Fifteen common sense cost cutting ideas

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  With a forecast of rising inflation putting pressure on costs coupled with shrinking sales in certain industries,  then many businesses will be paying  extra  attention to cost cutting opportunities. In this blog I have identified the top 15 generic opportunities for cost savings that can be applied either directly or in a modified state to almost any business.

Cost cutting should be viewed in a positive light

Done correctly, the benefits of a cost cutting exercise can deliver more than just excellent immediate financial returns. It can also be a vehicle for consolidation of management process and shedding of wastage after a long period of growth, when there may not always have been time to prune and shape the expansion for maximum value.

Each industry will have it’s own specific cost areas that are high on the agenda, but there is also a great deal that is shared across business in all industries.

Fundamental rules for cost cutting exercises

The first rule of finding good opportunities is to look in the most likely places. Natural human weaknesses are a dead cert; poor communication, empire building, hanging on to bad routines, loss of direction and purpose, poor decision making, fear of hiring good people, fear of encouraging good people.

The second rule of finding cost cutting opportunities is to avoid the ones that reduce the value proposition to your customers, the ones that harm communication, especially with the customer and the ones that rely on volatile currency rates or political situations and ones that de-motivate key personnel.

Below is a first stab at creating a universally applicable list of good cost cutting ideas:

1.       Reduce the size of HR and bring most of the hiring procedures inside business units. Let outgoing good people choose replacements and failing that let colleagues do it.
Every person they introduce will save an agency fee, the communications loop is cut to a fraction saving wasted time and effort and the new person will fit the job perfectly and blend in well.

2.       Offer bonuses to all staff and ex staff to help you fill vacancies, not only will you get better people you will save a fortune in agency fees.

3.       Get rid of the call centre and make each account manager responsible for maintaining the relationship with customers, if not directly then directly supervised. Task them to up sell and cross sell at every opportunity and to discover product opportunities and to get on first name terms.  Not only will your turn a liability into an asset through more sales, you will strengthen customer retention and be better informed about new product opportunities.  Every time you solve a problem for your customer, even if your product created it, you are strengthening the brand and deepening the relationship, provided you handle it well.

4.       Share your marketing costs through joint campaigns. Partner with non competitive  and complimentary businesses in your industry to share the cost of your mailings and other marketing initiatives. As well as sharing the cost of the campaign, you may also gain access to their database.

5.       Stop posting letters and use email for everything. It sounds simple, but the mail vans are still delivering sacks full of messages days later at substantial expense when they could have been delivered instantly and for free.

6.       Clamp down on meetings. By this I don’t mean stop them or give them a stigma, they are vital. Make sure they are used correctly and only when needed. Make sure there is an agenda and minutes and they are chaired.  Consider training or coaching prople or even having a meetings baron who chairs all the important ones and supervises the rest.
Make sure that people who work together sit together.

7.       Make sure everyone can type with more than two fingers and has been trained in advanced usage of the basic productivity software packages to get the best out of them. Like email, it sounds like a no-brainer, but the world is full of people who have struggled for years at 50% capacity all for the want of half a day in the classroom.

8.       Install VOIP and use it. If you want to try it out first, you can put Skype on every pc and cut out all costs attached to internal voice communications, this costs nothing, just an email explaining to the staff how to download and use it.
A well chosen VOIP system can also dramatically reduce all of your messaging costs for a moderate initial investment.  This is a must have, just like email.

9.       Negotiate tighter costs on your big purchases, if your market shrinks, your suppliers will shrink too. Give them a chance to secure your business and gain some extra discounts from them.

10.   Combat wage demands by making the staff happier at work so they don’t want to consider leaving. Encourage the people who are gifted in this way to organise sport and recreation groups. Provide child care for pre-school children and after school care to keep young mums at their desks and happy. Organise bulk buying clubs and help your employees to reduce their costs by buying the regular stuff at wholesale prices.

11.   Encourage all your people to work from home at least one day a week, this will reduce their motoring costs by 20% and hence their cost of living by  as much as 5%. It will also motivate them and help to retain them.

12.   Train your managers to show appreciation regularly, Ideally do it by example. This can substantially  mitigate pay demands.

13.   When you need new software consider the open source option first. With the right advice you can discover a great deal of very high quality software with no licensing costs and low initial costs and support costs.

14.   If you develop software hire a good agile project manager to deliver the low hanging fruit quickly and bring benefits in early, this will dramatically improve the business case.

15.   When you make changes, don’t just assume they will work, get away from your desk and make sure they are working.

 

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When is a business case not a business case (part 4)

 Read part one  Read part two Read part three  Read part four

In our previous instalments we discussed the preparation of a business case and calculation of the data needed to prove it.

Today we will be discussing the art of delivering the business case in such a way that it competes on a level playing field with all other initiatives currently on the agenda.

There a re a few fundamental rules to bear in mind when presenting any proposition:

1.       Recognise and understand your audience so that you can directly target a known need or desire with your proposition.

2.       Use the appropriate language and context to present your proposition.

3.       Get your timing right.

4.       Demonstrate understanding of and sensitivity to the operating environment.

 The first paragraph should always be entitled ‘Executive Summary’, but it should be the last one written.

The next paragraph should be a backgrounder that demonstrates succinctly and understanding of the operating environment, I.E. political, environmental, social, technological.  Make sure you don’t fall into the trap of contradicting the CEO. Work form the five year plan or current year plan or what ever is the most relevant document and if there have been significant changes in the operating environment since it was written then discuss it with senior people so that you reflect it accurately and delicately.
You may find for example that the CEO published a plan for robust growth ina bullish market three years ago and the CFO is now investing inwardly in cost avoidance projects while they watch the news with interest for an indication of the way forward.

In this case you need to be able to reflect this in your businss case so that it sets the scene for your cost reduction proposal.
 When it comes to writing down your propositions, bear in mind that there will be two distinct audiences, those who want to scrutinise the details and those who want the bottom line only.
The latter type will very often be relying on the former to take care for the detail for them so it is very important that you address each in the appropriate manner, presentation and language.
In part two we drew a map that linked features to benefits. In this section we will expand this idea further and we will map those benefits to stakeholder driven propositions.

Here is a simple example from my own experience.

Strategy and KPI mapping

 Strategy and KPI mapping

 In the diagram above we can clearly see that the CEO has published a key goal for the current period which is to improve net profit margins by 1 %.
 The CFO has a related KPI called indirect costs/sales volume and he is hell bent on improving this KPI by 1 point in order to meet the CEOs  goal.
The Operations Director is working on a goal to reduce the paperwork element  involved in picking, packing and shipping products, while maintaining or improving delivery success rates

In your business case the value propositions would address each of these stakeholders in his/her own terms and use context to draw an accurate picture of the scale of benefits.
E.G.
The proposed system will positively increase net profit margins by a factor between .2 and .4% in it’s first year of operation and reach breakeven in the first quarter of year 2.

In achieving this, it will increase the costs/sales volume KPI by a factor of around .3 through virtually eliminating the paperwork involved in the picking, packing and shipping aspect of operations.
Additional benefits will be reduced propensity for error in this area that we have not attempted to quantify.
For detailed breakdown, see the financial analysis section.
You will note that this sentence describes the system in terms of benefits that can be readily understood and appreciated by each individual stakeholder.
By quoting KPIs the scale of the benefit is immediately put into context so that you capture the attention of your target readers.

Presenting the figures.
You don’t need to be a financial analyst to figure out that bringing in benefits early has a dramatic affect on the financial results of your project.  If you cast your mind back to part three when we talked about Net Present Value (NPV), you will realise that bringing in, or saving  a million next year rather than the following year, supposing a discount rate of 10% will deliver an extra 100,000 in benefits.  Not only that but it reduces the total investment required, thus improving ROI and freeing up capital for other important projects.

This simple exercise will help you optimise your business case by bringing forward benefits where it can be done.  You may remember that in part one we talked about listing the features and benefits that make up your projects and creating metrics for each feature.
Here is a simple tool we use to prioritise these features.

Tool helps with prioritising features

 If you need to analyse more complex and more data rich cases, then a Pareto chart can be an excellent way to single out the low hanging fruit.
For non financially aware people you may be able to put the benefits in context by taking the ROI and calculating how much extra revenue it would take in order for the business to deliver that same return through extra revenue generation.
In order to make this case rock solid you need to also present at least one potential alternative tactical solution and a do nothing scenario.
In your final analysis, you will compare the do nothing scenario, the tactical solution and the proposed solution and demonstrate clearly the basis for your proposal. 

Project plan
An indicative project plan should be included in order to demonstrate the likely timelines including benefits realisation activities, implications for personnel, budget and  team structure.

The executive summary.
In this section we always place two things:
1.       Our proposal, stated in direct no nonsense language aimed at all relevant stakeholders jsut as we discussed earlier.

2.       Our paragraph of analysis that briefly describes the alternatives and the rationale behind our proposal.

The executive summary should contain nothing but the bare facts and concise value propositions, no rambling intros or winding up paragraphs. It is a business document and it is about cold hard cash so keep it clean and factual and get straight to the point.

Sign off sheet
Don’t forget a sign-off sheet so that they are very clear of the immediacy and urgency and the fact they will be expected to make decisions as opposed to having a discussion.
Presentation

n order to present the business case, our strong recommendation is that you produce three artefacts.

1.       The full business case

2.       A one page summary including the executive summary  and financial conclusions

3.       A presentation of four or five slides demonstrating pictorially, the background, the benefits, the financial analysis, the project outline.

The first  communication should be the short summary sent by email to the stakeholder list along with an invite to discuss it in a formal setting.
The second communication should be a presentation of the business case with opportunities for questions and answers and the full business case handed out about half way through the presentation once the key points have been presented.

  Read part one  Read part two Read part three  Read part four

 

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When is a business case not a business case (part three)

Read part one   part two Read part three  Read part four

In this part I will be talking about  the importance of the financial analysis and the practicalities of putting the figures together.
After all the bottom line in any busines case is going to be financial although individual stakeholder priorities and concerns will play important parts as will the organisation’s history with similar projects and even good old office politics will often play a part.

At this point I would caution that despite the importance of the figures, it would be foolish to present a business case without taking into account the stated aims of the business in it’s short and long term plans and the key performance indicators and critical success factors of the key stakeholders.

If you are able to tie your benefits very clearly and distinctly to the corporate goals and to the personal KPIs of your individual stakeholders, then you stand a much greater chance of getting their attention and you may even be able to enlist their help in fleshing out your arguments.
You will also have an aopportunity to spot delicate or contentious areas that are best played down or avoided.

The approach to financials

Financial decision based on Cost v benefit v risk

When approaching financial analysis for a business case, three subjects immediately emerge as important topics:

  1. Cost benefit analysis
  2. Quanitfying and presenting intangible benefits.
  3. Risk/reward analysis

The reasoning behind our approach is simple.
Ultimatey, your business case is about costs versus benefits so a good estimate of costs is critical alongside of a realistic estimate of benefits.

The majority of projects bring benefit that are not easy to measure in reduced costs or increased profits, but are nevertheless important and valuable.

Given that some benefits are easier to hook and land than others, it makes perfectly good sense to have an indicator of how likely you are to succeed in delivering the benefits and to stay within cost estimates.
This way you are able to cherry pick the projects that suit your organisation’s current appetite for risk and you have an option to delve further into risk management if the potential reward is particularly attractive.

 Positioning the business case
It  is important to position your business case and calculations correctly from the outset and to put in the appropriate level of analysis and checks in collating the figures.
This activity will begin as an outline business case offering your best estimates based on hard data where available and tacit input form key stakeholders to fill the gaps and make adjustments where appropriate. This type of estimation is often described as stake in the ground estimation. It’s purpose is to decide whether a initiative is worthy of pursuing further.

Later after you have received appoval to proceed, you will continue to refine all the estimates until you arrive at a baseline part of the way through the project.

Doing the mathematics

Rule number one;  Unless you are trained in financial analysis, put somebody else in charge of this part of the work and act as the collector of data. If you can’t delegeate it then you are still going to need close cooperation from the finance department to get access to key numbers and you will need them to scrutinise your figures before you show them to anybody else. 

The financial benefits can generally be described as either of Cost avoidance, or Increased revenue. These events have very similar effects on Return On Investment (ROI).
A key measure for most organisations will be ROI and a simple viewpoint can be that the project represents an investment of capital in the hope of achieveing better returns than it could achieve elsewhere.
One of the options for investment of retained capital would be the equities market though the key indicater here is the organisation’s Cost of Capital.  This figure is unique to every organisation so you need to find it out.

Costs

First you need to do some good old stake in the ground estimating of costs. Use as many reliable and respected opinions as possible to get ballpark figures at the start and refine this with as much verifiable data as you can get hold of. You can also try some online tools like Gartner TCO analyst, WIPRO TCA tool, or a number of services available online.

Look through old project budgets if you can and learn from experience to make sure that you don’t leave important costs out. Nothing can erode your credibility quite llike having a glaring ommission pointed out to you in front of the board.

 If you are estimating costs for a new  CRM system for example,  you can begin with internet research and you will find detailed case studies and benchmark costs there, which give a very useful starting guide once you factor in comparisons of scale and other knowns.

Next you can look at the organisation’s history of deliveirng similar projcts. This is a critical sanity check, because not all organisations have the same capabilities and you need to estimate realistically. Look at similarly sized projects and similarly complex projects and look for overall time, scope creep, cost escalations and the obvious areas of weakness.

Factoring this information into your initial estimates will give you a very sound footing for moving forward to attempting an actual breakdown of costs:
Typical project deliverables are a useful way of making sure you cover ebverything; Project planning, management, requirements analysis, licensing, etc until you have a comprehensive list.
You wil then need to seperate the ongoing costs form the capital costs. E.G. Support, annual licenses etc.

In the case of an IT investment I would generally expect to have three columns in my spreadsheet to cover three years going forward.
Now total up all of your costs for each year and make sure to account for indirect costs with a best estimate.
The last step in calculating costs is to apply a confidence level to each calculation based on the maximum you expect it to slip. E.G. you predict that testing will cost £100,000 and you expect that the most it could slip by is  8%. Your confidence level  8% the max figure is 108,000

Tangible benefits

Once you have finished calculating the costs, you can begin to calculate the tangible benefits.
In most cases this is a fairly simple set of calculations such as 20% reduction in returned goods.
cost of a single return = n total saving per annum = n * 20% *average returns level.

Always remember to do simple cause and effect analysis to determine what extra benefits might accrue that could be included and to be aware of any adverse effects that might result. The approach should be the same as with costs, the more collaboration you do, the more beleivable your results wil be and the more buy-in you will get.

Intangible benefits

Bit by bit organisations are coming to accept that intangible benefits are important and should be measured and accounted for. The difficulty is that measurement is as yet not a science and the responsibility of signing off large budgets without masurable benefits is too great for many senior executives.

The reality however, is that intellectual capital, the real classification of these intangibles is a major part of the calpital of every organisation and becomes especially noticeable when valuing a business for sale or valuing an equity. The business with an innovative loyal staff, an attractive location and great reputation is infinitely more valauable as an assett than an identical organisation without these attributes.

Physical and intellectual capital in an organisation

Above is a view that illustrates in a very simple way the part played in an organisation’s value by intellectual capital. The type that might be dismissed as intangible unless you make the attempt to represent it correctly.

One area where some progress has been made is the company Brand.
E.G. A favourite areas of disagreement used to be the expenditue on building and maintaining a brand.  CFOs were reluctant to sanction spendng on what they often saw as “pink and fluffy stuff ” that delivered nothing at the bottom line.
Recently Coca Cola had their brand revalued to $67.5 billion dollars and you can bet your last dollar that it appears on the balance sheet.
Today it is easier to get  formula for calcualting the value of the brand than it is to get a sensible definition of what a brand is, so don’t be put off by apparently intangible benefits. Tackle them and tame them.

There are three approaches that we tend to use most:

  1. Take the same aproach as brand valuation, I.E. how much more would the business be worth with a better reputation in the recruitment market and first call on the brightest talent.
    This type of calculation can be easier to do than seems apparent at first. If you can get hold of competitive analysis reports it will be easier still because the strengths and weaknesses of immediate competitors wioll be listed there and you can aim right at the bulls eye.
    Once you have made an estimate add a sensible confidence level to it and run wih it.
    Once again, remember to be collaborative and to bear in mind the language and culture of the orgnisation.
  2. Identify a KPI that will be significantly afffected by the benefit and discuss it with the owner of that KPI.  Perhaps the HR director is tasked to reduce staff churn and has a KPI measuring this.  Ask her to help you work out the value to the business of imporving that KPI by 1 point.
    Armed with this estimate, predict how mny points you expect to improve it by and then calculate the financial benefit. Again apply a sensible confidence metric.
  3.  Track benefits via impact analysis, represent this on simple fishbone charts and then quantify the bottom line beenefits that can be identified.  E.G.  Improved reputation as an employer -> reduction in churn -> reduced costs of recruitment (£) + More skillful staff -> win bigger projects from competitors ->(£)

Now that you have done the figures it is a simple matter of presenting them in a table so that they can be easily evaluated.

In my example you will notice that I have included my confidence levels on a seperate row so that the reader can take whichever view point he/she wishes.

The only  calculation we use in a standard business case is the NPV. This represents the Net Present Value of a sum of money, I.E the value of that money in todays currency after factoring in Cost Of Capital.
E.G. It is infintely better to have a poundt in your hand today than to receive it in three years, because it will purchase less in three years.  In the NPV calculation we use the same thinking except that rather than inflation we use a Discount Rate that is based on cost of capital, because to better represents the investment options for that capital.

It is key to get the cashflows right i.e. to work out a benefits schedule, because you need to know when cash is coming in and going out if you are to calculate NPV.
Once you have this in place you can use the NPV function in Excel to calculate the NPV for you.

The Payback period is a straightforwar and obvious calculation and the Internal Rate of Return (IRR) is just an interest rate representing the return on the investment of capital.

 

Year 1

Year 2

Year 3

Delivery costs

 (£6,256,871)

 

 

Delivery incl. risk (n%)

(£917,142)

 

 

Ongoing costs

 £0

 £0

£0

Ongoing incl.  risk (n%

£0

£0

£0

Benefits

 £11,896,000

£11,896,000

 

Benefits less risk (n%)

 (£4,664,800)

(£4,664,800)

 

Net Cash flow

 (£7,174,013)

£7,231,200

 £7,231,200

Options

(£1,600,000)

 £66,650,000

£66,650,000

Options risk

 (£45,060,000)

 (£45,060,000)

 

Net options

 (£1,600,000)

£21,590,000

£21,590,000

Discount rate

 15%

 

 

NPV

£3,984,186

 

 

Payback (months)

12

 

 

IRR

 63%

 

 

 Risk analysis

As you will have noticed we built the risk analysis into the individual calculations as opposed to applying it to the whole calculation at once.
If this is a sensitive area, then it is a simple matter to calcualte these elements as an overall cost risk and overall benefits risk and look at best and worst case scenarios.

 At this point we have a fit for purpose finacial proposal and now we need to set about optimising the presentation.