFOs are pursuing to improve their business's financial situation."
The report identifies five steps for finance executives to consider in managing indirect costs:
Establish spending policies that account for the needs of employees, then enforce them strictly. Policies are common, but few finance executives are satisfied with compliance. For example, 81% of respondents set spending limits but only 58% of CFOs are satisfied that employees comply. Compliance can be improved by involving those affected in the process of creating the policies, by making it clear that there are consequences to not complying and appealing to employees' understanding about rigorous expense management.
Centralise the management of expenses to ensure compliance. According to the report, companies manage indirect expenses in different parts of the group or not at all. This compromises the ability to control expenses, impedes the budgeting and forecasting process, and makes it nearly impossible to approach suppliers as a single entity. Centralised expenses management can facilitate more efficient purchasing decisions and enable the finance function to provide better advice to the businesses.
Use web-based technology to improve expense report filing and data access, and to take advantage of the online tools offered by suppliers and corporate card providers. Such technology can take several forms, including suppliers' web sites, client-hosted systems and web-hosted applications. Web technology can be an inexpensive way of controlling spending and streamlining internal processes. Implementing this technology can cut the time finance employees spend processing expense reports and the time non-finance employees spend submitting them.
Use corporate cards for indirect expenses in addition to travel and entertainment spending. Like web-based technology, corporate cards can yield better information about spending and lead to easier expense processing. Also, employees often view corporate cards as a convenience, since they enable them to avoid mixing business and personal expenses on their own cards. "However, these benefits are only maximise when usage is mandated and all employees are using these cards," the report says.
Use the spending data available in corporate systems to manage suppliers. Aggregating spending information and using it to get better prices is a common practice in direct spending, but few apply it to indirect spending. The reports says: "The principles of strategic sourcing can easily be applied to indirect expenses: determine how much the company as a whole spends with which suppliers, choose the best ones, and consolidate the spending the spending with them in exchange for better prices and perhaps customised service."
