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A presentation to the Novemeber NIBA conference focused on increasing the value of a business through effective expense management
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NIBANovember 18, 2010
Jim AgnewRichard Ungaro
“Increasing the Value of Your Business”
Cost Management Impact on Business ValueCost Management Impact on Business Value
Barriers and Challenges to Cost ManagementBarriers and Challenges to Cost Management
Best PracticesBest Practices
Actions & OutcomesActions & Outcomes
Options for Increasing Value for Your BusinessOptions for Increasing Value for Your Business
Objectives
Questions Questions
The Current Economic ClimateThe Current Economic Climate
Jim Agnew• 20 years Sales / Sales Management
–Packaging Supplies & Equipment–Maintenance & Janitorial Supplies–Institutional Food Products–Product Development / Marketing–Private Label marketing Strategies
• 10 years Logistics / Distribution–Operations Management–Fleet / Transportation Management–Warehouse layout / design–Employee Productivity / Process Improvement–Third Party Logistics–Customer Service–Procurement Methods and Strategies
Alco Standard Corp
Rich Ungaro
An extensive 40-year career as a Senior Executive with a special focus on business turnarounds, differentiating brands and exponential growth.
Cost Management Impact on Business ValueCost Management Impact on Business Value
Barriers and Challenges to Cost ManagementBarriers and Challenges to Cost Management
Best PracticesBest Practices
Actions & OutcomesActions & Outcomes
Options for Increasing Value for Your BusinessOptions for Increasing Value for Your Business
Objectives
Questions Questions
The Current Economic ClimateThe Current Economic Climate
• Increasing regulation• Increasing taxes• National Healthcare• Financial Reforms• Value of the U.S.
Dollar• Global Competition• New Technologies
Lots of Uncertainty
• Current economic conditions present challenges for most companies.
• Sales increases are difficult for many companies.
• Rules for institutional lending are tighter
• CASH IS KING – External & Internal
• YOUR competition is keeping all expenses as low as possible
The Pressure is ON
Cost Management Impact on Business ValueCost Management Impact on Business Value
Barriers and Challenges to Cost ManagementBarriers and Challenges to Cost Management
Best PracticesBest Practices
Actions & OutcomesActions & Outcomes
Options for Increasing Value for Your BusinessOptions for Increasing Value for Your Business
Objectives
Questions Questions
The Current Economic ClimateThe Current Economic Climate
• New Profitable Products• New Profitable Markets• More Profitable Sales• Build Advocates in Customers• More New Customers
External fundingExternal funding
Increasing SalesIncreasing Sales
Reduce ExpensesReduce Expenses
“How to Manage Your Business in a Recession”
5% price cut = 19%+ sales increase to recover lost revenue
•Staffing changes•Core expense renegotiations•Non-core cost reductions
• Investors
Traditional Options
10
“Grant me • The ability to accept the
things that I can’t change• The courage to change
the things that I can, • And the Wisdom to know
the difference”
What Do We Control?
What is it that we can change?What actions do we control?What will have the least external impact?
• New Profitable Products• New Profitable Markets• More Profitable Sales• Build Advocates in Customers• More New Customers
External fundingExternal funding
Increasing SalesIncreasing Sales
Reduce ExpensesReduce Expenses
“How to Manage Your Business in a Recession”
5% price cut = 19%+ sales increase to recover lost revenue
•Staffing changes•Core expense renegotiations•Non-core cost reductions
• Investors
Traditional Options
Expense management is the most directly controlled option for adding value to a business without external impact.
CFOs Recognize the Value…
67% Believe managing indirect expenses is an
important component of business improvement
Said “lowering costs from suppliers” is one of
their biggest challenges in expense management
Lack aggregated data to negotiate with
Suppliers
Believe they are not getting the best
prices
Source: CFO Magazine
50%
59%
78%
CFO White Paper
CFO Research Services – within CFO Publishing Corporation – publishes CFO magazine. Surveyed more than 200 senior finance executive from nearly every industry.
• Profitability comes through cost management
• Cost reductions can keep organizations fully funded and critical employees on payroll
• Companies commit more resources
to managing direct costs than
indirect costs
CFO White Paper
… The Value of Cost Management
Cost Management Impact on Business ValueCost Management Impact on Business Value
Barriers and Challenges to Cost ManagementBarriers and Challenges to Cost Management
Best PracticesBest Practices
Actions & OutcomesActions & Outcomes
Options for Increasing Value for Your BusinessOptions for Increasing Value for Your Business
Objectives
Questions Questions
The Current Economic ClimateThe Current Economic Climate
Column1
Current20% CostReduction
IncreaseSales
Revenue $ 100 $ 100 $ 140
Direct operating costs $ 35 $ 35 $ 49
Labor costs $ 35 $ 35 $ 49
Non-core indirect costs $ 20 $ 16 $ 28
Net profit $ 10 $ 14 $ 14
20% cost reduction or 40% increase in sales revenue both yield a 40% increase in Net Profit
Internal Funding Options
Which is more likely to happen in your business?
Overhead Costs Rarely Get Much Respect
Direct Costs35%
Overhead Costs20%
Profit10%
Payroll Related Costs35%
Senior Mgmt has no timeto focus on Overhead Costs
In addition to Revenue, these are the primary focus of costs
Which Are More Important?
Logistics• Small Package Freight• Domestic Freight• International Freight
Insurance• General/Worker’s Comp• Health
Services• Equipment Maintenance• Janitorial Services• Payroll Processing• Printing • Records Management• Temporary Labor• Uniforms• Waste Management
Supplies• Chemical• Cleaning• Food Services• Lab and Medical• MRO/Factory Consumables• Packaging and Shipping• Printing• Stationery and Office
Telecommunications • Data• Mobile
• Voice
Merchant Card Fees
Leasing
Overhead Expenses
Cost Management Impact on Business ValueCost Management Impact on Business Value
Barriers and Challenges to Cost ManagementBarriers and Challenges to Cost Management
Best PracticesBest Practices
Actions & OutcomesActions & Outcomes
Options for Increasing Value for Your BusinessOptions for Increasing Value for Your Business
Objectives
Questions Questions
The Current Economic ClimateThe Current Economic Climate
What prevents Companies from moving forward with Profit Improvement Plans?
Barriers Reasons
Management assumes it is being done
Consumed with other tasksMay not have expertise
Don’t spend enough to warrant effort
May have advantage in re-categorization of expenses
Success in primary cost containment or previous results
Strong negotiation skills and consistent reductions as a result
Time/budget Business goals, ancillary costs less important,under-manning
Loss of perceived leverage Believe long time relationship/volume produces advantage
Don’t know how to start Lack of understanding of expense market
Barriers
Staff and Management has limited time to address
non-strategic costs
Employees with limited purchasing experience makethe buying decisions
No benchmark data
No time to monitor
Believing suppliers arelooking out for their
best interests
Five companies with same supplier don’t get the same price
Title
Believe their doing an excellent job of cost control on their own
Level playing field between buyer &supplier is a misnomer
Multiple suppliersMultiple order points
ExpenseManagementChallenges
Supplier loyalty doesn’t equate to
best price or service
Challenges of Expense Control
21
Procurement
Experience
CategoryKnowledge Supplier
Insights
Analytical SkillsMarket
Benchmark Data Political Skills
Effective Cost Management Requires Multiple Skills
Time, Experience, Data
Cost Management Impact on Business ValueCost Management Impact on Business Value
Barriers and Challenges to Cost ManagementBarriers and Challenges to Cost Management
Best PracticesBest Practices
Actions & OutcomesActions & Outcomes
Options for Increasing Value for Your BusinessOptions for Increasing Value for Your Business
Objectives
Questions Questions
The Current Economic ClimateThe Current Economic Climate
Low
-
Savin
gs P
ote
nti
al -
H
igh
Low - Time/Effort/Expertise Required - High
Higher returnCore expertisePrimary focus
Do internally? Outsource?
Lower returnRequires high effort/expertise
Alternatives
Understand
components of
the expense
area(s)
Understand
components of
the expense
area(s)Eliminate
Paper
Simple Suggestions to Improve Expense Control
Understand
expense
benchmarksUnderstand
expense
benchmarks
Audit current bills
Audit current bills
Audit your procurement practices for
effectiveness
Audit your procurement practices for
effectiveness
replace some
face-to-face
with on-line
meetings
Use on-line booking
services for
travel
Examine Employee
Benefit plans
See if suppliers
offer Marketing
Coop funds
See if suppliers
offer Marketing
Coop funds
Take quick action on customer payment habits that change
negatively.
Take quick action on customer payment habits that change
negatively.
Identify target areas and maintain focus
Identify target areas and maintain focus
Good Quantify spends
Monitor quality and service levels
Obtain revised pricing from current vendors on a regular basis
Great Categorize spends
Identify usage patterns
Update requirements based on current spends
Identify competitive offerings from new suppliers
Include multiple suppliers for RFP process
Share purchasing data with suppliers
Exceptional Understand supplier’s pricing
strategy for spend category
Compare supplier pricing to current, industry benchmark pricing
Weight solutions of each supplier based on criteria set internally
Defined procurement process designed to minimize staff time
Audit monthly spend to ensure contract compliance
Manage stakeholder buy-in
Repeat as required
Procurement Best Practices
Effective Cost Management Strategy
• Cost Management is on-going
• Complacency = lost revenue – eliminate it
• Over-confidence = lost revenue – prevent it
• Cost reduction efforts should NEVER be visible to your customer.
• Cost reduction should NEVER make your sales go down.
• Prioritize cost reduction based on the potential impact. – Never walk over dollars to pick up pennies.
• Ask your employees for suggestions and reward them!
• Ask your suppliers and vendors for suggestions
• Compare to others in the industry
• Monitor and stay alert
Best Practices
Cost Management Impact on Business ValueCost Management Impact on Business Value
Barriers and Challenges to Cost ManagementBarriers and Challenges to Cost Management
Best PracticesBest Practices
Actions & OutcomesActions & Outcomes
Options for Increasing Value for Your BusinessOptions for Increasing Value for Your Business
Objectives
Questions Questions
The Current Economic ClimateThe Current Economic Climate
Do internally?
Outsource?
Decide on a Strategy
TimeAbilityStaffing needsOther tasks Cost
ExperienceImplementation Plan
• Effective cost management is a cultural activity•No person or activity is exempt or excluded
• Adopt a Drip Culture within the business..• Tend to every “leak” immediately• Across all business units and departments• Establish expectations and objectives• Monitor activities and results• Check, check, and check again
Adopt A “Drip” Culture
Outsource -What to Expect
• Deep category expertise and experience
• Access to aggregated benchmark costs and pricing
• Delivered success• Faster completion• Faster realized savings• Implementation support• Ongoing auditing for verified results
• Fund internal growth
• Build new products
• Retain good employees
• Buy additional equipment
• Pay down loans
• Buy a yacht
• ???????
What would you do with the hidden profit
in your business?
What would you do with the hidden profit
in your business?
Results Provide Choices
“There is no cost higher than the cost of doing nothing”
32
Inaction is Expensive
Questions???