THE GUIDE

COST CONTROL CHECKLIST

JANUARY 2010

IN ASSOCIATION WITH

F INANCIAL DIRECTOR

COST CONTROL CHECKLIST

JANUARY 2010

EDITOR Melanie Stern GROUP PRODUCTION EDITOR Dan Parker ART EDITOR Chris Gardner CONTRIBUTORS Carolyn Bresh, Andrew Hibbert, Liz Loxton, David Rae,Malcolm Wheatley EDITORIAL ENQUIRIES (020) 7316 9808 SALES MANAGER Kevin Sinclair (020) 7316 9591 KEY ACCOUNTS MANAGER Richard Beagley (020) 7316 9564EVENT MANAGER Briony Thompson (020) 7316 9820 DIGITAL PRODUCTION CONTROLLER Ross Brooks CIRCULATION MANAGER Tim Martin PRINTERS Headley Brothers Ltd.Mailed by Headley Brothers Ltd. Financial Director is printed on paper from sustainable sources in Scandinavia/Germany. CIRCULATION ENQUIRIES 0845 155 1846 email:incisivemedia@optimabiz.co.uk Subscriptions: UK £68; Europe £88; RoW £118 INTERNET REGISTRATION www.wdis.co.uk/financialdirector LICENSING Financial Director is available forinternational licensing. Contact Joanna Mitchell at joanna.mitchell@incisivemedia.com FINANCIAL DIRECTOR is published by Incisive Media © Incisive Media, 2009 FINANCIAL DIRECTOR is available onthe internet at www.financialdirector.co.uk

THE GUIDE

01CONTENTS

2 INTRODUCTION

How to make savingsand influence people

4 COST AWARENESS

How to ensure cost controldiscipline lasts beyond theend of the recession

6 LOCAL SUPPLIERS

Using local suppliers couldhelp to keep costs down

8 PURCHASE LEDGER

Considerable savings canbe made if FDs are willingto delve deeper

10LEADERSHIP

FDs can take the leadrole in creating a cultureof cost awareness

12 PROCUREMENT

Forging a relationship withthe head of procurementpays dividends

13 INCENTIVES

Incentivising awarenessamong non-financial staffwill focus their minds

14 SUSTAINABILITY

Embedding cost controlwill help you survive therecession and beyond

16 BENCHMARKING

Demonstrate theeffectiveness of yoursuccesses to the board

F INANCIAL DIRECTOR

OURCOSTCONTROLCHECKLIST ISN’T JUSTABOUT IDENTIFYINGSAVINGS, IT’S ALSOABOUTSUSTAINING,MEASURINGANDSHOUTINGABOUT THEM, SAYSMELANIE STERN

INTRODUCTION

Sustainable savings

1 Make cost awareness a business-widedisciplineHow can FDs turn good cost control practice into something that lastsbeyond recession?

2 Consider local suppliersWhy unbundling contracts from one large supplier and divvying them upacross a bunch of smaller players may save you money

3 Look at the bottom two-thirds of yourpurchase ledgerWhy stop at the first few lines of expenditure when the bottom of the listcould be hiding the sustainable savings?

4 Lead the creation of a cost control cultureMaking friends and influencing people is as important in cost control asfinding the cost hotspots

5 Forge a strong finance-procurementrelationshipOften seen as a problematic relationship, FDs need to get friendlywith procurement

6 Incentivise cost awarenessInfluencing non-financial staff to build in cost awareness responsibilitiescan be made easier if the rewards are made clear

7 Benchmark your savingsMaking cost savings sustainable means compiling the right data onwhere you are and where you’re headed

8 Communicate your achievementsCommunicating your wins and your leadership skills is crucial ifyou want to command the respect of the board and build evidenceof your achievements

9 Instil long-term practicesA lot of bad habits have been strangled by the recession and the necessityto be leaner. How can you preserve this mindset?

10 Don’t get complacent when sun’s back outPutting a long-term cost control mindset in place should be a priority asthe UK economy prepares to exit the recession

2 THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST

Quitting smoking or stickingon a jumper instead ofturning up the centralheating are both good

ideas that will save you money everyday. But they both involve making acommitment to regime change, forcingoneself to drop familiar habits in orderto squeeze a bit of betterment from theway we live. They can also irritate thosearound us, demanding they alsochange their ways – making youunpopular. But the means justify theends, and do so over a lifetime.

Our Cost Control Checklistmovesalong the same principle. Mindful ofthe increasing influence financedirectors have across theirbusinesses while cash remains king,we’ve come up with a list of tensimple ways to instil the habit of costawareness now and preserve itthrough better economic days – andwe’ve got ideas on how to bringnon-financial departments with you.Make our list part of your corporateNew Year’s resolutions and with anyluck, both the health of your bottomline and your reputation will seelasting dividends.

Melanie SternEditor, Financial Director

2010

IT IS EASYTOGETTOGRIPSWITHCOSTREDUCTION INACRISIS, BUT ITWILL TAKEACO-ORDINATEDEFFORTTOKEEPITGOINGWHENTHEUPTURNKICKS IN,WRITESDAVIDRAE

Fly theflag

There’s nothing quite like aglobal economic crash tosharpen financial minds– after all, recessions as

tough the one we are going throughtend to bring unnecessary corporatewaste into sharp focus.

They also help to foster bettercross-functional relations: a siegementality is adopted and those whoremain after redundancy rounds pulltogether to get the job done.

The difficulty is making suchbehaviour stick. It’s one thing to weedout bad practice when cash is tight– the secret is to keep it out when thegood times return. And it’s an issuethat finance directors would be wise toget on top of now, as implementingprocesses that resist a return to oldways will reap huge benefits in thelong term.

The first step that FDs must taketo instil sustainable cost-controlthroughout their organisation is to putin place a well-structured frameworkthat is centrally managed, but hasrepresentation in every function ordepartment and a method ofmeasurement everyone canunderstand and access.

Group finance is a good place forthis to be managed but, increasingly,centrally-led procurement functionsare playing a fundamental role in suchstrategies with the chief procurementofficer or purchasing director assumingultimate responsibility. They are, ineffect, the rising star of the corporateworld, and close relations betweenprocurement and finance is a recipe forsustainable savings.

The CFO of the pharma division at

4 THE FINANCIAL DIRECTOR GUIDE COST CONT

Swiss-based pharmaceutical giantNovartis, Jonathan Peacock, is anexample of a CFO who understandswhy this makes sense. “It’s really thepartnership of the CFO and the head ofprocurement that we found to be quitepowerful,” he says.

And it’s something Peacock puts hisfull weight behind to ensure that therest of the business is also bought intothe vision.

“For a sourcing organisation to besuccessful, it has to be integratedinto the business,” he explains. “I tryto act as a support in ensuring we getthat integration.”

This is often easier said than donebecause, traditionally, procurement staffhave been seen as junior partners in theaverage business and treated as ‘POpushers’ who are only to be brought inafter deals have been done. While thishas changed significantly in recentyears, there remain huge differences inthe maturity levels between companiesand industries.

Off limitsBlack spots include areas of traditionalpower within an organisation such asmarketing, legal and thosedepartments that are seen as thelifeblood of the company. For example,the research and development peoplewould hold all the cards inpharmaceuticals and high-technologyindustries and only with full boardsupport – in particular, the CFO’s – willprocurement be able to successfullytackle these problem areas.

But even with a centralisedprocurement function that enjoys fullboard support, sustaining savings into

ROL CHECKLIST

the long term can be a difficult nut tocrack – a particular bugbear of NeilDeverill, who has served as global chiefprocurement officer at both AngloAmericas and Royal Philips.

“Certainly, it is easier to observelasting change when there are systemsin place that prevent recourse toalternative or prior practice,” he says.“Of course, standardisation will bringabout common systems, processesand cost efficiencies, but I still detect

MAKE COST AWARENESS A BUSINESS-WIDE DISCIPLINE

hostility and resentment to newpractices, even when they’ve been inplace for five years or more.”

Key, therefore, to instilling long-termcost control and margin improvementis to embed processes by which theentire organisation must work to. Andthese processes must be developedand managed centrally.

Successful demand managementis a good example of a strategicprocess which can have immediate

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and material impact on externalexpenditure and the bottom line.By managing the behaviour of staffrather than telling them what suppliersto use, or demanding 10% budgetcuts, huge benefits can be realisedwithout damaging productivity.

A good example is travelmanagement. Do six people really haveto attend a meeting in New York? Can itbe held in Europe? Can it be combinedwith other meetings planned for later inthe year? Can it be conducted by videoconference instead?

These might seem like obviouspoints, but there are a frighteningnumber of companies that don’t haverobust policies in place to manageeven this level of behaviour.

Technology solutionsThere are also a multitude oftechnology solutions that can help.The adoption of e-procurementsystems, linked to pre-approvedcatalogues provided by suppliers,means that only approved vendorsare used, that price can be centrallymanaged and external spendaccurately tracked.

Spend analysis allows corporate-wideexpenditure to be analysed down to theline-item level, meaning that inefficienciescan be ironed out relatively easily.

It is not uncommon for differentdepartments in the same organisationto be buying exactly the same productfrom the same supplier at wildlydifferent rates, for example.

Also important to the process is toconduct regular measurement, withrelevant key performance indicators ofsuccess, such as annual savings as apercentage of sales, visibleimprovements in margin at the profitand loss level.

It’s one thing driving savings,quite another making sure it fallsto the bottom line and doesn’tget absorbed by the businessunit. This includes year-on-yearproductivity improvements.

But, as Deverill notes, not all FDssee the potential that such strategiesand processes hold. FDs “are good atgetting cuts,” he says, “but for the mostpart they are blind to the other side.” �

Four tipsIn 2009,Pricewaterhouse-Coopers published areport that identifiedwhy cost reductionattempts fail� Lack of a strongfoundationCompanies that don’thave a fullunderstanding of theircost baseline will havedifficulty identifyingopportunities� Dipping into the

same wellLow-hanging fruitis often targetedmultiple timesrather than largeropportunities� Failure to addresscost managementand controlCompanies focuson reducing costsnot spend culture� Inability tomeasure resultsCost-reduction isoften lost in annualoperating results

IRECTOR GUIDE COST CONTROL CHECKLIST 5

COULDSPREADINGCONTRACTS AMONGLOCAL SUPPLIERS SAVE YOUMONEYANDREDUCESUPPLYCHAIN RISK? ASKSDAVID RAE

Localfare

Think global, act local’ is awell-worn cliché used byeveryone from chief executivesto town planners to describe

an approach which encouragesdecisions to bemade only when thecomplete picture has been taken intoaccount. But in today’s economy, itadopts a more literal meaning.

The biggest impact on businessduring the past thirty years has beenthe relentless growth of globalisation,made possible by huge advances incontainerisation and port technologyand ever-more complex supply chains.

But if the past 24 months hasdone nothing else, it has brought intosharp relief the risks inherent in suchmodels. Massive commodity pricevolatility has led to the cost of fuel, atbest, being difficult to predict and, atworst, to become crippling. Productquality problems, such as Mattel’sinfamous recall of hundreds ofthousands of toys due to a lead-basedpaint being used in their production,have brought into focus the risksinherent in such relationships.

Often, the financial stability offar-flung suppliers is also difficult topredict and reputational issues ofdealing with suppliers in other cornersof the world, which western customersknow little about, seem to crop updaily. In short, the risks in global supplychains are huge— and growing.

Neither can the benefits of globalsourcing be taken for granted, as theyonce could. Increasing inflation and therise of the middle classes in developingcountries has led to subsequentincreases in the costs to western

6 THE FINANCIAL DIRECTOR GUIDE COST CONTR

businesses that buy there, whilecurrency fluctuations have also had animpact. As a result, finance directorswould be wise to carry out total cost ofownership calculations on currentsourcing strategies – because theoriginal calculations that the decisionswere based upon may no longer bevalid (see box).

Research carried out earlier thisyear by the Procurement LeadersNetwork and BrainNet SupplyManagement Group among morethan 150 chief procurement officers,Changing tides in global purchasing:focus on cost-efficiency andsustainability, paints a picture ofhow purchasing decisions are set tochange subtly over the coming years.

The research found that whilequantitative factors such as labourand raw-material costs continue todominate the decisions, less tangiblefactors such as flexibility in productionand logistics and access to a highlyqualified workforce and innovation aremore to the fore. And while ethical andenvironmental considerations still playa relatively small role, this is set to growconsiderably in the coming years.

Local sourcingBut one development which continuesto gain momentum is local-for-localsourcing – where local markets areserved by local suppliers. It’s arelatively new concept which is beingdriven by a combination of the risksand increased costs listed above,combined with demand from emergingeconomies and an increased tendencytowards protectionism. More than a

OL CHECKLIST

third of the CPOs surveyed in the studysaid that the local-for-local approachwould take on a more important role intheir company in the next few years.

“For several years now, many largemultinational companies have beenemploying a strategy where they act asa local player in their target markets,”says Sven Marlinghaus, partner andmanaging director at BrainNet SupplyManagement. “Over the next fewyears, we’ll see this trend intensify.” Assuch, Marlinghaus recommends thatlarge companies develop sustainable

CONSIDER LOCAL SUPPLIERS

procurement models which includeboth international and local solutions.

Panasonic has certainly benefited.The electronics giant is using local-for-local sourcing to meet the demands of

emerging markets.According to the company’s CFO,

Makoto Uenoyama, local sourcingefforts will play a big part in the future ofits growth in the Bric (Brazil, Russia,

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India and China) andMint (Mexico,Indonesia, Nigeria and Turkey) countries.

“Basically, we are looking to doeverything locally – product planning,design, development, production andparts procurement,” he says.

But while local buying certainly hasits place, large organisations must beaware that it can only form part of amuch wider product-sourcing strategy.

Recent research conducted by IBM,Sourcing in a demanding economicenvironment: generating value inchallenging times, points to the clearchallenges caused by “uncontrolledlocal buying” which the report claimsresults in a “loss of leverage, leading tohigher prices, reduced quality andservice issues”.

Cultural needsAnd one executive from a USconsumer products companysummed up the approach that mostorganisations should strive for, “We’reusing centrally defined and controlledprocesses but with local sourcingorganisations that understand the localbusiness and cultural needs.”

Understanding those culturalintricacies are key to buildingsustainable businesses in what canoften be complex overseas markets,and here local procurement activity,which embraces local suppliers andtechnologies, can give companies anexcellent head start.

And this is exactly the approachtaken by financial services giant AXA,which has even coined the word ‘glocal’to describe its approach. “Of courseprocurement is centralised,” says HeinzSchaeffer, chief procurement officer ofits northern, central and easternEuropean business.

“But we decentralise our technicalexperts, like facilities managementand even marketing or IT. We haveestablished a central basket where allrequests are going in, we process itand then give it back.”

In theory, governance and controlis maintained centrally, while thebenefits of local sourcing in categoriesof spend which are strongly influencedby local markets, such as marketing,are still accrued. �

Low-cost country sourcing decisions made on basiccost considerations are no longer valid. Rather, totalcost of ownership calculations, which take intoaccount the impact of inflation, currency fluctuations,freight and transport rates, staff retention issues,supplier on-boarding and risk mitigation must be used.

The Baltic Dry Index, for example, which is usedas a measure of the cost of dry freight, has been

volatile over the past two years, reaching a peak ofalmost 12,000 in June 2008, before plummeting to650 in December and rallying to the 5,000 mark asthis supplement went to press.

Costs for transporting a standard 40-footcontainer between China and the UK are nowhovering at $3,000. In the dark days of thedownturn the rates were, literally, zero.

Cost control and inflation

IRECTOR GUIDE COST CONTROL CHECKLIST 7

BUSINESSESAREMISSINGOUTONSAVINGS INTHEPURCHASELEDGER.THEYRUNOUTOFSTEAMAFTERTHEFIRSTFEWLINESOFEXPENDITURE,SAYSMALCOLMWHEATLEY

What liesbeneath

In any business, the provision ofdrinking water from water coolers isan essential, though not a major,item of expenditure. Even so, at

Moorfields Eye Hospital in London,contracts officer Aitor Cisneros wantedto be sure that the hospital was gettingthe best possible deal.

With 43 coolers in and around thehospital and its outreach clinics – eachtypically costing £6 to refill with a19-litre bottle of water – the annual costof around £1,000 per cooler quicklymounted. There were operational coststoo. “We were tied to having lorrydeliveries of water cooler bottles everytwo weeks,” says Cisneros. “We had tofind space to store the bottles and theempties were an eyesore.”

The solution: mainsfed water coolersfrom TanaWater, each equipped withhi-tech carbon block filters andultraviolet lamps to filter out and killany mains-borne contaminants.

The impact on cost? Instead ofpaying £6 or so for 19 litres of water,the hospital pays about two pence.A ‘sleepmode’ incorporated in eachcooler also reduces the hospital’senergy consumption.

“We only have one bottle fed coolerleft in the hospital,” says Cisneros.“Where you’ve got about 30 regularusers of one cooler, it definitelyamounts to a huge cost difference ifyou switch to mainsfed coolers.”

It’s a story that will warm any financedirector’s heart – especially in timeslike these when budgets are underso much pressure. Yet, in manybusinesses, these stories are as rareas they are welcome.

8 THE FINANCIAL DIRECTOR GUIDE COST CONTR

In practice, it turns out, under-pressureprocurement functions often stick tojust to the top one-third of thepurchase ledger to generate costsavings, leaving the bottom two-thirdsuntapped. The result: significantpotential for cost reduction, withno clear route to achieving it.

Anything’s possibleSo how can FDs and the financefunction get involved? How can theywork with purchasing to identifysavings? What kinds of savings arepossible – and how can they bestbe achieved?

Talk to FDs – and procurementfunctions – and some clear messagesquickly emerge.

To begin with, purchasing functionsmust first accept that there’s a case toanswer. Many buyers focus theirattention on negotiating new contractswith suppliers, supplemented byperiodic ‘category reviews’ of majorspend items. And if the potentialsavings tied up in the lower reaches ofthe purchase ledger are to be tapped,that needs to change.

“All too frequently, purchasers eitherthink that the bottom two-thirds areinconsequential, or that they’re alreadyachieving best-value pricing,” saysGraemeMcKinnon, commercial directorat Expense Reduction Analysts. “Theycouldn’t be more wrong.”

The figures speak for themselves. Athorough procurement review can yieldan average saving of between 5 and10% of its cash spend, researchsuggests – equivalent to a 20% boost inprofit for the average FTSE-350

OL CHECKLIST

business. And it’s in the bottomtwo-thirds of the purchase ledger wherethe potential is greatest. There are moresuppliers, and more ‘maverick buying’but because it’s been so neglected,there’s so much more potential.

“Once you start diving into the detail,there are invariably savings to bemade,” agrees Julian Seidman, clientfinance director at FD Solutions, aprovider of part-time finance directors.“On their own, they might not besignificant, but are often easily madeand quickly add up to a big number.”

Precisely how those savings will bemade is down to individual situations,and once focused on the task, buyerswill be quick to spot opportunities.

In some cases, re-opening pricenegotiations will be the answer. Inothers, it will be a policy decision: doeseveryone with a business-providedmobile phone or Blackberry actuallyneed that provision, for instance?Elsewhere, as at Moorfields Eye

EXAMINE YOUR PURCHASE LEDGER

Hospital, cheaper alternatives may bethe answer.

In some cases, supplier consolidationwill be the route to savings. At AlliedBakeries, explains its procurementdirector Nigel Draper, an annual £5mspend on building services across thecompany’s 11 bakeries— involving anumber of plumbers, painters and smallbuilders – is prompting the start ofjust such a programme.

“The question to ask is why thesuppliers in question are on the booksin the first place,” stresses Tony Morris,principal business consultant within theprocurement centre of excellence atfinance software vendor, Coda. “Arethere savings to be made by taking thebusiness away from them andawarding it to a bigger supplier at abetter discount?”

But, whichever tack is taken, data isvital. What is being bought, and fromwhich suppliers? While e-procurementplatforms and spend analysis systems

provide such insights as a matter ofroutine, the prosaic reality in mostcompanies is that obtaining that data isa work in progress.

The problem: while procurementtakes a transactional item-by-item viewof purchasing, it’s finance that pays thebills and has the supplier-centricpurchase ledger perspective.

Common viewOne idea is a business intelligenceplatform that provides the FD and theprocurement function with a commondata viewpoint, enabling them to worktogether to identify cost savings.QlikView is one such platform. Pullingdisparate data sources together inreal-time, businesses can ‘drill down’ tominute detail, such as the amountspent on paperclips last year. You neverknow where you’ll find savings.

The only difficulty: a relative wealth ofsurvey data suggesting thatprocurement and finance functions

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don’t, in fact, work well together at all.Research by Professor Adrian Done

of Spain’s IESE Business School,published in 2009 by finance systemvendor Basware, for instance, talksopenly of tensions between the twofunctions and contains hard-hittingquotes from a number of theprocurement executives on the tensioncontained in this relationship.

“While procurement is typically theleader across the organisation forspend management initiatives, only33% of procurement departmentspartner with finance groups to developand execute improvement initiativesthat further the success of theircompany,” Mickey North Rizza,research director in the procurementand sourcing practice at analysts AMRResearch, reveals.

In short, the prize contained in thequieter parts of your purchase ledger isworth the effort – but will finance andprocurement jointly seize it? �

RECTOR GUIDE COST CONTROL CHECKLIST 9

MALCOLMWHEATLEY EXAMINESHOWTHE FDCANLEVERAGEANEWCOMPANY-WIDECOSTAWARENESS TOCREATE A LONG-TERMCULTURE

In thesame boat

Arunning joke in the DailyTelegraph’s ‘Alex’ cartoonstrip is the amount of moneythe two protagonists, Clive

and Alex, charge to expenses – a jokegiven fresh impetus in the banking crisisas the two seek to circumvent thevarious strictures placed on them bysenior management.

But the corporate austerity heraldedby the ‘bash the bankers’ climatecontains uncomfortable echoes ofthe collapse of the dotcom boom adecade ago.

Then, as now, it was easy tolampoon what was widely seen as aculture of excess. Boo.com, forexample – which became the first high-profile dotcom implosion – famouslyploughed its way through £125m inexpenditure in just six months. Staffand contractors were recruited in largenumbers, with one contractor alonereputed to be earning over £100 anhour. Employees were encouraged todelay taking holidays by inducementsthat included 5-star hotels andfirst-class flights.

To excessIt’s easy to dismiss such excesses as,well, excessive. They aren’t typicaland most businesses have policiesand procedures in place to guardagainst the wilder enthusiasms ofemployees with a corporateexpense account. In the real world,the charge-it-to-expenses mindsetof the Alex cartoon has few parallels.

But employees can influence yourbusiness’s cost base in many moreways than simply charging too much to

10 THE FINANCIAL DIRECTOR GUIDE COST CONT

expenses. A whole series of choices– ranging from the selection ofsuppliers to the preferred brands ofstationery and office equipment – haveconsiderable cost consequences. Evensimple decisions about turning off lightsor air conditioning, or how much waterto boil for coffee, eventually influencethe bottom line.

For FDs, who are the custodiansof the bottom line, the challenge issimply-stated. Taking away the powerto make such decisions from others isimpractical and probably impossible.So, how can you set in place acorporate culture in which employeesthroughout the business – at all levels– become more aware of the costconsequences of the decisions thatthey take? And how can they extendthis awareness to whole departmentsand functions – many of whichjealously guard their budgets andenshrined practices?

Setting an exampleOne rule is immediately clear: leadby example. “Credibility is an issue,”says Peter Lunio, Bristol-basedassociate director at Baker TillyManagement Consultancy.

“It’s difficult for an FD to bang thedrum about cost control when thefinance function – and its leadership – isitself seen as lacking in that respect.”

FDs “set the standard”, adds ClaireArnold, partner in London-basedMaxxim Consulting.

“Good FDs don’t just merelycount the cost of the existing statusquo. They lead from the front in termsof setting expectations: is lunch a

ROL CHECKLIST

LEAD THE CREATION OF COST-AWARE CULTURE

plate of sandwiches, or a trip to afour-star restaurant?”

Equally, it’s important to involve andincentivise people, rather than swoopdown from on high to lecture them.

“Make people aware of the costtargets that the business is aiming for,how staff can help make this happenand what this will ultimately mean tothem,” urges John Judge, of Judge 3D,a commercial management specialistworking with a number financialdirectors and teams within FTSE-listedcompanies and government bodies.

“If you work for a large company,you have no real incentive to savethe company money, so businessesshould really think about givingemployees incentives to providethe company with ideas to both save– and make – money.

“A ‘cost aware’ culture isn’t justabout scaling back spending – it’sabout creating opportunities for thecompany to innovate and grow.”

Any suggestions?Indeed, as Siobhan Riggott, a seniorresearch analyst at working capitalconsultantcy REL notes, researchamong the world’s top 1000companies by revenue repeatedlyshows those that offer incentives toemployees – and companies thatsolicit their help through suggestionschemes and improvement initiatives– tend to perform better at cash andcost management.

And don’t forget to tailor themessage to the audience. MalcolmFollos, managing director of the UKarm of leadership consultancy Sensei,warns that FDs can sometimesstruggle to articulate ‘big picture’objectives in simple, clear terms.

A favourite story he relates concernsa potato crisp factory seeking to cutcosts by minimising waste.

Shop floor employees couldn’t reallyidentify with waste levels expressed interms of percentages – but got themessage when those percentageswere converted into bags of crisps.“Just by expressing the measure in adifferent way, the waste figure halved,”he notes.

Likewise, make the motivation clear.

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At Salford Royal NHS Foundation Trust,for instance, finance director anddeputy chief executive Tony Whitfieldis careful to link achieved savings to theorganisation’s frontline deliverables. “Isay to people: ‘I want you to savemoney – not for the sake of savingmoney, but to create the means for usto deliver better patient services,” hestresses. “You really have to place theobjective in context.”

And what of the FD’s interactionwith the functions and departmentswithin the business, as opposed toindividual employees?

Here, say the experts, it’s time to berealistic about the perception of an FDwithin the business – and involve theCEO, early on.

“The FD is the co-pilot, with theCEO as pilot,” is how Sensei’s Follosputs it.

“The FD has a role to play, but thechief executive has a bigger role,”agrees Ian Mackinnon, chief executiveof AIM-listed cosmetics, personal careand household goods contractmanufacturer, Swallowfield.

“The FD keeps the scorecard, andprods and pokes the function headsbut, if the operational managers aren’ton-message, it becomes like pushingwater uphill.”

Which isn’t to say that operationalmanagers – and their departments– necessarily have the skills to run a‘cost aware’ function. Willingness isone thing; skills in budgeting andprocurement quite another.

“Be prepared to have financepeople go out into the organisation,and demonstrate to people the rightbudgetary control skills, and where theycan find the information and resourcesthat they need,” says Baker Tilly’s PeterLunio. “Finance has an education andsupport role to play, helping people todo a better job of budgetary control.”

And finally, don’t forget to praise –and reward – that better job.

“Use positive praise, andcommunicate great examples of costsaving,” urges Arabella Ellis, director ofconsultancy The Thinking Partnership.“Build relationships by settingexpectations – not by telling peoplewhat to do.” �

ECTOR GUIDE COST CONTROL CHECKLIST 11

FDs ANDPROCUREMENTHEADSARE FAMOUS FORNOTSEEING EYE TO EYE. HERE, TWOEXPERIENCED FINANCEHEADSSHAREHOWTHEYWORKWITH PROCUREMENT

FORGE A STRONG PROCUREMENT RELATIONSHIP

Love thyneighbour

Asdirector of finance for GreatOrmond Street HospitalChildren’s Charity, I’mresponsible for ensuring our

£15m annual budget is managedefficiently and focused on achievingcharitable objectives.

Our charity does not have an in-house procurement specialist, so werely on the skills and talents of our staffto negotiate the best deals withsuppliers. Each department has its ownprocurement procedures tailored totheir needs, competitive tenderingtaking place within a framework agreedwith finance.

Our activities, including campaigns,developing corporate partnerships,major gifts, community fundraising,legacies and special events, are welldiversified and this decentralisedapproach to fiscal responsibility workswell for us.

A collaborative approach to goodprocurement practice engenders asense of responsibility at thedepartmental level. Each departmentaldirector ensures that local proceduresare adhered to and encourages theirstaff to challenge all costs, irrespectiveof origin.

All departmental budgets are createdfrom the bottom up. This detailedapproach is essential when wechallenge cost variances during ourquarterly reforecasting exercise.

The internal audit annual workprogramme includes a procurementpractices audit, giving the directorsassurance that agreed procedures arebeing followed.

Every pound we save on overheads

12 THE FINANCIAL DIRECTOR GUIDE COST CONT

is available to spend on charitableobjectives or more fundraising. Wehave been reviewing service levels incontracts and renegotiated a numberof those contracts to deliver costsavings as a result.

Implementing a framework for goodprocurement practice hasn’t been allthat difficult, but has reaped dividends.Andrew Hibbert is director offinance, information technology,operations and human resourcesfor Great Ormond Street HospitalChildren’s Charity

Two sides of the same coinI value the perspective procurementbrought to the business. But not unlikeX Factor’s Jedward, finance andprocurement make a double act thatcan misfire badly.

Only when they each concentrate ontheir specialism to complement theother can they make effective commoncause. It’s also helpful to hand off to the‘nasty cop’, tenaciously workingthrough the detail and driving a hardbut fair bargain, leaving operatingrelationships unsullied.

Three areas where strongcollaboration is crucial to bothprocurement and the business arereporting savings, business perspectiveand data provision.

Nothing rankles like puffed-up‘savings’ that never seem to flowthrough to a thumping end of yearsurplus and I strongly believe in ‘one setof authentic numbers produced byfinance’ – that means procurement too.

Savings claimed must tie in to theserecognisable figures. Procurement

ROL CHECKLIST

must be crystal clear on one question:what are savings measured against?

One saving against a probableoverspend could be a triumph for thebuying department, but might showas minor favourable variance againstbudget. Finance should work withprocurement to ensure it gets faircredit and credibility.

Beating suppliers up on paymentterms to the point they havecashflow problems and can’t supplyis clearly counterproductive.

If procurement operates inisolation, this can happen. I’veseen procurement brought in at theeleventh hour to shave another 20%and impose a plethora of conditions.

Finance is well placed to keep thebuying department in the know –ensuring this never happens. �

Carolyn Bresh is co-founder ofEverymind, a consultancy tofinance functions and waspreviously group financialcontroller at Reuters

PERSUADINGNON-FINANCIAL PEOPLE TO TAKENOTEOFEXPENDITURE AND FIND SAVINGS IS NOEASY TASK, BUTYOUCAN INCENTIVISE THEM, LIZ LOXTONDISCOVERS

INCENTIVISE COST AWARENESS

Quidpro quo

Thepast two years have madebusinesses aware of the needto eradicate waste andbecome cost efficient like

never before. The lesson enlightenedorganisations will be seeking to carryforward is the need to make thesehard-won disciplines permanent ones.

Chris Samson, a director in Deloitte’sfinancial services consulting practice,advises companies on large-scalecost reduction programmes. He saysthat in order to embed a long-termcost-saving mentality within anorganisation you need leadership andaccountability. “A large-scale costreduction programme can often requiresignificant cultural change and can bea fundamental test of leadership,” hesays. “Targets need to be allocated tokey divisional directors with transparentprocesses for reporting back.”

In an ideal setup, the CEO andCFO will take the lead, with the CEOproviding the mandate and the CFOplaying a crucial role by offeringindependent challenge to ensurethe robustness of all business cases,making sure the finance functionplays a central role and providingtransparency. Actually achieving thosesavings and effecting change, however,is down to the foot soldiers – themanagers and divisional directors.

So what can finance directorsdo to underpin that process andhelp put a cost-aware culture ona permanent footing?

Martyn Wates, CFO at TheCo-operative Group, says getting thecost-saving message through to anorganisation that is 120,000-strong

means putting the message front andcentre and becoming an ambassadorfor cost awareness at every turn.

He makes use of any opportunity toadvocate cost-awareness. Any and allmeetings and presentations to boardmembers, managers and staff includehis key message: “Would you spendthis if it was your own money? That’sthe best test. Every time you meetsomeone, or have a chance to present,or receive a capital expenditurerequest, then you apply that logic.”

As guardian of the company’sfinancial information, the FD will helptest whether targets are genuinely

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being met. They will also need to spendtime in different divisions to understandpeople’s priorities and pressures.

Samson has seen organisations setup business-wide forums to bring costsaving ideas to the forefront, anenvironment in which the FD can applysound financial tests. But if businessesare to create a culture of continuousimprovement, cost awareness needsto be linked to career advancementand reward, he argues.

Deloitte’s Samson says bonusarrangements that are performancerelated rather than solely profit relatedare effective and, to be transparent,these bonuses need to be clearlylinked to the delivery of cost savings.An even more powerful mechanism, inhis view, is to link career advancementto cost-reduction programmes.

“Some organisations link[cost-reduction] with their effortsto retain key talent. They wouldtypically identify key people and putthem into transformational roles.

“These kinds of change programmescan’t be done off the side of someone’sdesk. Some people need to live andbreathe this. In some instances, peopleare released from their day role and gothrough huge learning curves. Andultimately you end up with strongerorganisations when people go backto their line roles.” �

ECTOR GUIDE COST CONTROL CHECKLIST 13

ROBERT ALLISON,MDAT EXPENSEREDUCTIONANALYSTS,TELLSMELANIE STERNHOWFDSCANEMBEDCOSTCONTROL TOSURVIVE THERECESSION—AND FARBEYOND

In it for thelong haul

What do you think we’ve learnedmost keenly from the lastcouple of years, in terms ofcost cutting?With many board directors facing thefirst downturn of their careers, the lastcouple of years have brought costmanagement and purchasing back tothe boardroom table as serious issuesthat carry real influence over thecompany’s ability to reach its strategicobjectives. In spite of this, though,I still see over a third of businessesdoing little to tackle the majority oftheir cost areas.

In which areas are businessesand FDs focusing regards costcutting right now?As always, cost cutting starts at the topand works its way down the list. Formost organisations, this means the firstarea for cost reduction is headcountclosely followed by other major costoverheads, such as salary andpensions for the remaining staff. Nextto be targeted is often the direct or rawmaterial costs of the business. Veryrarely will most finance teams get muchbeyond this before other prioritiesappear on the radar.

What do you think will changethere in 2010 and beyond?There is a real trend now forming infinance teams nationwide to recognisethat effective cost management is notjust about taking a “slash ‘n’ burn”approach to cost cutting. Havingaddressed the main line costs in 2009,it’s now time to go behind the scenesand establish effective cost and

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purchase management processes– and culture – in order to ensureabsolute best value from all areas ofsupply within the company. Theseprocesses also ensure true cost savingsare achieved in the future througheffective supplier management, ratherthan settling for large headline savingstoday, which very often do notmaterialise in the future.

Has the relationship betweenFDs and procurement changedas pressures on businesses tofind cost savings have increasedamid recession?More and more FDs are now seeing theimportance of effective purchasing andits direct impact on cost management.While this has always existed for rawmaterial costs, what we have seen inrecent times are finance teams realisingthat, by working much closer withexperts in procurement, they canensure every cost within the businessdelivers best value.

More importantly, by establishingthe right relationships and goodreporting processes between thepeople who buy the goods orservices and the finance team, thecost savings found becomesustainable for the long term. Thatshould make the entire business unithealthier overall and somethingany business will need to achieve ifit wants to run efficient operationsin the UK and compete locallyor internationally.

Do you think FDs are at risk offorgetting the valuable lessons

TROL CHECKLIST

in cost control they have takenon in the recession when theeconomic sun comes out again?If the focus of FDs turns too quicklyaway from the lessons of recenttimes and the correct ongoing costand purchase managementprocesses and cultures are notmaintained on all areas of spending,complacency will quickly enter thesupply chain and businesses willstruggle even more to compete withleaner businesses elsewhere.

INSTIL LONG-TERM PRACTICES

How can FDs lead the processof instilling these lessonsas lasting disciplines?Lead from the front. Show the team thatyou are serious about ensuring bestvalue and making savings. If others seeyou take it seriously, they will quicklyecho the same habits.

It’s one thing to do that within thefinance function where the FD holdssway – but how do they do this if theywant to raise the profile and influence offinance across the business and keep

control of cost in other departments?Like any form of change, process

aimed at creating a lasting culturewhich recognises the importance ofalways getting best value fromsuppliers is about leading from the top.So to start, ensure all members of theboard place equal importance oncreating this culture. Beyond this,create the monitoring and reportingprocesses needed to continuouslymonitor whether best value is beinggained from suppliers.

THE FINANCIAL DIR

Of our list of ten ways tocontrol cost, which would yousay was the most important in2010 and why?While all are valuable points inbecoming an industry leader in costmanagement, many are not overnightsolutions and will take some time. Thesingle point which could provideimmediate benefit in 2010 would be tofocus on the behind-the-scenes costs,or the bottom two-thirds of yourpurchase ledger. Longer term, thecreation of a cost-aware culturethroughout the entire organisation iswhat will change UK industry for thelong-term and something I believemore and more FDs will be recognisedfor in the future.

How would you advise FDs toinstil this specific point as apermanent discipline?Establish the right reporting andmeasurement systems which canrecognise when someone is achievingbest value from suppliers. We all spenda fortune on sophisticated performancemeasurement systems for our sales andmarketing teams then reward andacknowledge their success publicly.

Having the right monitoring systemsin place to judge when best value isgained – and maintained – fromsuppliers will enable the samerecognition to be given to staff, and veryquickly make the necessities of 2009 apermanent discipline in the future.

What would your warning be toFDs who do not take a leadingrole in instilling longer-termcost control disciplines fromthe lessons we have had out ofthe recession?With slow growth and an increasinglyglobal market for UK businesses tocompete within, any company notoperating a best-value culture acrossall areas of the businesses purchasingwill not be able to match those who do.

I also believe that the achievement ofFDs in the area of leading a cost-awareculture will become an attributeinvestors will place increasing value onlong after the recession is over. �

ECTOR GUIDE COST CONTROL CHECKLIST 15

ONCEYOU’VE IDENTIFIEDWHAT SAVINGSCANBEMADE, YOUNEED TODEMONSTRATE YOURSUCCESSES TO THEBOARD,THEBUSINESS ANDYOURSTAKEHOLDERS, SAYS LIZ LOXTON

BENCHMARK AND COMMUNICATE SAVINGS

What’syour story?

Aswecome out of what hasbeen described as thestarkest recession in memoryand move into what is being

characterised as merely a period ofdeeply difficult trading conditions, costcontrol remains imperative.

What counts now for businesses andtheir investors is evidence thatcompanies have addressed cost-cutting and cost awareness head on.Stronger balance sheets and businesssurvival speak for themselves, butwhere companies have publiclycommitted to eradicating duplicationand unnecessary cost, the board andthe investment community will want tohear the specifics.

Benchmarking cost reduction effortsis a must, but it is an exercise that hasto be sensibly executed, says CliveLewis, head of SME issues at theInstitute of Chartered Accountants inEngland and Wales. Software can helpwith the detail, he says, but what reallymatters is having an agreed processthat fits the organisation.

“The board must agree KPIs that arerelevant to the business. The problemwith cost reduction is that some costsare relatively fixed and some vary withthe level of activity, so keeping an eyeon costs in absolute numbers isdifficult,” he adds.

For Barrie Brien, CFO and chiefoperating officer at marketing groupCreston, being able to demonstratecost management disciplines isimportant when income is fallingsteeply. His sector endured a difficultsummer in 2009 with sharp declinesin advertising revenues and Brien has

16 THE FINANCIAL DIRECTOR GUIDE COST CONT

needed to show the investmentcommunity that the business hasthe ability to manage costs in suchsituations more than usual.

“We manage our business toKPIs. Revenue per head showsthe level of activity. Profit per headshows efficiency.

“Salary cost to revenue is veryimportant, as is operating margin,since we are a people business.Internally and to the City that’show we get judged from a costmanagement perspective.”

Creston consolidated its callcentres and online market researchpanels in order to eradicate waste.

“Any investment we make, we tryand look at it from a groupperspective,” says Brien.

While the current conditions areexceptional, sudden falls in income inhis sector are nothing new. “Even ingood times, you can lose a big clientand take a large hit on income,” he says.

Run the numbersRegularly running the numbers to lookat the impact of losing key business is afamiliar discipline. “In this industry thatis a very well-trodden path,” he says.

At the Co-operative Group, CFOMartyn Wates says benchmarking thebusiness against competitors hasproved an invaluable starting point tothe group’s cost cutting initiative.

Profit margins, working capital,debtors, credit terms – all wereassessed and measured againstthe market.

The finance department then tookthe lead, working with operational

ROL CHECKLIST

teams to assess how the business wasdoing month-by-month against agreedreduction targets.

The result was a £150m year-on-year improvement on the workingcapital position, largely thanks torallying everyone in the business tothe cause of cost-reduction and ofrecording what happened so that itcould be communicated internally andto the wider world.

“Finance is just a record of whathappened in the business. If youdon’t make a difference at ground level,nothing changes,” says Wates. �