[Era] the financial-director_cost_control_checklist


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[Era] the financial-director_cost_control_checklist

  2. 2. JANUARY 2010 THE F INANCIAL DI RECTOR GUIDE COST CONTROL CHECKLIST01CONTENTS 2 INTRODUCTION How to make savings 8 PURCHASE LEDGER Considerable savings can 13 INCENTIVES Incentivising awareness and influence people be made if FDs are willing among non-financial staff to delve deeper will focus their minds 4 COST AWARENESS How to ensure cost control 10 LEADERSHIP FDs can take the lead 14 SUSTAINABILITY Embedding cost control discipline lasts beyond the role in creating a culture will help you survive the end of the recession of cost awareness recession and beyond 6 LOCAL SUPPLIERS Using local suppliers could 12 PROCUREMENT Forging a relationship with 16 BENCHMARKING Demonstrate the help to keep costs down the head of procurement effectiveness of your pays dividends successes to the boardEDITOR 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
  3. 3. INTRODUCTION Sustainable savings OUR COST CONTROL CHECKLIST ISN’T JUST ABOUT IDENTIFYING SAVINGS, IT’S ALSO ABOUT SUSTAINING, MEASURING AND SHOUTING ABOUT THEM, SAYS MELANIE STERN Make cost awareness a business-wide 1 uitting smoking or sticking discipline How can FDs turn good cost control practice into something that lasts beyond recession? Consider local suppliers Q 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 2 Why unbundling contracts from one large supplier and divvying them up across a bunch of smaller players may save you money 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 Look at the bottom two-thirds of your 3 purchase ledger Why stop at the first few lines of expenditure when the bottom of the list around us, demanding they also change their ways – making you unpopular. But the means justify the could be hiding the sustainable savings? ends, and do so over a lifetime. Our Cost Control Checklist moves Lead the creation of a cost control culture along the same principle. Mindful of 4 Making friends and influencing people is as important in cost control as finding the cost hotspots the increasing influence finance directors have across their businesses while cash remains king, we’ve come up with a list of ten Forge a strong finance-procurement 5 relationship Often seen as a problematic relationship, FDs need to get friendly simple ways to instil the habit of cost awareness now and preserve it through better economic days – and with procurement we’ve got ideas on how to bring non-financial departments with you. Make our list part of your corporate Incentivise cost awareness 6 Influencing non-financial staff to build in cost awareness responsibilities can be made easier if the rewards are made clear New Year’s resolutions and with any luck, both the health of your bottom line and your reputation will see lasting dividends. Benchmark your savings 7 Making cost savings sustainable means compiling the right data on where you are and where you’re headed Melanie Stern Editor, Financial Director Communicate your achievements 8 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 Instil long-term practices 9 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 recession2 THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST
  4. 4. 2010
  5. 5. Fly the flag 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 here’s nothing quite like a Swiss-based pharmaceutical giantT global economic crash to sharpen financial minds – after all, recessions astough the one we are going throughtend to bring unnecessary corporate 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 quitewaste into sharp focus. powerful,” he says. They also help to foster better And it’s something Peacock puts hiscross-functional relations: a siege full weight behind to ensure that thementality is adopted and those who rest of the business is also bought intoremain after redundancy rounds pull the vision.together to get the job done. “For a sourcing organisation to be The difficulty is making such successful, it has to be integratedbehaviour stick. It’s one thing to weed into the business,” he explains. “I tryout bad practice when cash is tight to act as a support in ensuring we get– the secret is to keep it out when the that integration.”good times return. And it’s an issue This is often easier said than donethat finance directors would be wise to because, traditionally, procurement staffget on top of now, as implementing have been seen as junior partners in theprocesses that resist a return to old average business and treated as ‘POways will reap huge benefits in the pushers’ who are only to be brought inlong term. after deals have been done. While this The first step that FDs must take has changed significantly in recentto instil sustainable cost-control years, there remain huge differences inthroughout their organisation is to put the maturity levels between companiesin place a well-structured framework and industries.that is centrally managed, but hasrepresentation in every function or Off limitsdepartment and a method of Black spots include areas of traditionalmeasurement everyone can power within an organisation such asunderstand and access. marketing, legal and those Group finance is a good place for departments that are seen as the the long term can be a difficult nut tothis to be managed but, increasingly, lifeblood of the company. For example, crack – a particular bugbear of Neilcentrally-led procurement functions the research and development people Deverill, who has served as global chiefare playing a fundamental role in such would hold all the cards in procurement officer at both Anglostrategies with the chief procurement pharmaceuticals and high-technology Americas and Royal Philips.officer or purchasing director assuming industries and only with full board “Certainly, it is easier to observeultimate responsibility. They are, in support – in particular, the CFO’s – will lasting change when there are systemseffect, the rising star of the corporate procurement be able to successfully in place that prevent recourse toworld, and close relations between tackle these problem areas. alternative or prior practice,” he says.procurement and finance is a recipe for But even with a centralised “Of course, standardisation will bringsustainable savings. procurement function that enjoys full about common systems, processes The CFO of the pharma division at board support, sustaining savings into and cost efficiencies, but I still detect4 THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST
  6. 6. MAKE COST AWARENESS A BUSINESS-WIDE DISCIPLINE 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 profitFour tips same well Low-hanging fruit hostility and resentment to new and loss level.In 2009, is often targeted practices, even when they’ve been in It’s one thing driving savings,Pricewaterhouse- multiple times place for five years or more.” quite another making sure it fallsCoopers published a rather than largerreport that identified opportunities Key, therefore, to instilling long-term to the bottom line and doesn’twhy cost reduction G Failure to address cost control and margin improvement get absorbed by the businessattempts fail cost managementG Lack of a strong and control is to embed processes by which the unit. This includes year-on-yearfoundation Companies focus entire organisation must work to. And productivity improvements.Companies that don’t on reducing costs these processes must be developed But, as Deverill notes, not all FDshave a full not spend cultureunderstanding of their G Inability to and managed centrally. see the potential that such strategiescost baseline will have measure results Successful demand management and processes hold. FDs “are good atdifficulty identifying Cost-reduction isopportunities often lost in annual is a good example of a strategic getting cuts,” he says, “but for the mostG Dipping into the operating results process which can have immediate part they are blind to the other side.” I THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST 5
  7. 7. Local fare COULD SPREADING CONTRACTS AMONG LOCAL SUPPLIERS SAVE YOU MONEY AND REDUCE SUPPLY CHAIN RISK? ASKS DAVID RAE hink global, act local’ is a businesses that buy there, whileT well-worn cliché used by everyone from chief executives to town planners to describean approach which encouragesdecisions to be made only when the 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 thecomplete picture has been taken into original calculations that the decisionsaccount. But in today’s economy, it were based upon may no longer beadopts a more literal meaning. valid (see box). The biggest impact on business Research carried out earlier thisduring the past thirty years has been year by the Procurement Leadersthe relentless growth of globalisation, Network and BrainNet Supplymade possible by huge advances in Management Group among morecontainerisation and port technology than 150 chief procurement officers,and ever-more complex supply chains. Changing tides in global purchasing: But if the past 24 months has focus on cost-efficiency anddone nothing else, it has brought into sustainability, paints a picture ofsharp relief the risks inherent in such how purchasing decisions are set tomodels. Massive commodity price change subtly over the coming years.volatility has led to the cost of fuel, at The research found that whilebest, being difficult to predict and, at quantitative factors such as labourworst, to become crippling. Product and raw-material costs continue toquality problems, such as Mattel’s dominate the decisions, less tangibleinfamous recall of hundreds of factors such as flexibility in productionthousands of toys due to a lead-based and logistics and access to a highlypaint being used in their production, qualified workforce and innovation arehave brought into focus the risks more to the fore. And while ethical andinherent in such relationships. environmental considerations still play Often, the financial stability of a relatively small role, this is set to grow third of the CPOs surveyed in the studyfar-flung suppliers is also difficult to considerably in the coming years. said that the local-for-local approachpredict and reputational issues of would take on a more important role indealing with suppliers in other corners Local sourcing their company in the next few years.of the world, which western customers But one development which continues “For several years now, many largeknow little about, seem to crop up to gain momentum is local-for-local multinational companies have beendaily. In short, the risks in global supply sourcing – where local markets are employing a strategy where they act aschains are huge — and growing. served by local suppliers. It’s a a local player in their target markets,” Neither can the benefits of global relatively new concept which is being says Sven Marlinghaus, partner andsourcing be taken for granted, as they driven by a combination of the risks managing director at BrainNet Supplyonce could. Increasing inflation and the and increased costs listed above, Management. “Over the next fewrise of the middle classes in developing combined with demand from emerging years, we’ll see this trend intensify.” Ascountries has led to subsequent economies and an increased tendency such, Marlinghaus recommends thatincreases in the costs to western towards protectionism. More than a large companies develop sustainable6 THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST
  8. 8. CONSIDER LOCAL SUPPLIERS 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 ofprocurement models which include emerging markets. its northern, central and easternboth international and local solutions. According to the company’s CFO, European business. Panasonic has certainly benefited. Makoto Uenoyama, local sourcing “But we decentralise our technicalThe electronics giant is using local-for- efforts will play a big part in the future of experts, like facilities managementlocal sourcing to meet the demands of its growth in the Bric (Brazil, Russia, and even marketing or IT. We have established a central basket where all Cost control and inflation requests are going in, we process it Low-cost country sourcing decisions made on basic volatile over the past two years, reaching a peak of and then give it back.” cost considerations are no longer valid. Rather, total almost 12,000 in June 2008, before plummeting to In theory, governance and control cost of ownership calculations, which take into 650 in December and rallying to the 5,000 mark as account the impact of inflation, currency fluctuations, this supplement went to press. is maintained centrally, while the freight and transport rates, staff retention issues, Costs for transporting a standard 40-foot benefits of local sourcing in categories supplier on-boarding and risk mitigation must be used. container between China and the UK are now of spend which are strongly influenced The Baltic Dry Index, for example, which is used hovering at $3,000. In the dark days of the as a measure of the cost of dry freight, has been downturn the rates were, literally, zero. by local markets, such as marketing, are still accrued. I THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST 7
  9. 9. What lies beneath BUSINESSES ARE MISSING OUT ON SAVINGS IN THE PURCHASE LEDGER. THEY RUN OUT OF STEAM AFTER THE FIRST FEW LINES OF EXPENDITURE, SAYS MALCOLM WHEATLEY n any business, the provision of In practice, it turns out, under-pressureI drinking water from water coolers is an essential, though not a major, item of expenditure. Even so, atMoorfields Eye Hospital in London,contracts officer Aitor Cisneros wanted 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: significantto be sure that the hospital was getting potential for cost reduction, withthe best possible deal. no clear route to achieving it. With 43 coolers in and around thehospital and its outreach clinics – each Anything’s possibletypically costing £6 to refill with a So how can FDs and the finance19-litre bottle of water – the annual cost function get involved? How can theyof around £1,000 per cooler quickly work with purchasing to identifymounted. There were operational costs savings? What kinds of savings aretoo. “We were tied to having lorry possible – and how can they bestdeliveries of water cooler bottles every be achieved?two weeks,” says Cisneros. “We had to Talk to FDs – and procurementfind space to store the bottles and the functions – and some clear messages business. And it’s in the bottomempties were an eyesore.” quickly emerge. two-thirds of the purchase ledger where The solution: mainsfed water coolers To begin with, purchasing functions the potential is greatest. There are morefrom Tana Water, each equipped with must first accept that there’s a case to suppliers, and more ‘maverick buying’hi-tech carbon block filters and answer. Many buyers focus their but because it’s been so neglected,ultraviolet lamps to filter out and kill attention on negotiating new contracts there’s so much more potential.any mains-borne contaminants. with suppliers, supplemented by “Once you start diving into the detail, The impact on cost? Instead of periodic ‘category reviews’ of major there are invariably savings to bepaying £6 or so for 19 litres of water, spend items. And if the potential made,” agrees Julian Seidman, clientthe hospital pays about two pence. savings tied up in the lower reaches of finance director at FD Solutions, aA ‘sleep mode’ incorporated in each the purchase ledger are to be tapped, provider of part-time finance directors.cooler also reduces the hospital’s that needs to change. “On their own, they might not beenergy consumption. “All too frequently, purchasers either significant, but are often easily made “We only have one bottle fed cooler think that the bottom two-thirds are and quickly add up to a big number.”left in the hospital,” says Cisneros. inconsequential, or that they’re already Precisely how those savings will be“Where you’ve got about 30 regular achieving best-value pricing,” says made is down to individual situations,users of one cooler, it definitely Graeme McKinnon, commercial director and once focused on the task, buyersamounts to a huge cost difference if at Expense Reduction Analysts. “They will be quick to spot opportunities.you switch to mainsfed coolers.” couldn’t be more wrong.” In some cases, re-opening price It’s a story that will warm any finance The figures speak for themselves. A negotiations will be the answer. Indirector’s heart – especially in times thorough procurement review can yield others, it will be a policy decision: doeslike these when budgets are under an average saving of between 5 and everyone with a business-providedso much pressure. Yet, in many 10% of its cash spend, research mobile phone or Blackberry actuallybusinesses, these stories are as rare suggests – equivalent to a 20% boost in need that provision, for instance?as they are welcome. profit for the average FTSE-350 Elsewhere, as at Moorfields Eye8 THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST
  10. 10. EXAMINE YOUR PURCHASE LEDGERHospital, cheaper alternatives may be provide such insights as a matter of don’t, in fact, work well together at all.the answer. routine, the prosaic reality in most Research by Professor Adrian Done In some cases, supplier consolidation companies is that obtaining that data is of Spain’s IESE Business School,will be the route to savings. At Allied a work in progress. published in 2009 by finance systemBakeries, explains its procurement The problem: while procurement vendor Basware, for instance, talksdirector Nigel Draper, an annual £5m takes a transactional item-by-item view openly of tensions between the twospend on building services across the of purchasing, it’s finance that pays the functions and contains hard-hittingcompany’s 11 bakeries — involving a bills and has the supplier-centric quotes from a number of thenumber of plumbers, painters and small purchase ledger perspective. procurement executives on the tensionbuilders – is prompting the start of contained in this relationship.just such a programme. Common view “While procurement is typically the “The question to ask is why the One idea is a business intelligence leader across the organisation forsuppliers in question are on the books platform that provides the FD and the spend management initiatives, onlyin the first place,” stresses Tony Morris, procurement function with a common 33% of procurement departmentsprincipal business consultant within the data viewpoint, enabling them to work partner with finance groups to developprocurement centre of excellence at together to identify cost savings. and execute improvement initiativesfinance software vendor, Coda. “Are QlikView is one such platform. Pulling that further the success of theirthere savings to be made by taking the disparate data sources together in company,” Mickey North Rizza,business away from them and real-time, businesses can ‘drill down’ to research director in the procurementawarding it to a bigger supplier at a minute detail, such as the amount and sourcing practice at analysts AMRbetter discount?” spent on paperclips last year. You never Research, reveals. But, whichever tack is taken, data is know where you’ll find savings. In short, the prize contained in thevital. What is being bought, and from The only difficulty: a relative wealth of quieter parts of your purchase ledger iswhich suppliers? While e-procurement survey data suggesting that worth the effort – but will finance andplatforms and spend analysis systems procurement and finance functions procurement jointly seize it? I THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST 9
  11. 11. In the same boat MALCOLM WHEATLEY EXAMINES HOW THE FD CAN LEVERAGE A NEW COMPANY-WIDE COST AWARENESS TO CREATE A LONG-TERM CULTURE running joke in the Daily expenses. A whole series of choicesA Telegraph’s ‘Alex’ cartoon strip is the amount of money the two protagonists, Cliveand Alex, charge to expenses – a jokegiven fresh impetus in the banking crisis – 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 lightsas the two seek to circumvent the or air conditioning, or how much watervarious strictures placed on them by to boil for coffee, eventually influencesenior management. the bottom line. But the corporate austerity heralded For FDs, who are the custodiansby the ‘bash the bankers’ climate of the bottom line, the challenge iscontains uncomfortable echoes of simply-stated. Taking away the powerthe collapse of the dotcom boom a to make such decisions from others isdecade ago. impractical and probably impossible. Then, as now, it was easy to So, how can you set in place alampoon what was widely seen as a corporate culture in which employeesculture of excess. Boo.com, for throughout the business – at all levelsexample – which became the first high- – become more aware of the costprofile dotcom implosion – famously consequences of the decisions thatploughed its way through £125m in they take? And how can they extendexpenditure in just six months. Staff this awareness to whole departmentsand contractors were recruited in large and functions – many of whichnumbers, with one contractor alone jealously guard their budgets andreputed to be earning over £100 an enshrined practices?hour. Employees were encouraged todelay taking holidays by inducements Setting an examplethat included 5-star hotels and One rule is immediately clear: leadfirst-class flights. by example. “Credibility is an issue,” says Peter Lunio, Bristol-basedTo excess associate director at Baker TillyIt’s easy to dismiss such excesses as, Management Consultancy.well, excessive. They aren’t typical “It’s difficult for an FD to bang theand most businesses have policies drum about cost control when theand procedures in place to guard finance function – and its leadership – isagainst the wilder enthusiasms of itself seen as lacking in that respect.”employees with a corporate FDs “set the standard”, adds Claireexpense account. In the real world, Arnold, partner in London-basedthe charge-it-to-expenses mindset Maxxim Consulting.of the Alex cartoon has few parallels. “Good FDs don’t just merely But employees can influence your count the cost of the existing statusbusiness’s cost base in many more quo. They lead from the front in termsways than simply charging too much to of setting expectations: is lunch a10 THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST
  12. 12. LEAD THE CREATION OF COST-AWARE CULTUREplate of sandwiches, or a trip to a At Salford Royal NHS Foundation Trust,four-star restaurant?” for instance, finance director and Equally, it’s important to involve and deputy chief executive Tony Whitfieldincentivise people, rather than swoop is careful to link achieved savings to thedown from on high to lecture them. organisation’s frontline deliverables. “I “Make people aware of the cost say to people: ‘I want you to savetargets that the business is aiming for, money – not for the sake of savinghow staff can help make this happen money, but to create the means for usand what this will ultimately mean to to deliver better patient services,” hethem,” urges John Judge, of Judge 3D, stresses. “You really have to place thea commercial management specialist objective in context.”working with a number financial And what of the FD’s interactiondirectors and teams within FTSE-listed with the functions and departmentscompanies and government bodies. within the business, as opposed to “If you work for a large company, individual employees?you have no real incentive to save Here, say the experts, it’s time to bethe company money, so businesses realistic about the perception of an FDshould really think about giving within the business – and involve theemployees incentives to provide CEO, early on.the company with ideas to both save “The FD is the co-pilot, with the– and make – money. CEO as pilot,” is how Sensei’s Follos “A ‘cost aware’ culture isn’t just puts it.about scaling back spending – it’s “The FD has a role to play, but theabout creating opportunities for the chief executive has a bigger role,”company to innovate and grow.” agrees Ian Mackinnon, chief executive of AIM-listed cosmetics, personal careAny suggestions? and household goods contractIndeed, as Siobhan Riggott, a senior manufacturer, Swallowfield.research analyst at working capital “The FD keeps the scorecard, andconsultantcy REL notes, research prods and pokes the function headsamong the world’s top 1000 but, if the operational managers aren’tcompanies by revenue repeatedly on-message, it becomes like pushingshows those that offer incentives to water uphill.”employees – and companies that Which isn’t to say that operationalsolicit their help through suggestion managers – and their departmentsschemes and improvement initiatives – necessarily have the skills to run a– tend to perform better at cash and ‘cost aware’ function. Willingness iscost management. one thing; skills in budgeting and And don’t forget to tailor the procurement quite another.message to the audience. Malcolm “Be prepared to have financeFollos, managing director of the UK people go out into the organisation,arm of leadership consultancy Sensei, and demonstrate to people the rightwarns that FDs can sometimes budgetary control skills, and where theystruggle to articulate ‘big picture’ can find the information and resourcesobjectives in simple, clear terms. that they need,” says Baker Tilly’s Peter A favourite story he relates concerns Lunio. “Finance has an education anda potato crisp factory seeking to cut support role to play, helping people tocosts by minimising waste. do a better job of budgetary control.” Shop floor employees couldn’t really And finally, don’t forget to praise –identify with waste levels expressed in and reward – that better job.terms of percentages – but got the “Use positive praise, andmessage when those percentages communicate great examples of costwere converted into bags of crisps. saving,” urges Arabella Ellis, director of“Just by expressing the measure in a consultancy The Thinking Partnership.different way, the waste figure halved,” “Build relationships by settinghe notes. expectations – not by telling people Likewise, make the motivation clear. what to do.” I THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST 11
  13. 13. FORGE A STRONG PROCUREMENT RELATIONSHIP Love thy neighbour FDs AND PROCUREMENT HEADS ARE FAMOUS FOR NOT SEEING EYE TO EYE. HERE, TWO EXPERIENCED FINANCE HEADS SHARE HOW THEY WORK WITH PROCUREMENT s director of finance for Great is available to spend on charitableA Ormond Street Hospital Children’s Charity, I’m responsible for ensuring our£15m annual budget is managedefficiently and focused on achieving 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.charitable objectives. Implementing a framework for good Our charity does not have an in- procurement practice hasn’t been allhouse procurement specialist, so we that difficult, but has reaped dividends.rely on the skills and talents of our staff Andrew Hibbert is director ofto negotiate the best deals with finance, information technology,suppliers. Each department has its own operations and human resourcesprocurement procedures tailored to for Great Ormond Street Hospitaltheir needs, competitive tendering Children’s Charitytaking place within a framework agreedwith finance. Two sides of the same coin Our activities, including campaigns, I value the perspective procurement must be crystal clear on one question:developing corporate partnerships, brought to the business. But not unlike what are savings measured against?major gifts, community fundraising, X Factor’s Jedward, finance and One saving against a probablelegacies and special events, are well procurement make a double act that overspend could be a triumph for thediversified and this decentralised can misfire badly. buying department, but might showapproach to fiscal responsibility works Only when they each concentrate on as minor favourable variance againstwell for us. their specialism to complement the budget. Finance should work with A collaborative approach to good other can they make effective common procurement to ensure it gets fairprocurement practice engenders a cause. It’s also helpful to hand off to the credit and credibility.sense of responsibility at the ‘nasty cop’, tenaciously working Beating suppliers up on paymentdepartmental level. Each departmental through the detail and driving a hard terms to the point they havedirector ensures that local procedures but fair bargain, leaving operating cashflow problems and can’t supplyare adhered to and encourages their relationships unsullied. is clearly counterproductive.staff to challenge all costs, irrespective Three areas where strong If procurement operates inof origin. collaboration is crucial to both isolation, this can happen. I’ve All departmental budgets are created procurement and the business are seen procurement brought in at thefrom the bottom up. This detailed reporting savings, business perspective eleventh hour to shave another 20%approach is essential when we and data provision. and impose a plethora of conditions.challenge cost variances during our Nothing rankles like puffed-up Finance is well placed to keep thequarterly reforecasting exercise. ‘savings’ that never seem to flow buying department in the know – The internal audit annual work through to a thumping end of year ensuring this never happens. Iprogramme includes a procurement surplus and I strongly believe in ‘one set Carolyn Bresh is co-founder ofpractices audit, giving the directors of authentic numbers produced by Everymind, a consultancy toassurance that agreed procedures are finance’ – that means procurement too. finance functions and wasbeing followed. Savings claimed must tie in to these previously group financial Every pound we save on overheads recognisable figures. Procurement controller at Reuters12 THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST
  14. 14. INCENTIVISE COST AWARENESS being met. They will also need to spend time in different divisions to understand people’s priorities and pressures. Samson has seen organisations set Quid 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 pro quo improvement, cost awareness needs to be linked to career advancement and reward, he argues. Deloitte’s Samson says bonus arrangements that are performance PERSUADING NON-FINANCIAL PEOPLE TO TAKE NOTE OF related rather than solely profit related EXPENDITURE AND FIND SAVINGS IS NO EASY TASK, BUT are effective and, to be transparent, YOU CAN INCENTIVISE THEM, LIZ LOXTON DISCOVERS these bonuses need to be clearly linked to the delivery of cost savings. An even more powerful mechanism, in he past two years have made means putting the message front and his view, is to link career advancementT businesses aware of the need to eradicate waste and become cost efficient likenever before. The lesson enlightenedorganisations will be seeking to carry 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 to cost-reduction programmes. “Some organisations link [cost-reduction] with their efforts to retain key talent. They would typically identify key people and putforward is the need to make these members, managers and staff include them into transformational roles.hard-won disciplines permanent ones. his key message: “Would you spend “These kinds of change programmes Chris Samson, a director in Deloitte’s this if it was your own money? That’s can’t be done off the side of someone’sfinancial services consulting practice, the best test. Every time you meet desk. Some people need to live andadvises companies on large-scale someone, or have a chance to present, breathe this. In some instances, peoplecost reduction programmes. He says or receive a capital expenditure are released from their day role and gothat in order to embed a long-term request, then you apply that logic.” through huge learning curves. Andcost-saving mentality within an As guardian of the company’s ultimately you end up with strongerorganisation you need leadership and financial information, the FD will help organisations when people go backaccountability. “A large-scale cost test whether targets are genuinely to their line roles.” Ireduction 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 THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST 13
  15. 15. In it for the long haul ROBERT ALLISON, MD AT EXPENSE REDUCTION ANALYSTS, TELLS MELANIE STERN HOW FDS CAN EMBED COST CONTROL TO SURVIVE THE RECESSION — AND FAR BEYONDWhat do you think we’ve learned purchase management processesmost keenly from the last – and culture – in order to ensurecouple of years, in terms of absolute best value from all areas ofcost cutting? supply within the company. TheseWith many board directors facing the processes also ensure true cost savingsfirst downturn of their careers, the last are achieved in the future throughcouple of years have brought cost effective supplier management, rathermanagement and purchasing back to than settling for large headline savingsthe boardroom table as serious issues today, which very often do notthat carry real influence over the materialise in the future.company’s ability to reach its strategicobjectives. In spite of this, though, Has the relationship betweenI still see over a third of businesses FDs and procurement changeddoing little to tackle the majority of as pressures on businesses totheir cost areas. find cost savings have increased amid recession?In which areas are businesses More and more FDs are now seeing theand FDs focusing regards cost importance of effective purchasing andcutting right now? its direct impact on cost management.As always, cost cutting starts at the top While this has always existed for rawand works its way down the list. For material costs, what we have seen inmost organisations, this means the first recent times are finance teams realisingarea for cost reduction is headcount that, by working much closer withclosely followed by other major cost experts in procurement, they canoverheads, such as salary and ensure every cost within the businesspensions for the remaining staff. Next delivers best value.to be targeted is often the direct or raw More importantly, by establishingmaterial costs of the business. Very the right relationships and goodrarely will most finance teams get much reporting processes between thebeyond this before other priorities people who buy the goods or in cost control they have takenappear on the radar. services and the finance team, the on in the recession when the cost savings found become economic sun comes out again?What do you think will change sustainable for the long term. That If the focus of FDs turns too quicklythere in 2010 and beyond? should make the entire business unit away from the lessons of recentThere is a real trend now forming in healthier overall and something times and the correct ongoing costfinance teams nationwide to recognise any business will need to achieve if and purchase managementthat effective cost management is not it wants to run efficient operations processes and cultures are notjust about taking a “slash ‘n’ burn” in the UK and compete locally maintained on all areas of spending,approach to cost cutting. Having or internationally. complacency will quickly enter theaddressed the main line costs in 2009, supply chain and businesses willit’s now time to go behind the scenes Do you think FDs are at risk of struggle even more to compete withand establish effective cost and forgetting the valuable lessons leaner businesses elsewhere.14 THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST
  16. 16. 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 fromHow can FDs lead the process control of cost in other departments? the lessons we have had out ofof instilling these lessons Like any form of change, process the recession?as lasting disciplines? aimed at creating a lasting culture With slow growth and an increasinglyLead from the front. Show the team that which recognises the importance of global market for UK businesses toyou are serious about ensuring best always getting best value from compete within, any company notvalue and making savings. If others see suppliers is about leading from the top. operating a best-value culture acrossyou take it seriously, they will quickly So to start, ensure all members of the all areas of the businesses purchasingecho the same habits. board place equal importance on will not be able to match those who do. It’s one thing to do that within the creating this culture. Beyond this, I also believe that the achievement offinance function where the FD holds create the monitoring and reporting FDs in the area of leading a cost-awaresway – but how do they do this if they processes needed to continuously culture will become an attributewant to raise the profile and influence of monitor whether best value is being investors will place increasing value onfinance across the business and keep gained from suppliers. long after the recession is over. I THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST 15
  17. 17. BENCHMARK AND COMMUNICATE SAVINGS What’s your story? 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 s we come out of what has needed to show the investmentA been described as the starkest recession in memory and move into what is beingcharacterised as merely a period ofdeeply difficult trading conditions, cost 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 showscontrol remains imperative. the level of activity. Profit per head What counts now for businesses and shows efficiency.their investors is evidence that “Salary cost to revenue is verycompanies have addressed cost- important, as is operating margin,cutting and cost awareness head on. since we are a people business.Stronger balance sheets and business Internally and to the City that’ssurvival speak for themselves, but how we get judged from a costwhere companies have publicly management perspective.”committed to eradicating duplication Creston consolidated its calland unnecessary cost, the board and centres and online market researchthe investment community will want to panels in order to eradicate waste.hear the specifics. “Any investment we make, we try Benchmarking cost reduction efforts and look at it from a groupis a must, but it is an exercise that has perspective,” says Brien.to be sensibly executed, says Clive While the current conditions areLewis, head of SME issues at the exceptional, sudden falls in income inInstitute of Chartered Accountants in his sector are nothing new. “Even inEngland and Wales. Software can help good times, you can lose a big clientwith the detail, he says, but what really and take a large hit on income,” he says.matters is having an agreed processthat fits the organisation. Run the numbers “The board must agree KPIs that are Regularly running the numbers to look teams to assess how the business wasrelevant to the business. The problem at the impact of losing key business is a doing month-by-month against agreedwith cost reduction is that some costs familiar discipline. “In this industry that reduction targets.are relatively fixed and some vary with is a very well-trodden path,” he says. The result was a £150m year-on-the level of activity, so keeping an eye At the Co-operative Group, CFO year improvement on the workingon costs in absolute numbers is Martyn Wates says benchmarking the capital position, largely thanks todifficult,” he adds. business against competitors has rallying everyone in the business to For Barrie Brien, CFO and chief proved an invaluable starting point to the cause of cost-reduction and ofoperating officer at marketing group the group’s cost cutting initiative. recording what happened so that itCreston, being able to demonstrate Profit margins, working capital, could be communicated internally andcost management disciplines is debtors, credit terms – all were to the wider world.important when income is falling assessed and measured against “Finance is just a record of whatsteeply. His sector endured a difficult the market. happened in the business. If yousummer in 2009 with sharp declines The finance department then took don’t make a difference at ground level,in advertising revenues and Brien has the lead, working with operational nothing changes,” says Wates. I16 THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST