| In these days of insecurity and uncertain futures, | | | | Be alert to inexplicable increases even if they |
| the tendency is to manage for survival but the | | | | appear to be small. |
| smart business leaders are actively hunting for | | | | Q2: Who has accountability? What are the KPIs? |
| profits. | | | | Take a list of your operating costs and write next |
| And they are doing this without launching costly | | | | to each line item who you hold accountable within |
| new initiatives or major capital investments. | | | | your organisation for managing it. |
| Seems difficult? Only if we are bound by the | | | | In business, you need clear linesof accountability |
| traditional approaches to profit growth. | | | | to produce targeted results. |
| Take the case of a business with 50% margin | | | | Who do you look to within your business to |
| and a 10% bottom line profit. To double the profit | | | | reduce (not just contain) operating costs? "Cost |
| to 20%, business mathematics would suggest you | | | | management is everyone's job" is a slogan. Apart |
| could try a range of approaches from doubling | | | | from slogans to assure results, you also need |
| your sales (not easy in these days of fierce | | | | unambiguously articlated goals and clear lines of |
| competition) to improving the margin by as much | | | | accountabilities. |
| as 20 points through better productivity. | | | | Remember, unlike assigning accountabilities for |
| In most cases, this may involve shedding jobs at | | | | functions such as making sales, collecting cash and |
| the risk of losing valuable corporate memory, not | | | | preparing accounts, it is sometimes difficult to |
| to mention the attendant social costs. | | | | assign accountabilities for managing some |
| Often overlooked is the profit opportunity that | | | | operating costs. |
| lies hidden within the operating costs of most | | | | For instance, operating costs such as |
| businesses. | | | | communiation or printing costs are incurred right |
| In ERA's work with organisations, of all types and | | | | across the various business silos and processes. |
| sizes, right acoss the various economic sectors | | | | Whoever you hold accountable should have the |
| round the globe, it never ceases to amaze us the | | | | authority and capacity to act for the entire |
| surprisingly large values which can be unlocked | | | | company. |
| from business operating costs. | | | | Their accountability and the related KPIs should be |
| What's more, the value release goes directly to | | | | in their performance contracts. |
| the bottom line. Even though every business | | | | Make sure you review this regularly as part of |
| nowadays claims to manage their costs prudently, | | | | their performance evaluation and feedback |
| many are continuing to over pay - by as much as | | | | process. |
| 75%. | | | | If there are particular costs against which you |
| Even a saving three times smaller would have | | | | can't clearly identify who within your organisation |
| been enough to double the net profit in the above | | | | is accountable for managing them, chances are |
| example. | | | | you have identified potential areas of profit |
| Such are the possibilities of cost reduction | | | | opportunities. |
| management. | | | | Q3: How is performance measured, reported and |
| But, how does one achieve such staggering | | | | reviewed? |
| results? Essentially by following a three-step | | | | What performance measure do you rely on to |
| process: | | | | check that your operating costs are being |
| Step 1 - Challenge demand internally | | | | controlled? |
| The first step in capturing value from costs starts | | | | The aphorism, "what does not get measured - |
| with vigorously questioning the demand for the | | | | does not get done," is true. |
| product or service being purchased. | | | | The problem is what metric you use. If you are |
| Is it a strategic or an operational cost? an we | | | | drawing comfort from seeing positive variances |
| eliminate the need for this cost altogether? If it is | | | | either against prior period or budgets - beware. |
| absolutely necessary, is it needed as frequently? | | | | Internal, historical measures tell you only how well |
| Is it worth paying more for additional service and | | | | you have done against your own standards. |
| or quality? | | | | They don't tell you whether you are optimising |
| Is there a clear business case based on total cost | | | | performance or even how well you are doing in |
| of ownership? Can we pay for use rather than | | | | comparison with businesses of similar size and |
| pay to own? | | | | type. |
| Step 2 - Get the right supply relationship | | | | If there are particular costs where your only |
| Next step in the process is to get the | | | | available metric is historical and/or internal, you |
| fundamentals right with the supply relationship. | | | | have stumbled on a potential profit opportunity. |
| An optimal relationship creates value for both you | | | | Q4: What is the process for incurring cost? |
| and your supplier because it delivers value to the | | | | Get people to list the suppliers you are using |
| end user - who is after all the ultimate customer | | | | against each cost line-item. If there are several |
| for both of you. | | | | suppliers against a particuilar line-item potential |
| In building supply relationships take care to avoid | | | | exists for value capture through streamlining and |
| extremes. | | | | innovation. |
| It is unwise to base supply relationships on blind | | | | If people are telling you, "we buy things as we |
| trust. | | | | use them," - it might not always be because they |
| It is equally unwise to take a "winner takes all" | | | | are being prudent. |
| adversarial stance. Be a professional sceptic and | | | | "Ad hoc" purchasing generally ends up costing |
| check out the supplier assertions. | | | | more. |
| Make sure you are only paying for what you | | | | If supplier contracts are being entered into, are |
| need and negotiate to eliminate unnecessary bells | | | | you satisfied that your people have the |
| and whistles. | | | | necessary "state-of-the-art" market knowledge, |
| You should be fully aware of your cost analysis to | | | | tendering capabilities and negotiating experience? |
| help identify excessive margins in supplier pricing. | | | | This is particularly important if the item being |
| At the same time, treat the supplier as a partner | | | | contracted is not part of your core business and |
| in your business and work co-operatively to | | | | consequently, your staff is not well versed with |
| identify savings. | | | | the intricacies of the supply market. |
| Step 3 - Improve supplier value creation | | | | If you have had the same supplier for a long |
| Sustainable value from the supply relationship | | | | period, they should also be proactively identifying |
| does not arise by you simply pushing your costs | | | | profit opportunities for you through innovation. |
| upstream to the supplier. | | | | Some final thoughts |
| True, you have moved the costs out of your | | | | We all have the propensity to believe what we |
| business but the supplier is now burdened with | | | | like to see happen in our business is actually |
| them. | | | | happening. |
| Such a situation is not very tenable in the long run. | | | | Staff members, however well intentioned, also |
| On the other hand, when you and your supplier | | | | have the propensity to tell the business leader |
| use innovation and/or technology to create new | | | | what he or she likes to hear. Don't let that happen |
| value, it is lasting and can benfit both parties. | | | | to you. vigorously seek out evidence that your |
| Proactively work with your supplier to identify | | | | costs are being reduced. |
| such value. | | | | Complancency is a serious obstacle against |
| But how can you, as the business leader, check | | | | achieving just results. |
| whether opportunities of this magnitude - to | | | | Don't let your organisation wait for some |
| release profits from costs - exist within your | | | | catastrophic event toforce action. Take the |
| business? Here is a quick check list: | | | | initiative. Set high standards. Expect the best from |
| Q1: What are the facts about your operating | | | | your organisation. |
| costs? | | | | At ERA, for every $1million of costs under |
| History plus history plus history is trend. Calculate | | | | management we put $200,000 on average on to |
| your operating costs as a percentage of your | | | | our clients' bottom line. Of course, we tend to get |
| sales over the last five years: is it going up, | | | | the more difficult and complex cases but this |
| staying the same or coming down? | | | | should give you a yardstick of what may be |
| Can you explain the trend from what you know | | | | possibile within your organisation. |
| about your business? | | | | After all, it's your profit - you have worked hard |
| If you can't, this should quickly alert you to | | | | to earn it. Don't let it leak out of your business! |
| possibilities for releasting profit from your costs. | | | | |