Finance Matters: Cost management
Robert Allison, managing director of Expense Reduction Analysts, discusses a value approach to cost management.
Recently my own organisation, in conjunction with Midlands Business Insider, hosted a debate on sustaining a healthy bottom line after almost three years of unabated cost cutting.
As consultants in this area what was most interesting – and heartening – to hear were comments that obtaining value from suppliers is more important than gaining lowest costs.
We always advise that reducing costs is not just about going to a cheaper supplier. Instead work with them closely to identify value creation strategies which generate savings without affecting or disrupting standards of service through changing suppliers. Participants in the debate highlighted examples where engaging with suppliers and understanding their needs, as well as fully assessing and communicating their own requirements and objectives, had proved beneficial, leading to cost savings.
Another interesting focus of the debate was the recognition amongst businesses that there was a need to better manage non-core business expenditure. Even though there was a general feeling that a lot of work had been put in over the last few years in relation to reducing overhead and suppliers’ costs, a key challenge to address was the monitoring and delivery of savings in business expenditure categories where different tiers of employees were involved in achieving cost reductions further down the chain.
We find this in most businesses we consult on. They are costs that are often found in the bottom two-thirds of the purchase ledger and go unnoticed and unchecked for years. By focusing on, monitoring and forensically examining such costs, which can be as diverse as banking and insurance, utilities, logistics, office supplies and communication, businesses can make major savings which go to straight to the bottom line.
To drive such cost savings it was agreed universally that there was a real need to create a cost conscious culture driven from Board level down with the Financial Directorprimarily responsible for creating this environment. That said, many also thought that while the FD was able to provide strategic guidance, he/she sometimes isn't in touch with the operational impact of some types of cost reduction and therefore other departments and senior managers needed to be closely involved in implementing savings and managing change.
