Era Profit Discovery - Issue 8


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Copy of the 8th edition of the Expense Reduction Analysts Newsletter. Topics covered include IT Asset Management; Waste Disposal Costs; Insurance Market.

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Era Profit Discovery - Issue 8

  1. 1. Profit Discovery Expense Reduction Analysts’ Business Newsletter 08Winter 2008 Understand and harness your IT assets for savings of up to 35% IT: GARETH EVERSON Also in this issue One of the core fundamentals of productivity and, in the longer term, Rising fares for air business finance is the concept of become less competitive as a business. travel proliferation capital productivity, the measure of As one of any organisation’s most of fees, plus capacity how successful a business is at driving significant operational costs, IT is a reductions, will dominate sales from the net assets at its disposal. critical driver of capital productivity. the airfare market Decisions on managing IT assets all in 2009 Page 2 Any business faced with unpredictable too often, however, fail to reflect the turnover that has neither the means to same level of economic prudence that Credit Crunch fuels soft effectively and appropriately reduce costs an otherwise effective business would insurance market nor, alternatively, to drastically improve achieve in its other operations. An The Insurance market is productivity, faces a very strong likelihood appropriate Technology Asset Review easing with falling rates that it will face a downward spiral of capital (TAR) can help redress that balance. for businesses. Continued on page 2 Page 3 Commercial rents of critical importance Strong growth for the retail sector property rates and a potential drop in rental values to come. Page 3 European Truck makers sales hit the road! A dramatic change for truck makers as a decline of 40% sales hits the logistics market. Page 4 Company cars – capital allowance changes Time is running out to take action! Lower emissions mean lower costs Page 5 “Organisations that implement an effective for company fleets. Entertaining Insurance asset management strategy realise savings Savings for Zavvi and Winning profits for of up to 35 percent of their IT budgets and Harvey Ingrams. achieve more with those assets.” Page 6 find extra profit
  2. 2. Understand and harness your IT assets for savings of up to 35% continued... IT: GARETH EVERSON If your business answers ‘no’ to any of the • Does the business constantly review the Few organisations completely synchronise following 3 critical questions, it may make technology throughout its lifecycle to IT, finance and procurement departments prudent economic sense to conduct a formal determine if there are ways to improve to operate with total transparency, clarity technology asset review: its value to the business? and integration with one another. Effective technology asset management is a means Evidence shows that slashing capital invest- • Can the business calculate the true net to help businesses do this and maximise ments is no more an appropriate response to asset value of each particular software, the return from historic and future IT declining capital productivity than is spending hardware or infrastructure asset, measuring investments with minimal ongoing or heavily on new technology, nor is it viable to that asset’s tangible or intangible asset unbudgeted costs. do little or nothing to improve the return on value against its ongoing operational costs each of a business’s existing IT capital assets. Gartner believes “organisations that and maintenance liabilities – or is the implement an effective asset management business’s understanding limited to the IT costs have risen by 11% this year strategy realise savings of up to 35 percent straight-line depreciation value that (source: Gartner). The last quarter has seen of their IT budgets and achieve more with appears on its balance sheet? hardware sales up by 16% year on year those assets.” (source: IDC). Energy costs, despite having • When the business makes IT procurement shown recent falls since they peaked in July Conducting a thorough Technology Asset decisions, is there a clear business 2008, are still 45% higher than they were Review will allow your business to valuation process that all stakeholders can in November 2007 (source: ICIS Heren). appropriately plan to retain or improve understand that gives a measurable and capital productivity performance despite the objective view of how the investment will Is your business taking appropriate unpredictability of external trading conditions. impact the capital productivity of the investment precautions to get the most business – over the lifetime of its use? effective return on assets? Rising fares for air travel TRAVEL: DEREK HODD European based business travellers face …additional service fees will create air-fare increases of up to 9% next year: travel budgets will need to be viewed as new challenges for corporate travel an investment in business growth. Prices will be influenced by program managers… reduced capacity and competition, with reductions in air-fare and hotel rates in some markets, according to the annual American Express Global Business Travel Forecast. UK companies may see rises of up to 2%, but businesses can expect up to an additional This will have a ripple effect in other areas 15% added to base fares as a result of of travel including hotel, car rental and airlines continuing to un-bundle services such corporate meetings and events. as checked luggage, in-flight refreshments Amex Business Travel advisory services and fees for amenities such as aisle seating. vice-president Joakim Johansson observed: Charging fees for different services came “To help mitigate the impact of these new “In a difficult economic as a response to the record energy prices in charges, already seen in the US, we advise environment, successful travel and 2008. This proliferation of fees, plus capacity companies to consider increasing their entertainment management strategies will reductions, will dominate the airfare market focus on demand management to ensure be based upon the total cost of a business in 2009 and create a significant need for planned trips meet the guidelines designed trip, which takes into consideration such companies to establish and clarify, or create, to promote the most effective use of their costs as parking fees, airline fees, meals and new policies for their business travellers, business investment.” other related expenses. according to the report. He added: “With costs rising, business “Effective measurement of the return on As suppliers adjust to rising operating costs, leaders are recognising the need to balance that investment will supplement the savings additional service fees will create new travel and entertainment spending with achieved by controlling travel expenses through challenges for corporate travel program the role travel plays as an essential comprehensive travel policies and increased managers in 2009. revenue-generating function. policy compliance by business travellers.”
  3. 3. Credit Crunch fuels soft insurance market INSURANCE: SCOTT INGHAM Hot on the heels of this was the increased appetite for placing insurances realisation that a number with traditional insurers who do not have of insurers and in involvement in the more alternative particular the AIG insurance products market. had a mind-boggling The outlook for insurance costs for business level of exposure to continues to be positive with falling rates bank-related financial for most classes, with broadening cover guarantee products, availability, mainly due to the absence of which, if triggered, large global weather losses and overall a could result in a catas- very profitable period for the insurance trophic chain reaction market. Average premium savings which with no identifiable end should have been easily achieved by point. Luckily for AIG, organisations in 2008 are 15 -20%, with several other insurance the effective management strategies being companies and our economy, applied to the renewal process, this could their respective governments readily be increased to 30-40%, and clients have stepped in to prevent Despite the financial problems who are coming to the end of a long term this developing. that have befallen AIG, one of insurance agreement have seen savings the most highly rated global At present, it is still business as high as 50-60%. insurers, this is unlikely to as usual with AIG and there change the progress of the has not been the insurance market in its continuing reduction in insurance rates. The expected rush to replace insurances with …continuing reduction initial impact of the subprime alternative providers. mortgage revelations was to in insurance rates. send investors towards what However, the situation was regarded as a safer and more structured risk taking does require ongoing …increased appetite for market, which flooded the sector with yet more capital monitoring and certainly, as in placing insurances with chasing premiums with the resultant the banking sector increased competition and reduced costs. there has been an traditional insurers… Commercial rents of critical importance PROPERTY: PAUL GINESS Rents agreed in 2008 will have a throughout the UK. Central London, with legislation (introduced 1 April 2008) and significant impact on the forthcoming a strong emphasis on the West End, has a slowdown in the UK and world economy 2010 business rates revaluation. New experienced an enormous growth in rental has led to reduced demand and a potential rateable values will come into effect value due to very limited office space being drop in rental values. It will therefore be on 1 April 2010, however the valuation available in this area. This compares with interesting when the Government publishes date occurs two years before the the rest of the UK, which has seen a more the draft values next year to see how this is revaluation and is based on rental levels measured rise in value. taken into account. on the open market at 1 April 2008. Industrial property has been steady and Negotiating a fair rent is always of strategic Property rents have increased by an less erratic than the other sectors with importance but particularly at the moment, average of 13% nationwide during the last an average rental growth of just 6%. and achieving the correct rent in the revaluation period 2003 to 2008. The retail Prior to 1 April 2008, rental values were current market will benefit your company’s sector has experienced the strongest rental still relatively buoyant, however the bottom line whilst at the same time helping growth with an average rise of 16% in the combination of changes to empty rates to release hidden profits. revaluation period, although this figure reflects different trends within this sector. For example, retail warehouses have seen a stronger growth than high street shops The retail sector has experienced and shopping centre units – by almost 10%. Office rents have seen an average rise the strongest rental growth with of 11%, however, similar to retail, this average reflects differing pockets of growth an average rise of 16%…
  4. 4. European Truck makers sales hit the road! LOGISTICS: KEN ROGERS By late October, most of the major The downside of running older vehicles European truck makers had reported to the users of services is that service that sales of new commercial vehicles standards begin to slip because of had dropped over by 40%. increased breakdowns and non-scheduled service times impacting on delivery service. This dramatic statistic is symptomatic of This unwillingness or inability to invest in the significant impact of the credit squeeze asset replacement will have a medium term and developing recession on the logistics impact on the cost of supply chains. For sector. The implications will have a direct example, the reduced volumes of goods effect on the cost of supply chains for being moved does not necessarily translate manufacturers and wholesalers. into fewer deliveries, but potentially into smaller, more frequent and less predictable The drop in truck sales (larger than that delivery patterns. The UK Logistics sector being reported in the wider economy) is has been honed into a very efficient the result of a triple whammy: operation based around a strong economy, • Service providers are unsure of demand and the supply chain characteristics for logistics services, against a necessary to serve such an economy. background of declining demand, Adapting that infrastructure to changed and are therefore delaying replacement, supply chain characteristics will require or reducing fleet sizes investments in different vehicle specifi- cations, depot networks, and warehouse • In the short term, running vehicles for operations. For many logistic service A simple example of the added cost of longer reduces bottom line costs through providers struggling for survival, it will be sub-optimal provision would be a company lower depreciation or leasing costs some time before the funding is available supplying their goods to the market via • Even if providers wish to replace vehicles, to achieve the required efficiencies. In the palletised distribution. If delivery frequency there is not necessarily the capital available meantime, this potentially leaves users remains the same to satisfy customer from the financial markets to do so. bearing the cost of sub-optimal solutions. requirement, but volumes reduce by 25%, the cost of distribution per item sold increases by 33%, even if the logistics The implications will have a direct service provider’s charges remain constant. Against this background, it is vital that effect on the cost of supply chains suppliers of goods should be reviewing not only the prices of logistics services, but also for manufacturers and wholesalers whether they have the correct choice of supplier(s) to provide lowest cost solutions against their changing requirements. Disposal of Waste Revenue Quote from one merchant: “prices are changing quarterly – going down every quarter hour!” WASTE: DAVID LITTLE & KEITH ROBINSON • Plastics – e.g LDPE clear down from around £300/t in early Sept to £100/t Waste costs have again risen at well • Steel cans/packaging – £235/t in in late October. above inflation this year due to the mid summer to £10 in late October 33% increase in landfill tax, fuel costs • Cardboard/paper – down by at least Batteries Directive and further regulations. Now there 50%, with one local council collector is another problem – the sale values only offered £10/t by their merchant. It is expected that the waste producers’ of recycled materials are dropping The problem is how to stockpile it if it recycling responsibilities for Batteries are alarmingly. In some cases recyclers can’t be sold – if left out in the weather now not likely to be introduced before Jan have refused to accept more materials it deteriorates and becomes worthless. 2010 (instead of 2009). as the demand has dried up and storage facilities are full. The international banking A dramatic fall crisis and worldwide slowdown in manufacturing in the demand has triggered a dramatic fall in the demand (and therefore prices) for recycled materials and prices for in recent months: recycled materials
  5. 5. Company cars – capital allowance changes Time is running out to take action! FLEET: GERRY PENTLETON The move to emissions-based Capital Allowances on company cars, announced in the March 2008 Budget, will have a significant impact for all UK businesses, irrespective of how they are acquired. With the new legislation due to take effect from April 2009, getting ready for this new regime should be a major focus for all organisations regardless of the number of cars they operate. The changes in the treatment of Capital Allowances are part of a range of Government measures to encourage greener motoring and focus on replacing the current rules, based on price, to one centred on their CO2 emissions. However, it should be noted that the Treasury is yet to confirm whether this legislation is to be applied retrospectively or solely on new cars registered after 1st April 2009. It is hoped that clarification on this point will be made within the pre-Budget Report. The move to emissions-based Capital Allowances on company cars will have a significant impact for all UK businesses... When a car is disposed of, the proceeds The precise impact will depend on the CO2 Current Rules will be deducted from the relevant pool, make up your fleet of company cars and Company cars are written down at 20% but there will be no balancing allowance, how the cars are acquired. (or 25% for those registered prior to 1st because cars will not be separately A further beneficial effect will be to lower fuel April 2008) on a reducing balance basis, identified. Each pool (i.e. 10% or 20%) costs as there is a strong link between low to a maximum of £3,000 per annum. will continue to be written down on an CO2 emissions and improved fuel efficiency. Each car is calculated individually and ongoing basis. This means that, in the vast there is a balancing adjustment when the majority of cases, cars will still be going It will also simplify administration, as cars will car is disposed of: this ensures there is through the writing down process long after be pooled rather than dealt with individually. full corporation tax relief for the difference they have been disposed of. between the purchase price and the Action To Take But what does this all mean for your eventual sales proceeds. Cars with CO2 As a minimum, it is advisable to undertake organisation and what steps should you emissions of 110g/km or lower enjoy a a review of your car choice guidelines and take to be ready for it? first year allowance of 100%. amend your policy to ensure that only cars omitting less than 161g/km are allowed on The Impact New Rules choice lists. The Government's view is that this change The new scheme will include all cars on will be broadly cost neutral. However it will It is also sensible to review how you acquire a pooled basis rather than individually. only be so if the emissions profile of your your cars – if you currently purchase Cars with emissions above 160g/km will fleet is tax efficient. expensive cars with emissions lower than be written down at 10% and those under 161g/km, it is likely to be cost effective to 161g/km will be at 20%, both on a Cars will have to be written down over a finance these in future via an operating lease. reducing balance basis. The £3,000 longer period of time and despite the removal maximum is to be removed and the first of the £3,000 per annum limit, the corporation This legislative change also offers a good year allowance of 100% for cars under tax write off for most organisations is likely opportunity to fully review all aspects of how 111g/km will remain in place. to be less than it is currently. you operate your company car fleet.
  6. 6. Entertaining Insurance Savings for Zavvi SUCCESS STORY: SCOTT INGHAM Steve Peckham, Zavvi’s Chief Financial the extensive support of a group was to ensure that the communication lines Officer explains: “I was particularly insurance department and, therefore, to the insurance market were managed concerned that, as a new company needed to review our administration effectively and the information was coming out from the shelter of a group and risk management procedures.” presented in a clear format, to enable the insurance programme, we might face underwriters to understand the qualities of Scott Ingham, Director (ERAICM) explains, an increase in premiums. The group the business fully and consequently reflect “The challenge was to correctly position insurance covers were very generalist this confidence in zavvi, with lower Zavvi’s risk profile with the insurance and there was a definite need for a insurance costs and broader cover. market. This was achieved through a series programme more suited to Zavvi’s of interviews with key operational staff and retail operations. We were also used to In support of this the broker service also by focussing on Zavvi’s commitment to risk has to be organised carefully, with the management and good claims experience. right people for the job, because they have With retail operations, the key insurance an ongoing and integral role to support exposures revolve around injury claims these activities, so generating a tripartite from the public, property exposures and relationship is important to support this supply chain. So the focus for the project on an ongoing basis.” “I was very impressed with the depth of expertise which was applied to the exercise, which was a well balanced objective process and delivered many improvements including substantial cost savings. It was a painless process and one which I would recommend to all organisations.” Steve Peckham, Chief Financial Officer Winning profits for Harvey Ingrams SUCCESS STORY: ADAM WHEATLEY organisation and absolutely focused on the following recommendation: “We wish delivering best value to Harvey Ingram.” to bring to your notice the opportunity to Adam Wheatley first got involved with work with a very professional organisation. Harvey Ingram in 2003. He met with Sarah asked us to provide an ongoing Adam Wheatley has introduced a variety the Managing Partner, Chris Finlay, and service for Power. Sarah explains “I have of specialists who have delivered increased Practice Manager, Tony Yates, to look been very impressed with the service profits in a variety of cost areas. at reducing expenses. Adam brought provided, the level of personal care and in a number of Expense Reduction attention being very high. I have learned The supply agreements negotiated have Analysts specialist consultants to review that the increased profit achieved, in itself been entirely satisfactory and the profit Communications (Landlines and very valuable, is only part of the value that improvements achieved have proved to be Mobiles), Power, Stationery, Print and Expense Reduction Analysts bring. As a greater than originally predicted. Harvey DX. Overall savings of 24% have been result I have asked them to continue to look Ingram’s experience of dealing with Expense achieved across these cost areas. after our Energy requirements beyond the Reduction Analysts has been positive and initial period of engagement.” produced very real profit improvements. Sarah Fane-Forester comments “When I arrived at Harvey Ingram my predecessor, Harvey Ingram were pleased with Expense We are happy to recommend Expense Tony, who retired, spoke of Expense Reduction Analysts efforts and so brought Reduction Analysts to other solicitors, Reduction Analysts very positively. Of course us to the attention of other solicitors, with and to anyone else for that matter.” I had the usual doubts: were the increased profits quoted for real?; why can’t we make “I have been very impressed with the service these increased profits for ourselves?; cheapest is not usually best; and so on. provided by Expense Reduction Analysts. The Since then my experience of working with Expense Reduction Analysts has taught me level of personal care and attention is very high.” that they really are a highly professional Sarah Fane-Forester, Practice Manager Correct at time of print find extra profit