As a CEO or CFO of a mid-market organisation, you’d be aware that “You can’t cut your way to growth” and that there’s no shortcut to growth. Reducing costs is great, but down to the bone will impact your competitive advantage and profitability. You also question how, in a climate of rising prices, your competitors can afford the expanded activities and services that you had to cut back to sustain cash flow.
In this article, I will inform you of a proven 4-step process using best practices to access in 12 weeks the largest pool of cash hidden inside your indirect expenses. Even if you have already reduced costs and especially if you believe “my team have it under control.”
I have first-hand experience with the pressure businesses feel when cost reduction efforts didn’t deliver to expectations and the option to raise prices or cut staff would impact our competitive edge. This wasn’t due to any shortcomings of our team, but a lack of insider knowledge and influence over each of our supplier’s industries to determine whether we were paying above the market rate. What I have learnt since has resulted in savings of 20%-38%, simply because of extra knowledge and a systematic way of viewing these costs that I didn’t know about before.
I have identified 4 critical steps that will save you money by preventing you from overpaying your suppliers.
I’ve seen procurement teams use traditional methods far too frequently, relying on aggressive haggling and the lowest price in their review of indirect costs. This may work when regularly purchasing “Widgets” but fails badly when applied to annual or bi-annually contracted products or services, like insurance, office & warehouse consumables, and print. Procurement regards the infrequency of these reviews as a distraction and often takes shortcuts so they can return to their core tasks. This worsens when your procurement team verifies proposals without detailed industry data, trends, and market pricing that has occurred over the last 12 to 24 months.
Imagine where your cost baselines would be if you possessed the same in-depth intelligence and advanced analytics on your indirect spending as you do on your customer base or brand. This is too expensive to ignore the savings opportunity from a business perspective.
The following 4-steps define the “best practices” required in your cost review process that will enable you to sustainably access, typically within 12 weeks, the sizable cash pool hidden within your indirect expenses and effectively fund your growth projects so that they reach their full potential.
Step 1 – Strategy Session
First, you will need to recruit your “A-Team” specialised in the inner workings of your suppliers and the products and services they offer. If this expertise does not exist in-house, or if the scale of your business doesn’t warrant employing your own specialists in each category, this activity should be outsourced.
Your A-Team’s first crucial mission requires them to deep dive, 12 to 24 months deep, shining the brightest light on every invoice, and searching for “over-promised and under-delivered” transactions compared to your agreement. We have frequently discovered many discrepancies here because of the “set-and-forget” mentality that prevails with staff focused on their priorities and suppliers on their margin. Step 1 should be completed in 3–4 weeks to be on course to bank savings “within 12 weeks”.
Step 2 – Fit 4 Purpose
Next, your A-team will need to establish a “fit for purpose” criteria. They must identify and decide on what are your critical success factors and opportunities most important to the business. Criteria established, your A-team will now determine the best suppliers to meet your exact requirements and eliminate those who don’t. After all, why would you work with an inept supplier who cleverly outsources your job and “clips the ticket” on the way through? This happens more times than you may be aware of.
Step 3 – Make Good
With chosen preferred supplier(s), It’s time to make good (implement). To execute this step and your supplier agreement, your A-Team must collaborate with your chosen supplier(s) to apply the agreed standards, procedures, costs, and rebates. This includes any onboarding and training of your chosen supplier(s) and stakeholders to ensure all expectations and deliverables are met. Your A-Team must take the necessary time to get this right without cutting corners with training or making assumptions that everyone’s across the details of the new agreement and procedures. We frequently discover that by this point, if these steps weren’t followed and shortcuts were taken, any anticipated savings would have been diverted into your suppliers’ bank.
“Put in the Time to save the Dime (Dollars)”… after all it’s your money.
Step 4 – Show me the Money!
You’ve made it to the 12-week mark, The “Show me the money,” fourth and final step. From here the savings start to show up in your bank account. It is crucial to not drop the ball from here. Your A-Team must constantly and meticulously monitor every transaction for compliance with your supplier’s agreement until its expiry. Particularly on promised service levels, pricing, incentives you’re entitled to but never claim and maverick spending by your staff. These are the typical areas that are overlooked, which inflate your costs by hundreds of thousands of dollars across the year.
The success of the 4-steps will be determined by the level of attention to fully implement all aspects of the steps. In doing so, you will now have selected the best-fit for-purpose supplier(s) that will deliver consistently on capability, quality, and value (savings) at industry rates. A feat currently only achieved by the top 10% of businesses.
I invite you by clicking the icons below, to arrange a complimentary 1-hour strategy session at which I will share category insights particular to your business and explore the impact the 4 steps will have on your business to achieve “Best Practice” cost reduction results, consistently and beyond expectations.
Expense Reduction Analysts.