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Seven Steps to Cutting Costs vs. Cutting Jobs
January 26, 2010
By Miles Lee
These are scary times for business owners. Demand for products and services is slowing, equity values are plummeting, and it is becoming more difficult to gain access to working capital.
So what are your plans to maintain or grow profitability in this climate? Raising prices could put your business at a competitive disadvantage. Delaying or canceling capital equipment purchases risks creating inefficiencies. Or you can reduce expenses, which offers many benefits if you avoid the pitfalls.
Laying people off is an immediate way to reduce costs, but it risks destroying morale, reducing productivity, and could create an enterprise that can no longer attract and keep the best talent.
Another solution for cutting costs is the adoption of best practices in purchasing. When times get tough, reviewing your procurement practices may be the best and quickest way to free up the cash flow necessary to sustain your business.
Industry analysts suggest each $1 in procurement cost savings has the same impact as $5 in new revenue. Using that ratio, $100,000 in savings would replace $500,000 in lost sales. This savings frees up cash flow, increases borrowing power, and boosts equity values.
The same is true for not-for-profit organizations. Every dollar of cost contained replaces $5 lost through attrition in donations, grants, endowment income, and fund raising activities.
So why doesn't every CEO implement an across-the-board cost cutting initiative in the procurement arena? Because identifying cost savings involves solving unforeseen challenges making procurement more difficult than it may appear. Here are some strategies for executives serious about reducing procurement expenses to consider:
1. The CEO or business owner must make procurement a top priority. Providing strong leadership and ongoing support to the cost containment effort throughout the organization is critical.
2. Review all expenses. Every dollar matters. Sometimes the greatest overall cost savings come from the multitude of mundane, non-strategic expenses such as office supplies, telecommunications, and printing.
3. Oversee a fair evaluation of supplier alternatives. Leverage your annual spending across each expense area and initiate a competitive bidding process that is fair, equal, and arms length.
4. Consider new suppliers and never allow incumbent suppliers preferential treatment in a competitive bidding process. Your company must be willing to terminate longstanding, "sacred cow" vendor relationships if there are lower cost alternatives elsewhere.
5. Challenge assumptions about supplier service and quality. Low price and high quality are not mutually exclusive. Don't accept the myth that low cost always means poor quality. Don't accept assumptions not based on facts.
6. Monitor compliance. Once suppliers have been carefully qualified and selected, limit purchases only to these preferred suppliers. "Maverick spending" to non-qualified suppliers will reduce the performance leverage, pricing advantage, and soft cost reductions.
7. Treat your suppliers as clients. Clearly articulate your expectations in a way that is fair and understandable. Also, be sure to thank suppliers who meet or exceed your expectations. A little appreciation from the CEO can stimulate extra effort.
Whether you adopt this new purchasing process internally or through the assistance of third-party cost management consultants such as Alliance Cost Containment, implementing a cost control regimen using best practices like these will almost certainly result in the easiest revenue enhancement your company will realize in this difficult economic environment.
Miles Lee is president of Alliance Cost Containment (ACC), a national procurement services firm that specializes in cost reduction, group purchasing, and vendor management for middle market companies. For more information on ACC, go to www.costcontain.com. ACC's expertise is in expense reduction, accounting, consulting, business coaching, factoring, CPA, executive sales, or financial services.
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