Ten Missteps of Cost Reduction
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areas, organizations can find savings by dividing volume into sub-accounts and taking advantage of small business or unpublished rates.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!
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.