How cost disciplines can drive innovation

An interview with Ian Yates, Director at Barcanet

Interviewer: I saw a quote recently from Michael Krigsman, “No business ever achieved greatness through cost-savings alone“ – but you have a career from helping businesses control costs – how?

IY: It’s a very true statement, but at the same time managing cost is part of every CFO’s agenda and that’s because it plays such an important part in generating cash, which ultimately is what the business has to do or there is no business.

Many businesses are growth focussed, almost to the exclusion of anything else.  Leveraging the fixed-cost base means incremental sales go straight to the bottom line and cash is not a major issue.  But when that sales growth falters and cash challenges occur businesses often react with some real tough measures, redundancy, headcount freezes, travel bans, I’ve even seen Christmas parties being cancelled.

Now, you can argue this is a form of cost discipline, but they are measures that send all the wrong messages to the business, customers and shareholders.  There are better ways.

Interviewer:  OK, but with the economy growing as it is, businesses should be looking to build and grow and not cost cut?

IY:  Well, firstly, over 80% of CFO’s are expecting UK profits to decline by at least 10% in the next 12 months – so maybe its not as positive as we think.

But aside from that I see the pressure building on businesses. Customers are demanding more for less and have little brand loyalty, shareholders are demanding increased returns and quicker as there are so many new investment opportunities and competition is intensifying not only traditional competitors who continue to innovate but new entrants are completely changing the game in most sectors.  We have all seen the stats, Facebook the biggest media company who owns nothing, AirBNB the largest hotel chain who don’t own a property, Uber the global taxi service who don’t own a vehicle.  And this disruption isn’t stopping, automotive is under pressure, so are telecoms and finance, the manufacturing sector has been under pressure from Asia for decades.

But its worth remembering cost discipline isn’t just about paying less for the goods and services we consume.  It’s about becoming more efficient, traditional silo’s working together to changing operating models, release cash and drive innovation.  We need this cash to compete, but we aren’t in a crisis, so this is the absolute right time to evaluate existing and introduce new cost disciplines to a business.

Interviewer:  How does a business go about this evaluation?

IY:  Ok, lets face it, costs are not sexy – especially for revenue-focussed businesses.  Everyone loves chasing the deal, but making sure everyone prints black & white, double –sided doesn’t have the same adrenalin rush.

So this change will take time, energy, leadership and a great deal of skill in knowing when to raise and lower the volume of intensity, when to praise and when to discipline.  It’s a cultural change and you need to bring people with you if this is going to work.

There are two starting points which should be done simultaneously.

Firstly, choosing the cost discipline leadership.  The executive who does more than just sponsor, the support team who are ‘high-fliers’ so it isn’t seen as some form of punishment or graveyard.  This needs people who can take all levels of employee on a journey from their part in implementing efficiencies to the impact on earnings and stock-price – in a really simple way.

At the same time, give everyone in the business the relevant tools and authority to make change happen.  Let me explain that.

At Barcanet we talk about 5 levers – visibility, compliance, consumption, price and process and we use these levers to drive cost discipline.  When I am with a customer or presenting to an audience I like to ask with a show of hands who has a business mobile phone – almost everyone puts their hand up, I then ask them to keep their hands up if they have ever seen their business mobile phone bill – generally its around 10% who keep their hands up.

So there is the first lever, give people the right level of visibility.  This links directly to the 3rd lever – consumption.  If people don’t see the cost of something, they really don’t care, there might be a little voice in the head saying don’t watch the football until you get to the hotel wi-fi, but its not a very loud voice.  I had one customer who reduced data usage and cost by 38% through sharing consumption data with the users – 38%, that’s huge.

Now apply that to any usage, other end-user spends like printing, software.  Another great question to ask when sales guys are present is who has a copy of Microsoft Project on their laptop.  Every sales person uses it once for a customer presentation, then it sits there costing several hundreds of pounds a time.  But the scope for visibility and changing consumption habits is pretty much unlimited.

Interviewer:  I understand the visibility and consumption levers, what about the other three?

IY:  I skipped over visibility a little.  There is much more to that in terms of getting the right insight to the right people in a business to make decision making easier, whether that’s end users, or budget holders, vendor managers through to the board wanting metrics, there is a lot too that.

Compliance is 3 things.  One is making sure you use all the goods and services you pay for – going back to phones or software, there are huge amounts of money being spent every month on services where people have left the business, Concur licenses, Microsoft, Salesforce etc..  The second is making sure you pay what you are contractually obliged to pay, upto 30% invoices have errors on them often financial and invariably in suppliers favour.  This can cost business millions if you don’t check every line item, and most people faced with anything more than a 3 page invoice will check the final number is about what it was last month and pay it.  The third area is compliance to internal policy, anything from PO usage to energy management.  One area we are looking at more and more often is rogue spend, in IT its called shadow spend or consumerisation, but basically spend that isn’t with preferred suppliers or is outside budget or process.  We keep telling customers some of this spend will keep them agile, but some is just mis-management and some may even be fraudulent, ours is not to determine which, but to bring the spend to light.

The price lever is more obvious, but the key with this is you now have meaningful data about usage with that supplier.  So one I know exactly what I am using and when, so when a suppliers offers me a great discount on something I don’t actually use, I know its not that great.  And two, I know everything I am spending with that supplier. I had one customer who knew he spent millions with one particular supplier but didn’t know an exact value or on what.  The supplier had multiple brands and invoiced a mixture of centrally and locally to stores.  Having the visibility allowed him to negotiate better.

The process lever is the most complex and this is where you need the leadership from the business.  We can consolidate all the data, bring insight and what-if scenarios and generate some friendly competition internally, but managers need to set-aside their departmental loyalties for the wider good of the business.  Easily said, but if this happens then collaboration is king and the benefits can be really significant.

Interviewer:  All sounds sensible if a little difficult, what is the size of the prize?

IY:  Yes, some of those leavers are more difficult to implement than others.  But the starting point is getting the relevant data and bringing visibility.  That used to be incredibly difficult with so many difference data formats and a many disparate systems in an organisation.  Today with the big-data analytics technologies, it is much easier.  Having a framework of the five levers means we don’t pull one lever if the benefit won’t be great enough.  That said, we do generally find the more difficult the lever to pull, the more value it returns.

What is the prize, we regularly see 20-50% direct cost reductions in a category through implementing those first 4 levers – the process lever is measured more against internal process and costs and comes with a different measure – but as I said earlier, this can have the greatest impact on a business, transformational.

Interviewer:  Thank you for your time Ian, any last tips you can offer?

IY:  My pleasure.  My 4 takeaways would be;

Push visibility of as much operating expense into the business as possible, give people the tools and authority to make change happen and be careful not to disempower people and over-control them.

Bring the silo’s together without making them defensive, keep them focussed on business outcomes and not on how to get around the system.  Share best practices and build some internal competition, friendly rivalry can really drive collaboration.

We generally work with the finance community as they are seen as the custodians of data.  But its important they aren’t seen as the bad-cop here, they need to be the business partner with the expertise, insight and data to help the local teams.

Above all, recognise cost discipline is a constant process.  Re-engineering, becoming more efficient, releasing cash for growth, there is no destination!  The sooner you start, the sooner the benefits start coming.

For further information, contact Ian Yates, Director at Barcanet
[email protected] or Tel. +44 7868-745705