Continual - Institutional Cost Reduction, Business Expense Management
Bigger, Better, Smarter Cost Reduction Strategies
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Continual Insights

What you don't know costs you money.

Ten Missteps of Cost Reduction

By Justin O'Rourke, @justino365
VP of Client Development | Continual

1.       Arguing Isn’t Enough.

Everyone knows someone who thinks they can “negotiate anything.”  This person won’t leave a car lot until they feel like a winner, and will boast about the power and influence they think they had over the sales manager.  But the extent of their ability is limited to simple tit-for-tat arguments, and the willingness to stubbornly sacrifice as much time as is necessary to get what he wants.  At the end of the day, they probably didn’t get the best deal they could.

In industrial and organizational cost reduction, negotiating without insight and expertise to backup your requests will rarely achieve a bottom-dollar price.  Additionally, simple rate negotiation only tends to be a small portion of the savings.  In many expense areas, self-inflicted errors occupy the lion’s share of the overspending.

2.       Buying Power Isn’t Always King

Many large businesses assume that the terms of their agreements are untouchable because they used their purchasing volume as leverage.  In reality, the only thing that volume may be leveraging is a pair of basketball tickets from the sales representative.  In some expense areas, organizations can find savings by dividing volume into sub-accounts and taking advantage of small business or unpublished rates.  This should be left to an expert with knowledge of current rates and programs.

3.       Letting the Wrong People Make the Decisions.

When reducing cost, it is important to include stakeholders.  However, final decisions should typically be made by the organization’s financial decision maker or the person responsible for the organization’s big-picture strategy.  Lower-level pushback against new ideas, products, services, and consultants can perpetuate the status quo.  The cost of ego can be substantial!

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4.       Aimless Reduction

When reducing cost, don’t put on a blindfold and start hacking away.  After getting experts involved, plot opportunities on a BCG matrix (see Cost Reduction Priorities Matrix).  Focus on the opportunities with high savings potential and low time investment, working your way toward opportunities with low return that may take a long time to implement.  Opportunities in the Priority 4 Quadrant may not even be worth the time invested.

5.       Group Purchasing Isn’t Always the Best Option

Time after time, business leaders utilize group purchasing organizations (GPOs) with the assumption that they will acquire discounts akin to that of only Fortune 50 companies.  However, these GPOs typically offer their members blanket discounts, rather than customizing discounts to match the characteristics of the spend.  When considering a GPO, identify those that tailor the discounts to your organization’s characteristics.

6.       Assuming Lack of Competition Means Savings Don’t Exist

Many organizations see certain expenses as a “necessary evil” of doing business because other options are not feasible or available.  For example, in many regions, there is no competition for gas and electrical service.  Since every business must use the regional utility provider, customers do not assume there is no possibility of negotiation or reduction.   However, with the utility space being heavily regulated, there may be a large variety of opportunities to save money and get the same service currently received.

7.       Forgetting about Progress

Remember, your job is to increase value and generate revenue.  Cutting cost strengthens a business and minimizes risk.  It does not grow a business.  Focus your energy on your organization’s progress and let cost containment experts.  Find a firm that utilizes individual experts in each expense area and takes the time to understand the specific goals of your organization.  A cost reduction firm that is only focused on slashing cost will deliver recommendations that are not in the best interest of your clients, products/services, and employees.

8.       Paying for a benchmark analysis

Some of the largest consulting firms in the World will be happy to storm your office with a team of ten junior MBAs, perform a pricing benchmark analysis, and send a bill for $20,000.  But organizations usually are not interested if they are paying the same as businesses of similar characteristics if they can confidently say they pay the lowest price possible.  Rather than shelling out money for an analysis, find a solution that will get you the lowest pricing.

9.       Purchasing unnecessary software

Older generations do not trust computers enough, while younger generations trust them too much!  There are a variety of software products that claim to be turn-key, out-of-the-box solutions to cost savings.  The software entices organizational heads to believe they will experience correct pricing every time.  However, such software products are not nearly as robust as its developers claim.  For example, no small parcel shipping system on the planet can consistently ship packages for the lowest price.  In fact, 15-20% savings opportunity tends to remain after implementation of such software.

10.   Forgetting to review

“Set it and forget it” is not a wise policy for cost reduction.  If your business is changing at a rapid pace, your vendors’ businesses probably are, too.  With industry quickly evolving, it is important to periodically review your expenses to ensure that your spend is optimized and alternatives are not appropriate. 

Justin O'Rourke
Negotiating with Vendors, Not Against Them

By Justin O'Rourke, @justino365
VP of Client Development | Continual

The closer you are with your vendor, the more uncomfortable negotiating new agreements, rates, and discounts can be.  Furthermore, if you have one of those great service representatives who responds to you immediately, stops in to ask about the family, and sends a decent bottle of wine at the holidays, you probably prefer to preserve the positive relationship.  Consequently, your desire to engage in negotiations means that both your vendor and service representative are probably going to lose money.  So, how do you self-advocate for your financial best interest without destroying the goodwill between you and your vendor?  Here are a few tips…

1. BE TRANSPARENT

Explain to your service rep that you are engaging in cost-cutting measures and are trying to find ways to keep service with their company, but are also seeking alternatives.  They won’t be excited about it, but this respectfully sets the stage for the vendor to sharpen their pencil, get creative, and find ways for you to save money with their service.

2. ASK A LOT OF QUESTIONS

Rather than storming through the gates and voicing a list of demands, start by asking questions.  Not only will you learn more about the savings possibilities, you will also be able to gauge your service rep’s willingness to get creative.

3. PICK UP THE PHONE

You cannot avoid an uncomfortable discussion by hiding behind the computer.  In fact, lengthy emails bullet-pointing your demands may be the catalyst for an even more contentious relationship.  Too often, negotiating by email makes both parties seem like overzealous litigators.  Additionally, making a call, or holding an in-person conversation allows you to pick up on the verbal and non-verbal cues that do not exist in written communication.

4. JUSTIFY YOUR REQUESTS

Start by getting as much data as possible.  Your negotiation demands will carry a lot more weight if you can justify “why” the request makes sense.  Not only will a dose of logic get you what you want, it will help your rep understand where you are coming from.  Even if they are not able to meet your specific request, understanding your point of view might motivate them to create additional savings elsewhere.

5. INVOLVE EXPERTS

No matter how skilled of a business leader you are, no one person can be a great negotiator unless you fully understand the service that is being negotiated.  Industry-specific third-party negotiation experts are available for almost every expense area imaginable.  By utilizing a third party with a high level of expertise, you can gain high-level insider knowledge, outsource the uncomfortable conversations, and achieve greater savings.

FINAL THOUGHTS

Vendor representatives are often just number gatherers who do not know exactly what their sales managers can do to save an account.  They are the middleman who needs to advocate for both their employer and client.  So, when negotiating, gather all your data, make justified demands, and be respectful.  Don’t shoot the messenger.

Establishing a Gainsharing Incentive Program

By Justin O'Rourke, @justino365
VP of Client Development | Continual

Gainsharing, a incentivized compensation program that shares achieved savings or revenue with those impacting the savings, has become an increasingly popular way to reduce some hard-to-manage business operating expenses.  While gainsharing programs can result in benefits to the workforce beyond greater paychecks, implementing gainsharing programs to reduce waste can be challenging.  To implement a successful program, an organizational leader must communicate the program effectively, involve the appropriate stakeholders, and maintain momentum after savings are achieved.

It’s Not (Just) About the Money

Last time you stayed at a hotel, did you notice the little sticker on the backup roll of toilet paper asking you to be environmentally conscious by using the other roll first?  While the use of this message may fall under an environmental element of the hotel’s organizational strategy, the primary function of that sticker is to save money by ensuring housekeepers are not throwing away partial toilet paper rolls.  Although the sticker’s primary purpose is cost savings, influencing guest behavior would not be nearly as effective if the sticker asked to finish the other roll to help the hotel save money.

So, how do you deliver your gainsharing message?

Just like the hotel guests, your message might be better received if it is not just about the money.  For example, here are the two ways of introducing an employee gainsharing program to reduce paper spend:

The Easy Way: “We spent too much on paper products last year, so we are paying employees a percentage of what is saved next year.”

The Better Way: “We used too many paper products last year.  Reducing our carbon footprint aligns with the corporate citizenship component of our organizational strategy.  To do so, we are introducing an incentive to eliminate unnecessary use of paper products.  Any savings on next year’s paper spend will be shared with employees at the end of the year.”

The “Better Way” approach not only entices the employee by presenting a financial incentive, it draws upon something bigger than a self-serving monetary reward.  For some employees, that “something bigger” will be environmental consciousness.  For dedicated employees, their motivation could just be a matter of optimizing the organizational strategy.  Either way, it’s about more than just money.

Engage and Empower Stakeholders

Good business leaders often look for ways to increase employee engagement and buy-in.  They don’t want to gift full governing authority to their staff, but they recognize the need for employees to feel like they positively influence their workplace.  This is because autonomy and employee buy-in has been shown countless times to increase job satisfaction and employee performance.

Let your employees play a substantial role in determining what actionable steps will be taken to reduce spend.  In some areas, they may have better ideas than the management team.  If employees collaborate to create their own plan, they will be more likely to implement the plan.

Continuing Success

After the first term, you may feel like savings in the expense are may have been optimized.  If you are right, your team will find it difficult to make themselves extra money if the benchmark has been reset.

After the first year, you have a few choices.  First, you could reset the benchmark to encourage staff to achieve even further savings in the expense area.  Consequently, if the expense area is already optimized by the last term’s efforts, employees’ attempt to achieve further savings may be damaging to the business.

Your second option is to discontinue the gainsharing program altogether.  However, discontinuing the program puts you at risk for employees to fall back into old habits.  Ideally, employees would have changed their behavior and developed better habits during the initial term and will no longer need a financial incentive.

The third option, and perhaps the most effective, is to shift the gainshare focus to another expense area.  While you are relying on the formed habits of employees to sustain the savings in the primary area, the continued integration of savings into organizational culture creates additional support to the initial expense area.

Overall, gainsharing can be an effective method of reducing waste in the workplace.  Business leaders can see positive reduction in waste by aligning the savings initiative to organizational strategy and allowing employees to drive the change.  By getting managers and supervisors on board with the savings plan, the business can ensure that employers are receiving the right support to drive a long-term waste reduction plan.

Continual Nominated for Rising Business Star Award

Continual is honored to be a nominee for the Rising Business Star Award.  This award recognizes Chamber member entrepreneurs who have been in business less than three years.  This award recognizes that starting a business requires a unique blend of vision, energy, perseverance and talent.  It is given to a business that has gotten off to a strong start and exhibits the potential for continued and consistent growth.

Additionally, Continual's affiliate, Ship-Rec Logistics Inc., is nominated for the Business Excellence Award. This award recognizes a business that has created a positive and long-standing impact in the community.  They could have expanded facilities, made capital improvements, hired additional personnel and continue to demonstrate leadership by their commitment and support in the Chamber and community activities.  The business must have been in business at least three years and be a member of the Chamber.

Nominees will join other Chamber members and Lt. Gov. Rebecca Kleefisch at the Chamber's Annual Awards Banquet on Wednesday, Feb. 8th.

For more information on nominees, click here.

Justin O'Rourke
Continual Awarded Startup of the Year

Continual is honored to be the recipient of the Columbia County Economic Development Corporation's Startup of the Year Award.  Continual's affiliate, Ship-Rec Logistics Inc., was also nominated for Small Business of the Year.  Both awards are based on significant business accomplishments and community contributions.

For more information on award recipients, click here.

Justin O'Rourke