Many of today’s CFOs are finding themselves overworked. With not enough time in the day and a tight economy putting pressure on their finance department, many CFOs are scrambling to mitigate the impact of increasing wages and health care costs to bring back the perks needed to retain and attract the best employees.
“If CFOs had unlimited resources and time, they could do a reasonable job of uncovering hidden savings in their companies,” says Marylou Garcia, managing director of Expense Reduction Analysts. “But because finding those savings can be tedious and requires an intimate understanding of the inner-workings of each supplier industry to get that last 10 to 30 percent of savings, it’s not practical and not always considered the best use of their time.” Garcia’s experience with clients continues to reinforce that 10 to 30 percent of many large spends could be recovered from the supplier base with no compromise to quality and service.
Smart Business spoke with Garcia about options CFOs have to streamline expenses and optimize savings with oftentimes surprising results.
What are the more common areas in which companies overspend?
There are many areas in which overspending occurs. Most often, however, overspending happens within the category of general and administrative (G&A) expenses because they’re typically not reviewed with a fine-tooth comb the way larger costs, such as payroll and cost of goods, are. The primary reason companies overpay suppliers in this category is because the supplier is motivated to get the highest margin they can and not make it easy to get the lowest price, and it is impractical for procurement departments to have an intimate understanding of the inner-workings of each supplier industry.
Companies’ buying in this category typically comes from multiple sources and could be somewhat fragmented. General items, such as office supplies or telecommunications, can come from multiple vendors. If your company is buying office supplies from multiple providers, the spend per vendor is significantly less than if it were consolidated. That means each supplier doesn’t have much of a reason to offer a substantial discount. More importantly, most companies don’t really have the insider knowledge to negotiate the best pricing with their suppliers.
Within a category, another area where savings are commonly lost is in the review of invoices, which typically aren’t easy to follow or understand. Having visibility into the different areas of expenditures within a category is an opportunity to ask questions, challenge historical assumptions that may have been established many years ago and are no longer relevant, and ask suppliers to validate if they still are. It might be discovered that your company could be paying for things that are no longer important or relevant. Sometimes in a supplier relationship that’s existed for a long time, people get comfortable and there’s not as much incentive to negotiate better pricing. It’s a good practice to review your expenses on a regular basis, and have the negotiation done by someone other than the person in direct contact with the supplier. Lastly, as the market changes, prices change. Unless you’re keeping abreast of what’s happening, it’s easy to miss a better price or alternative that came about because of a process or technology change.
How can busy CFOs find the time it takes to reduce these expenses?
There are third-party companies that CFOs can engage to provide a high-level review of their general ledger expenses. They’ll look at the size of the expenditure per expense category, identify any seasonality, analyze the number of suppliers used and estimate the potential savings/incremental cash flow to the company. The partner will list the areas of potential savings and, based on that, a decision can be made to dig deeper on certain items or find other areas where hidden savings could be found.
Knowing that time is a concern, it is important for CFOs to partner with a firm that has the supplier industry specialists who can bring their knowledge and benchmark data to the table and can structure their processes so that majority of the heavy lifting is done by their team and their intellectual property is solid. It is important for the firm to analyze data at the invoice level, challenge past assumptions and present the facts to their client. Once the savings have been identified, the third party should help the company through the implementation of the project, work with the various stakeholders and supplier groups and monitor the savings to make sure they are realized.
Savings in and by itself isn’t very important unless you know what to do with it. Many companies have important expenditures, either operating or capital, that are not being funded for the fiscal year. It makes sense for companies to pick an expenditure or two that have fallen below the budget line to target, and tie the savings to that expenditure — new software, for instance. Sometimes the savings discovered results in hiring a person to help departments that are understaffed and overworked.
Knowing how little time there is in the day and how impractical it is to have several industry specialists within a company, CFOs are often glad that there are resources available to them to see if they’re leaving money on the table, where it is and how to get it. Having a conversation with a qualified third party is a quick way to begin to address this and increase cash flow without tying up internal resources.
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Marylou Garcia is the managing director for Expense Reduction Analysts, a worldwide network of more than 700 consultants in 30 countries specializing in delivering extra profits for midsized companies through cost reduction. Garcia has an MBA in Finance from the Wharton Business School, has held senior positions in finance, including CFO and Corporate Finance Director for various multinational hotel chains, and has helped many companies in the U.S. and internationally increase their operating margins and cash flow.