A report on tips and hints to save your organisation costs. Published in 2010 still relevant today where businesses have focused on key areas and are now looking for additional savings.
4. 2 THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST
OUR COST CONTROL CHECKLIST ISN’T JUST ABOUT IDENTIFYING SAVINGS, IT’S ALSO
ABOUT SUSTAINING, MEASURING AND SHOUTING ABOUT THEM, SAYS MELANIE STERN
INTRODUCTION
Sustainable savings
1 Make cost awareness a business-wide
discipline
How can FDs turn good cost control practice into something that lasts
beyond recession?
2 Consider local suppliers
Why unbundling contracts from one large supplier and divvying them up
across a bunch of smaller players may save you money
3 Look at the bottom two-thirds of your
purchase ledger
Why stop at the first few lines of expenditure when the bottom of the list
could be hiding the sustainable savings?
4 Lead the creation of a cost control culture
Making friends and influencing people is as important in cost control as
finding the cost hotspots
5 Forge a strong finance-procurement
relationship
Often seen as a problematic relationship, FDs need to get friendly
with procurement
6 Incentivise cost awareness
Influencing non-financial staff to build in cost awareness responsibilities
can be made easier if the rewards are made clear
7 Benchmark your savings
Making cost savings sustainable means compiling the right data on
where you are and where you’re headed
8 Communicate your achievements
Communicating your wins and your leadership skills is crucial if
you want to command the respect of the board and build evidence
of your achievements
9 Instil long-term practices
A lot of bad habits have been strangled by the recession and the necessity
to be leaner. How can you preserve this mindset?
10 Don’t get complacent when sun’s back out
Putting a long-term cost control mindset in place should be a priority as
the UK economy prepares to exit the recession
Q
uitting smoking or sticking
on a jumper instead of
turning up the central
heating are both good
ideas that will save you money every
day. But they both involve making a
commitment to regime change, forcing
oneself to drop familiar habits in order
to squeeze a bit of betterment from the
way we live. They can also irritate those
around us, demanding they also
change their ways – making you
unpopular. But the means justify the
ends, and do so over a lifetime.
Our Cost Control Checklist moves
along the same principle. Mindful of
the increasing influence finance
directors have across their
businesses while cash remains king,
we’ve come up with a list of ten
simple ways to instil the habit of cost
awareness now and preserve it
through better economic days – and
we’ve got ideas on how to bring
non-financial departments with you.
Make our list part of your corporate
New Year’s resolutions and with any
luck, both the health of your bottom
line and your reputation will see
lasting dividends.
Melanie Stern
Editor, Financial Director
6. 4 THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST
IT IS EASY TO GET TO GRIPS WITH COST REDUCTION IN A
CRISIS, BUT IT WILL TAKE A CO-ORDINATED EFFORT TO KEEP
IT GOING WHEN THE UPTURN KICKS IN, WRITES DAVID RAE
Fly the
flag
T
here’s nothing quite like a
global economic crash to
sharpen financial minds
– after all, recessions as
tough the one we are going through
tend to bring unnecessary corporate
waste into sharp focus.
They also help to foster better
cross-functional relations: a siege
mentality is adopted and those who
remain after redundancy rounds pull
together to get the job done.
The difficulty is making such
behaviour stick. It’s one thing to weed
out bad practice when cash is tight
– the secret is to keep it out when the
good times return. And it’s an issue
that finance directors would be wise to
get on top of now, as implementing
processes that resist a return to old
ways will reap huge benefits in the
long term.
The first step that FDs must take
to instil sustainable cost-control
throughout their organisation is to put
in place a well-structured framework
that is centrally managed, but has
representation in every function or
department and a method of
measurement everyone can
understand and access.
Group finance is a good place for
this to be managed but, increasingly,
centrally-led procurement functions
are playing a fundamental role in such
strategies with the chief procurement
officer or purchasing director assuming
ultimate responsibility. They are, in
effect, the rising star of the corporate
world, and close relations between
procurement and finance is a recipe for
sustainable savings.
The CFO of the pharma division at
Swiss-based pharmaceutical giant
Novartis, Jonathan Peacock, is an
example of a CFO who understands
why this makes sense. “It’s really the
partnership of the CFO and the head of
procurement that we found to be quite
powerful,” he says.
And it’s something Peacock puts his
full weight behind to ensure that the
rest of the business is also bought into
the vision.
“For a sourcing organisation to be
successful, it has to be integrated
into the business,” he explains. “I try
to act as a support in ensuring we get
that integration.”
This is often easier said than done
because, traditionally, procurement staff
have been seen as junior partners in the
average business and treated as ‘PO
pushers’ who are only to be brought in
after deals have been done. While this
has changed significantly in recent
years, there remain huge differences in
the maturity levels between companies
and industries.
Off limits
Black spots include areas of traditional
power within an organisation such as
marketing, legal and those
departments that are seen as the
lifeblood of the company. For example,
the research and development people
would hold all the cards in
pharmaceuticals and high-technology
industries and only with full board
support – in particular, the CFO’s – will
procurement be able to successfully
tackle these problem areas.
But even with a centralised
procurement function that enjoys full
board support, sustaining savings into
the long term can be a difficult nut to
crack – a particular bugbear of Neil
Deverill, who has served as global chief
procurement officer at both Anglo
Americas and Royal Philips.
“Certainly, it is easier to observe
lasting change when there are systems
in place that prevent recourse to
alternative or prior practice,” he says.
“Of course, standardisation will bring
about common systems, processes
and cost efficiencies, but I still detect
7. THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST 5
MAKE COST AWARENESS A BUSINESS-WIDE DISCIPLINE
hostility and resentment to new
practices, even when they’ve been in
place for five years or more.”
Key, therefore, to instilling long-term
cost control and margin improvement
is to embed processes by which the
entire organisation must work to. And
these processes must be developed
and managed centrally.
Successful demand management
is a good example of a strategic
process which can have immediate
and material impact on external
expenditure and the bottom line.
By managing the behaviour of staff
rather than telling them what suppliers
to use, or demanding 10% budget
cuts, huge benefits can be realised
without damaging productivity.
A good example is travel
management. Do six people really have
to attend a meeting in New York? Can it
be held in Europe? Can it be combined
with other meetings planned for later in
the year? Can it be conducted by video
conference instead?
These might seem like obvious
points, but there are a frightening
number of companies that don’t have
robust policies in place to manage
even this level of behaviour.
Technology solutions
There are also a multitude of
technology solutions that can help.
The adoption of e-procurement
systems, linked to pre-approved
catalogues provided by suppliers,
means that only approved vendors
are used, that price can be centrally
managed and external spend
accurately tracked.
Spend analysis allows corporate-wide
expenditure to be analysed down to the
line-item level, meaning that inefficiencies
can be ironed out relatively easily.
It is not uncommon for different
departments in the same organisation
to be buying exactly the same product
from the same supplier at wildly
different rates, for example.
Also important to the process is to
conduct regular measurement, with
relevant key performance indicators of
success, such as annual savings as a
percentage of sales, visible
improvements in margin at the profit
and loss level.
It’s one thing driving savings,
quite another making sure it falls
to the bottom line and doesn’t
get absorbed by the business
unit. This includes year-on-year
productivity improvements.
But, as Deverill notes, not all FDs
see the potential that such strategies
and processes hold. FDs “are good at
getting cuts,” he says, “but for the most
part they are blind to the other side.” I
Four tips
In 2009,
Pricewaterhouse-
Coopers published a
report that identified
why cost reduction
attempts fail
G Lack of a strong
foundation
Companies that don’t
have a full
understanding of their
cost baseline will have
difficulty identifying
opportunities
G Dipping into the
same well
Low-hanging fruit
is often targeted
multiple times
rather than larger
opportunities
G Failure to address
cost management
and control
Companies focus
on reducing costs
not spend culture
G Inability to
measure results
Cost-reduction is
often lost in annual
operating results
8. 6 THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST
COULD SPREADING CONTRACTS AMONG
LOCAL SUPPLIERS SAVE YOU MONEY AND
REDUCE SUPPLY CHAIN RISK? ASKS DAVID RAE
Local
fare
T
hink global, act local’ is a
well-worn cliché used by
everyone from chief executives
to town planners to describe
an approach which encourages
decisions to be made only when the
complete picture has been taken into
account. But in today’s economy, it
adopts a more literal meaning.
The biggest impact on business
during the past thirty years has been
the relentless growth of globalisation,
made possible by huge advances in
containerisation and port technology
and ever-more complex supply chains.
But if the past 24 months has
done nothing else, it has brought into
sharp relief the risks inherent in such
models. Massive commodity price
volatility has led to the cost of fuel, at
best, being difficult to predict and, at
worst, to become crippling. Product
quality problems, such as Mattel’s
infamous recall of hundreds of
thousands of toys due to a lead-based
paint being used in their production,
have brought into focus the risks
inherent in such relationships.
Often, the financial stability of
far-flung suppliers is also difficult to
predict and reputational issues of
dealing with suppliers in other corners
of the world, which western customers
know little about, seem to crop up
daily. In short, the risks in global supply
chains are huge — and growing.
Neither can the benefits of global
sourcing be taken for granted, as they
once could. Increasing inflation and the
rise of the middle classes in developing
countries has led to subsequent
increases in the costs to western
businesses that buy there, while
currency fluctuations have also had an
impact. As a result, finance directors
would be wise to carry out total cost of
ownership calculations on current
sourcing strategies – because the
original calculations that the decisions
were based upon may no longer be
valid (see box).
Research carried out earlier this
year by the Procurement Leaders
Network and BrainNet Supply
Management Group among more
than 150 chief procurement officers,
Changing tides in global purchasing:
focus on cost-efficiency and
sustainability, paints a picture of
how purchasing decisions are set to
change subtly over the coming years.
The research found that while
quantitative factors such as labour
and raw-material costs continue to
dominate the decisions, less tangible
factors such as flexibility in production
and logistics and access to a highly
qualified workforce and innovation are
more to the fore. And while ethical and
environmental considerations still play
a relatively small role, this is set to grow
considerably in the coming years.
Local sourcing
But one development which continues
to gain momentum is local-for-local
sourcing – where local markets are
served by local suppliers. It’s a
relatively new concept which is being
driven by a combination of the risks
and increased costs listed above,
combined with demand from emerging
economies and an increased tendency
towards protectionism. More than a
third of the CPOs surveyed in the study
said that the local-for-local approach
would take on a more important role in
their company in the next few years.
“For several years now, many large
multinational companies have been
employing a strategy where they act as
a local player in their target markets,”
says Sven Marlinghaus, partner and
managing director at BrainNet Supply
Management. “Over the next few
years, we’ll see this trend intensify.” As
such, Marlinghaus recommends that
large companies develop sustainable
9. CONSIDER LOCAL SUPPLIERS
procurement models which include
both 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 sourcing
efforts will play a big part in the future of
its growth in the Bric (Brazil, Russia,
India and China) and Mint (Mexico,
Indonesia, Nigeria and Turkey) countries.
“Basically, we are looking to do
everything locally – product planning,
design, development, production and
parts procurement,” he says.
But while local buying certainly has
its place, large organisations must be
aware that it can only form part of a
much wider product-sourcing strategy.
Recent research conducted by IBM,
Sourcing in a demanding economic
environment: generating value in
challenging times, points to the clear
challenges caused by “uncontrolled
local buying” which the report claims
results in a “loss of leverage, leading to
higher prices, reduced quality and
service issues”.
Cultural needs
And one executive from a US
consumer products company
summed up the approach that most
organisations should strive for, “We’re
using centrally defined and controlled
processes but with local sourcing
organisations that understand the local
business and cultural needs.”
Understanding those cultural
intricacies are key to building
sustainable businesses in what can
often be complex overseas markets,
and here local procurement activity,
which embraces local suppliers and
technologies, can give companies an
excellent head start.
And this is exactly the approach
taken by financial services giant AXA,
which has even coined the word ‘glocal’
to describe its approach. “Of course
procurement is centralised,” says Heinz
Schaeffer, chief procurement officer of
its northern, central and eastern
European business.
“But we decentralise our technical
experts, like facilities management
and even marketing or IT. We have
established a central basket where all
requests are going in, we process it
and then give it back.”
In theory, governance and control
is maintained centrally, while the
benefits of local sourcing in categories
of spend which are strongly influenced
by local markets, such as marketing,
are still accrued. I
Low-cost country sourcing decisions made on basic
cost considerations are no longer valid. Rather, total
cost of ownership calculations, which take into
account the impact of inflation, currency fluctuations,
freight and transport rates, staff retention issues,
supplieron-boardingandriskmitigationmustbeused.
The Baltic Dry Index, for example, which is used
as a measure of the cost of dry freight, has been
volatile over the past two years, reaching a peak of
almost 12,000 in June 2008, before plummeting to
650 in December and rallying to the 5,000 mark as
this supplement went to press.
Costs for transporting a standard 40-foot
container between China and the UK are now
hovering at $3,000. In the dark days of the
downturn the rates were, literally, zero.
Cost control and inflation
THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST 7
10. BUSINESSESAREMISSINGOUTONSAVINGSINTHE
PURCHASELEDGER.THEYRUNOUTOFSTEAMAFTERTHE
FIRSTFEWLINESOFEXPENDITURE,SAYSMALCOLMWHEATLEY
What lies
beneath
8 THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST
I
n any business, the provision of
drinking water from water coolers is
an essential, though not a major,
item of expenditure. Even so, at
Moorfields Eye Hospital in London,
contracts officer Aitor Cisneros wanted
to be sure that the hospital was getting
the best possible deal.
With 43 coolers in and around the
hospital and its outreach clinics – each
typically costing £6 to refill with a
19-litre bottle of water – the annual cost
of around £1,000 per cooler quickly
mounted. There were operational costs
too. “We were tied to having lorry
deliveries of water cooler bottles every
two weeks,” says Cisneros. “We had to
find space to store the bottles and the
empties were an eyesore.”
The solution: mainsfed water coolers
from Tana Water, each equipped with
hi-tech carbon block filters and
ultraviolet lamps to filter out and kill
any mains-borne contaminants.
The impact on cost? Instead of
paying £6 or so for 19 litres of water,
the hospital pays about two pence.
A ‘sleep mode’ incorporated in each
cooler also reduces the hospital’s
energy consumption.
“We only have one bottle fed cooler
left in the hospital,” says Cisneros.
“Where you’ve got about 30 regular
users of one cooler, it definitely
amounts to a huge cost difference if
you switch to mainsfed coolers.”
It’s a story that will warm any finance
director’s heart – especially in times
like these when budgets are under
so much pressure. Yet, in many
businesses, these stories are as rare
as they are welcome.
In practice, it turns out, under-pressure
procurement functions often stick to
just to the top one-third of the
purchase ledger to generate cost
savings, leaving the bottom two-thirds
untapped. The result: significant
potential for cost reduction, with
no clear route to achieving it.
Anything’s possible
So how can FDs and the finance
function get involved? How can they
work with purchasing to identify
savings? What kinds of savings are
possible – and how can they best
be achieved?
Talk to FDs – and procurement
functions – and some clear messages
quickly emerge.
To begin with, purchasing functions
must first accept that there’s a case to
answer. Many buyers focus their
attention on negotiating new contracts
with suppliers, supplemented by
periodic ‘category reviews’ of major
spend items. And if the potential
savings tied up in the lower reaches of
the purchase ledger are to be tapped,
that needs to change.
“All too frequently, purchasers either
think that the bottom two-thirds are
inconsequential, or that they’re already
achieving best-value pricing,” says
Graeme McKinnon, commercial director
at Expense Reduction Analysts. “They
couldn’t be more wrong.”
The figures speak for themselves. A
thorough procurement review can yield
an average saving of between 5 and
10% of its cash spend, research
suggests – equivalent to a 20% boost in
profit for the average FTSE-350
business. And it’s in the bottom
two-thirds of the purchase ledger where
the potential is greatest. There are more
suppliers, 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 be
made,” agrees Julian Seidman, client
finance director at FD Solutions, a
provider of part-time finance directors.
“On their own, they might not be
significant, but are often easily made
and quickly add up to a big number.”
Precisely how those savings will be
made is down to individual situations,
and once focused on the task, buyers
will be quick to spot opportunities.
In some cases, re-opening price
negotiations will be the answer. In
others, it will be a policy decision: does
everyone with a business-provided
mobile phone or Blackberry actually
need that provision, for instance?
Elsewhere, as at Moorfields Eye
11. THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST 9
EXAMINE YOUR PURCHASE LEDGER
Hospital, cheaper alternatives may be
the answer.
In some cases, supplier consolidation
will be the route to savings. At Allied
Bakeries, explains its procurement
director Nigel Draper, an annual £5m
spend on building services across the
company’s 11 bakeries — involving a
number of plumbers, painters and small
builders – is prompting the start of
just such a programme.
“The question to ask is why the
suppliers in question are on the books
in the first place,” stresses Tony Morris,
principal business consultant within the
procurement centre of excellence at
finance software vendor, Coda. “Are
there savings to be made by taking the
business away from them and
awarding it to a bigger supplier at a
better discount?”
But, whichever tack is taken, data is
vital. What is being bought, and from
which suppliers? While e-procurement
platforms and spend analysis systems
provide such insights as a matter of
routine, the prosaic reality in most
companies is that obtaining that data is
a work in progress.
The problem: while procurement
takes a transactional item-by-item view
of purchasing, it’s finance that pays the
bills and has the supplier-centric
purchase ledger perspective.
Common view
One idea is a business intelligence
platform that provides the FD and the
procurement function with a common
data viewpoint, enabling them to work
together to identify cost savings.
QlikView is one such platform. Pulling
disparate data sources together in
real-time, businesses can ‘drill down’ to
minute detail, such as the amount
spent on paperclips last year. You never
know where you’ll find savings.
The only difficulty: a relative wealth of
survey data suggesting that
procurement and finance functions
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 system
vendor Basware, for instance, talks
openly of tensions between the two
functions and contains hard-hitting
quotes from a number of the
procurement executives on the tension
contained in this relationship.
“While procurement is typically the
leader across the organisation for
spend management initiatives, only
33% of procurement departments
partner with finance groups to develop
and execute improvement initiatives
that further the success of their
company,” Mickey North Rizza,
research director in the procurement
and sourcing practice at analysts AMR
Research, reveals.
In short, the prize contained in the
quieter parts of your purchase ledger is
worth the effort – but will finance and
procurement jointly seize it? I
12. A
running joke in the Daily
Telegraph’s ‘Alex’ cartoon
strip is the amount of money
the two protagonists, Clive
and Alex, charge to expenses – a joke
given fresh impetus in the banking crisis
as the two seek to circumvent the
various strictures placed on them by
senior management.
But the corporate austerity heralded
by the ‘bash the bankers’ climate
contains uncomfortable echoes of
the collapse of the dotcom boom a
decade ago.
Then, as now, it was easy to
lampoon what was widely seen as a
culture of excess. Boo.com, for
example – which became the first high-
profile dotcom implosion – famously
ploughed its way through £125m in
expenditure in just six months. Staff
and contractors were recruited in large
numbers, with one contractor alone
reputed to be earning over £100 an
hour. Employees were encouraged to
delay taking holidays by inducements
that included 5-star hotels and
first-class flights.
To excess
It’s easy to dismiss such excesses as,
well, excessive. They aren’t typical
and most businesses have policies
and procedures in place to guard
against the wilder enthusiasms of
employees with a corporate
expense account. In the real world,
the charge-it-to-expenses mindset
of the Alex cartoon has few parallels.
But employees can influence your
business’s cost base in many more
ways than simply charging too much to
expenses. A whole series of choices
– ranging from the selection of
suppliers to the preferred brands of
stationery and office equipment – have
considerable cost consequences. Even
simple decisions about turning off lights
or air conditioning, or how much water
to boil for coffee, eventually influence
the bottom line.
For FDs, who are the custodians
of the bottom line, the challenge is
simply-stated. Taking away the power
to make such decisions from others is
impractical and probably impossible.
So, how can you set in place a
corporate culture in which employees
throughout the business – at all levels
– become more aware of the cost
consequences of the decisions that
they take? And how can they extend
this awareness to whole departments
and functions – many of which
jealously guard their budgets and
enshrined practices?
Setting an example
One rule is immediately clear: lead
by example. “Credibility is an issue,”
says Peter Lunio, Bristol-based
associate director at Baker Tilly
Management Consultancy.
“It’s difficult for an FD to bang the
drum about cost control when the
finance function – and its leadership – is
itself seen as lacking in that respect.”
FDs “set the standard”, adds Claire
Arnold, partner in London-based
Maxxim Consulting.
“Good FDs don’t just merely
count the cost of the existing status
quo. They lead from the front in terms
of setting expectations: is lunch a
10 THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST
MALCOLM WHEATLEY EXAMINES HOW THE FD CAN
LEVERAGE A NEW COMPANY-WIDE COST
AWARENESS TO CREATE A LONG-TERM CULTURE
In the
same boat
13. plate of sandwiches, or a trip to a
four-star restaurant?”
Equally, it’s important to involve and
incentivise people, rather than swoop
down from on high to lecture them.
“Make people aware of the cost
targets that the business is aiming for,
how staff can help make this happen
and what this will ultimately mean to
them,” urges John Judge, of Judge 3D,
a commercial management specialist
working with a number financial
directors and teams within FTSE-listed
companies and government bodies.
“If you work for a large company,
you have no real incentive to save
the company money, so businesses
should really think about giving
employees incentives to provide
the company with ideas to both save
– and make – money.
“A ‘cost aware’ culture isn’t just
about scaling back spending – it’s
about creating opportunities for the
company to innovate and grow.”
Any suggestions?
Indeed, as Siobhan Riggott, a senior
research analyst at working capital
consultantcy REL notes, research
among the world’s top 1000
companies by revenue repeatedly
shows those that offer incentives to
employees – and companies that
solicit their help through suggestion
schemes and improvement initiatives
– tend to perform better at cash and
cost management.
And don’t forget to tailor the
message to the audience. Malcolm
Follos, managing director of the UK
arm of leadership consultancy Sensei,
warns that FDs can sometimes
struggle to articulate ‘big picture’
objectives in simple, clear terms.
A favourite story he relates concerns
a potato crisp factory seeking to cut
costs by minimising waste.
Shop floor employees couldn’t really
identify with waste levels expressed in
terms of percentages – but got the
message when those percentages
were converted into bags of crisps.
“Just by expressing the measure in a
different way, the waste figure halved,”
he notes.
Likewise, make the motivation clear.
THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST 11
LEAD THE CREATION OF COST-AWARE CULTURE
At Salford Royal NHS Foundation Trust,
for instance, finance director and
deputy chief executive Tony Whitfield
is careful to link achieved savings to the
organisation’s frontline deliverables. “I
say to people: ‘I want you to save
money – not for the sake of saving
money, but to create the means for us
to deliver better patient services,” he
stresses. “You really have to place the
objective in context.”
And what of the FD’s interaction
with the functions and departments
within the business, as opposed to
individual employees?
Here, say the experts, it’s time to be
realistic about the perception of an FD
within the business – and involve the
CEO, early on.
“The FD is the co-pilot, with the
CEO as pilot,” is how Sensei’s Follos
puts it.
“The FD has a role to play, but the
chief executive has a bigger role,”
agrees Ian Mackinnon, chief executive
of AIM-listed cosmetics, personal care
and household goods contract
manufacturer, Swallowfield.
“The FD keeps the scorecard, and
prods and pokes the function heads
but, if the operational managers aren’t
on-message, it becomes like pushing
water uphill.”
Which isn’t to say that operational
managers – and their departments
– necessarily have the skills to run a
‘cost aware’ function. Willingness is
one thing; skills in budgeting and
procurement quite another.
“Be prepared to have finance
people go out into the organisation,
and demonstrate to people the right
budgetary control skills, and where they
can find the information and resources
that they need,” says Baker Tilly’s Peter
Lunio. “Finance has an education and
support role to play, helping people to
do a better job of budgetary control.”
And finally, don’t forget to praise –
and reward – that better job.
“Use positive praise, and
communicate great examples of cost
saving,” urges Arabella Ellis, director of
consultancy The Thinking Partnership.
“Build relationships by setting
expectations – not by telling people
what to do.” I
14. A
s director of finance for Great
Ormond Street Hospital
Children’s Charity, I’m
responsible for ensuring our
£15m annual budget is managed
efficiently and focused on achieving
charitable objectives.
Our charity does not have an in-
house procurement specialist, so we
rely on the skills and talents of our staff
to negotiate the best deals with
suppliers. Each department has its own
procurement procedures tailored to
their needs, competitive tendering
taking place within a framework agreed
with finance.
Our activities, including campaigns,
developing corporate partnerships,
major gifts, community fundraising,
legacies and special events, are well
diversified and this decentralised
approach to fiscal responsibility works
well for us.
A collaborative approach to good
procurement practice engenders a
sense of responsibility at the
departmental level. Each departmental
director ensures that local procedures
are adhered to and encourages their
staff to challenge all costs, irrespective
of origin.
All departmental budgets are created
from the bottom up. This detailed
approach is essential when we
challenge cost variances during our
quarterly reforecasting exercise.
The internal audit annual work
programme includes a procurement
practices audit, giving the directors
assurance that agreed procedures are
being followed.
Every pound we save on overheads
is available to spend on charitable
objectives or more fundraising. We
have been reviewing service levels in
contracts and renegotiated a number
of those contracts to deliver cost
savings as a result.
Implementing a framework for good
procurement practice hasn’t been all
that difficult, but has reaped dividends.
Andrew Hibbert is director of
finance, information technology,
operations and human resources
for Great Ormond Street Hospital
Children’s Charity
Two sides of the same coin
I value the perspective procurement
brought to the business. But not unlike
X Factor’s Jedward, finance and
procurement make a double act that
can misfire badly.
Only when they each concentrate on
their specialism to complement the
other can they make effective common
cause. It’s also helpful to hand off to the
‘nasty cop’, tenaciously working
through the detail and driving a hard
but fair bargain, leaving operating
relationships unsullied.
Three areas where strong
collaboration is crucial to both
procurement and the business are
reporting savings, business perspective
and data provision.
Nothing rankles like puffed-up
‘savings’ that never seem to flow
through to a thumping end of year
surplus and I strongly believe in ‘one set
of authentic numbers produced by
finance’ – that means procurement too.
Savings claimed must tie in to these
recognisable figures. Procurement
must be crystal clear on one question:
what are savings measured against?
One saving against a probable
overspend could be a triumph for the
buying department, but might show
as minor favourable variance against
budget. Finance should work with
procurement to ensure it gets fair
credit and credibility.
Beating suppliers up on payment
terms to the point they have
cashflow problems and can’t supply
is clearly counterproductive.
If procurement operates in
isolation, this can happen. I’ve
seen procurement brought in at the
eleventh hour to shave another 20%
and impose a plethora of conditions.
Finance is well placed to keep the
buying department in the know –
ensuring this never happens. I
Carolyn Bresh is co-founder of
Everymind, a consultancy to
finance functions and was
previously group financial
controller at Reuters
12 THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST
FDs AND PROCUREMENT HEADS ARE FAMOUS FOR NOT
SEEING EYE TO EYE. HERE, TWO EXPERIENCED FINANCE
HEADS SHARE HOW THEY WORK WITH PROCUREMENT
FORGE A STRONG PROCUREMENT RELATIONSHIP
Love thy
neighbour
15. THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST 13
T
he past two years have made
businesses aware of the need
to eradicate waste and
become cost efficient like
never before. The lesson enlightened
organisations will be seeking to carry
forward is the need to make these
hard-won disciplines permanent ones.
Chris Samson, a director in Deloitte’s
financial services consulting practice,
advises companies on large-scale
cost reduction programmes. He says
that in order to embed a long-term
cost-saving mentality within an
organisation you need leadership and
accountability. “A large-scale cost
reduction programme can often require
significant cultural change and can be
a fundamental test of leadership,” he
says. “Targets need to be allocated to
key divisional directors with transparent
processes for reporting back.”
In an ideal setup, the CEO and
CFO will take the lead, with the CEO
providing the mandate and the CFO
playing a crucial role by offering
independent challenge to ensure
the robustness of all business cases,
making sure the finance function
plays a central role and providing
transparency. Actually achieving those
savings and effecting change, however,
is down to the foot soldiers – the
managers and divisional directors.
So what can finance directors
do to underpin that process and
help put a cost-aware culture on
a permanent footing?
Martyn Wates, CFO at The
Co-operative Group, says getting the
cost-saving message through to an
organisation that is 120,000-strong
means putting the message front and
centre and becoming an ambassador
for cost awareness at every turn.
He makes use of any opportunity to
advocate cost-awareness. Any and all
meetings and presentations to board
members, managers and staff include
his key message: “Would you spend
this if it was your own money? That’s
the best test. Every time you meet
someone, or have a chance to present,
or receive a capital expenditure
request, then you apply that logic.”
As guardian of the company’s
financial information, the FD will help
test whether targets are genuinely
being met. They will also need to spend
time in different divisions to understand
people’s priorities and pressures.
Samson has seen organisations set
up business-wide forums to bring cost
saving ideas to the forefront, an
environment in which the FD can apply
sound financial tests. But if businesses
are to create a culture of continuous
improvement, cost awareness needs
to be linked to career advancement
and reward, he argues.
Deloitte’s Samson says bonus
arrangements that are performance
related rather than solely profit related
are effective and, to be transparent,
these bonuses need to be clearly
linked to the delivery of cost savings.
An even more powerful mechanism, in
his view, is to link career advancement
to cost-reduction programmes.
“Some organisations link
[cost-reduction] with their efforts
to retain key talent. They would
typically identify key people and put
them into transformational roles.
“These kinds of change programmes
can’t be done off the side of someone’s
desk. Some people need to live and
breathe this. In some instances, people
are released from their day role and go
through huge learning curves. And
ultimately you end up with stronger
organisations when people go back
to their line roles.” I
PERSUADING NON-FINANCIAL PEOPLE TO TAKE NOTE OF
EXPENDITURE AND FIND SAVINGS IS NO EASY TASK, BUT
YOU CAN INCENTIVISE THEM, LIZ LOXTON DISCOVERS
INCENTIVISE COST AWARENESS
Quid
pro quo
16. What do you think we’ve learned
most keenly from the last
couple of years, in terms of
cost cutting?
With many board directors facing the
first downturn of their careers, the last
couple of years have brought cost
management and purchasing back to
the boardroom table as serious issues
that carry real influence over the
company’s ability to reach its strategic
objectives. In spite of this, though,
I still see over a third of businesses
doing little to tackle the majority of
their cost areas.
In which areas are businesses
and FDs focusing regards cost
cutting right now?
As always, cost cutting starts at the top
and works its way down the list. For
most organisations, this means the first
area for cost reduction is headcount
closely followed by other major cost
overheads, such as salary and
pensions for the remaining staff. Next
to be targeted is often the direct or raw
material costs of the business. Very
rarely will most finance teams get much
beyond this before other priorities
appear on the radar.
What do you think will change
there in 2010 and beyond?
There is a real trend now forming in
finance teams nationwide to recognise
that effective cost management is not
just about taking a “slash ‘n’ burn”
approach to cost cutting. Having
addressed the main line costs in 2009,
it’s now time to go behind the scenes
and establish effective cost and
purchase management processes
– and culture – in order to ensure
absolute best value from all areas of
supply within the company. These
processes also ensure true cost savings
are achieved in the future through
effective supplier management, rather
than settling for large headline savings
today, which very often do not
materialise in the future.
Has the relationship between
FDs and procurement changed
as pressures on businesses to
find cost savings have increased
amid recession?
More and more FDs are now seeing the
importance of effective purchasing and
its direct impact on cost management.
While this has always existed for raw
material costs, what we have seen in
recent times are finance teams realising
that, by working much closer with
experts in procurement, they can
ensure every cost within the business
delivers best value.
More importantly, by establishing
the right relationships and good
reporting processes between the
people who buy the goods or
services and the finance team, the
cost savings found become
sustainable for the long term. That
should make the entire business unit
healthier overall and something
any business will need to achieve if
it wants to run efficient operations
in the UK and compete locally
or internationally.
Do you think FDs are at risk of
forgetting the valuable lessons
in cost control they have taken
on in the recession when the
economic sun comes out again?
If the focus of FDs turns too quickly
away from the lessons of recent
times and the correct ongoing cost
and purchase management
processes and cultures are not
maintained on all areas of spending,
complacency will quickly enter the
supply chain and businesses will
struggle even more to compete with
leaner businesses elsewhere.
ROBERT ALLISON, MD AT EXPENSE REDUCTION ANALYSTS,
TELLS MELANIE STERN HOW FDS CAN EMBED COST
CONTROL TO SURVIVE THE RECESSION — AND FAR BEYOND
In it for the
long haul
14 THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST
17. How can FDs lead the process
of instilling these lessons
as lasting disciplines?
Lead from the front. Show the team that
you are serious about ensuring best
value and making savings. If others see
you take it seriously, they will quickly
echo the same habits.
It’s one thing to do that within the
finance function where the FD holds
sway – but how do they do this if they
want to raise the profile and influence of
finance across the business and keep
control of cost in other departments?
Like any form of change, process
aimed at creating a lasting culture
which recognises the importance of
always getting best value from
suppliers is about leading from the top.
So to start, ensure all members of the
board place equal importance on
creating this culture. Beyond this,
create the monitoring and reporting
processes needed to continuously
monitor whether best value is being
gained from suppliers.
INSTIL LONG-TERM PRACTICES
Of our list of ten ways to
control cost, which would you
say was the most important in
2010 and why?
While all are valuable points in
becoming an industry leader in cost
management, many are not overnight
solutions and will take some time. The
single point which could provide
immediate benefit in 2010 would be to
focus on the behind-the-scenes costs,
or the bottom two-thirds of your
purchase ledger. Longer term, the
creation of a cost-aware culture
throughout the entire organisation is
what will change UK industry for the
long-term and something I believe
more and more FDs will be recognised
for in the future.
How would you advise FDs to
instil this specific point as a
permanent discipline?
Establish the right reporting and
measurement systems which can
recognise when someone is achieving
best value from suppliers. We all spend
a fortune on sophisticated performance
measurement systems for our sales and
marketing teams then reward and
acknowledge their success publicly.
Having the right monitoring systems
in place to judge when best value is
gained – and maintained – from
suppliers will enable the same
recognition to be given to staff, and very
quickly make the necessities of 2009 a
permanent discipline in the future.
What would your warning be to
FDs who do not take a leading
role in instilling longer-term
cost control disciplines from
the lessons we have had out of
the recession?
With slow growth and an increasingly
global market for UK businesses to
compete within, any company not
operating a best-value culture across
all areas of the businesses purchasing
will not be able to match those who do.
I also believe that the achievement of
FDs in the area of leading a cost-aware
culture will become an attribute
investors will place increasing value on
long after the recession is over. I
THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST 15
18. A
s we come out of what has
been described as the
starkest recession in memory
and move into what is being
characterised as merely a period of
deeply difficult trading conditions, cost
control remains imperative.
What counts now for businesses and
their investors is evidence that
companies have addressed cost-
cutting and cost awareness head on.
Stronger balance sheets and business
survival speak for themselves, but
where companies have publicly
committed to eradicating duplication
and unnecessary cost, the board and
the investment community will want to
hear the specifics.
Benchmarking cost reduction efforts
is a must, but it is an exercise that has
to be sensibly executed, says Clive
Lewis, head of SME issues at the
Institute of Chartered Accountants in
England and Wales. Software can help
with the detail, he says, but what really
matters is having an agreed process
that fits the organisation.
“The board must agree KPIs that are
relevant to the business. The problem
with cost reduction is that some costs
are relatively fixed and some vary with
the level of activity, so keeping an eye
on costs in absolute numbers is
difficult,” he adds.
For Barrie Brien, CFO and chief
operating officer at marketing group
Creston, being able to demonstrate
cost management disciplines is
important when income is falling
steeply. His sector endured a difficult
summer in 2009 with sharp declines
in advertising revenues and Brien has
needed to show the investment
community that the business has
the ability to manage costs in such
situations more than usual.
“We manage our business to
KPIs. Revenue per head shows
the level of activity. Profit per head
shows efficiency.
“Salary cost to revenue is very
important, as is operating margin,
since we are a people business.
Internally and to the City that’s
how we get judged from a cost
management perspective.”
Creston consolidated its call
centres and online market research
panels in order to eradicate waste.
“Any investment we make, we try
and look at it from a group
perspective,” says Brien.
While the current conditions are
exceptional, sudden falls in income in
his sector are nothing new. “Even in
good times, you can lose a big client
and take a large hit on income,” he says.
Run the numbers
Regularly running the numbers to look
at the impact of losing key business is a
familiar discipline. “In this industry that
is a very well-trodden path,” he says.
At the Co-operative Group, CFO
Martyn Wates says benchmarking the
business against competitors has
proved an invaluable starting point to
the group’s cost cutting initiative.
Profit margins, working capital,
debtors, credit terms – all were
assessed and measured against
the market.
The finance department then took
the lead, working with operational
teams to assess how the business was
doing month-by-month against agreed
reduction targets.
The result was a £150m year-on-
year improvement on the working
capital position, largely thanks to
rallying everyone in the business to
the cause of cost-reduction and of
recording what happened so that it
could be communicated internally and
to the wider world.
“Finance is just a record of what
happened in the business. If you
don’t make a difference at ground level,
nothing changes,” says Wates. I
16 THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST
ONCE YOU’VE IDENTIFIED WHAT SAVINGS CAN BE MADE, YOU
NEED TO DEMONSTRATE YOUR SUCCESSES TO THE BOARD,
THE BUSINESS AND YOUR STAKEHOLDERS, SAYS LIZ LOXTON
BENCHMARK AND COMMUNICATE SAVINGS
What’s
your story?