Could You Do Better Than 43%!?

April, the beginning of the financial year for many businesses.

2023/24 is likely to be another year of disruption, although we are seeing business confidence grow however a “return to normal” is likely to be a bit further over the horizon.

As you look at your budgets for next year there is likely to be a gap between the margins and bottom-line numbers you want to deliver and what your current forecasts indicate.

You’re left with 2 Responses:

1. Accept the numbers and recognise 2023/24 as another transition year, or
2. Put something in place to close the gap.

That something to close the gap is not the “CFO balancing line”.

There is a risk you seek to close the gap solely through focusing on your cost of goods sold.

These direct costs tend to be the most visible within an organisation, with a clear budget owner and accountability.

These tend to be costs that are well controlled, you know the right suppliers, the right processes, and the price you should be paying.

There is a role here for maximizing efficiency, but it's not the only place to look.

That leaves 2 places to look for efficiencies, one obvious and one that tends to be ignored.

1)?? Staffing: tends to be one of the largest cost areas for any business, reducing headcount because of delivering efficiency gains, outsourcing or ceasing of operations is a sensible choice.

Slashing staff costs as a kneejerk response to financial pressures is a bad choice, this will slow down the path to future growth and will disengage the employees you have left.

Tread carefully with staff reductions.

2)?????Indirect spend / overheads: the place that tends to be ignored. These costs tend not to have an accountable budget holder.

There is often little control over the selection of these suppliers, how they are managed, and the price paid for these goods and services.

Clarity at a granular level is one of the biggest challenges when it comes to reviewing overhead costs, it is one of the reasons they are often ignored.

Often when these areas are reviewed it’s a quick google or ring around, a vastly different process compared to how organisations ensure best value across their direct costs.

This is not how a review of your overheads should be approached.

Whilst overheads account for a smaller proportion of the cost base, a 15%-20% saving will help close the “CFO balancing line”.

This must be a place every CFO looks to take cost out ahead of the challenges ahead.

Is it time for you to consider your process and how you can systematically review your overhead costs?

The Slippage Challenge

Even with the ideal savings / efficiency program there will always be some slippage.

The question is do you give the organisation the actual amount you need to save, or do you increase the target knowing that because of slippage you will need a buffer?

If the organisation thinks you have inflated the gap, you lose buy in, but if you go for the lower figure, you risk under delivering.

Top Down or Bottom-Up?

• Top-down targets have the risk of hitting the most efficient parts of your business, the assumption of fairness should not be the driver.
• The bottom-up approach ensures buy in but also needs strong project management to ensure projects deliver with clear project briefs and milestones to track progress.

What incentive is there for a budget holder to offer up savings in a bottom-up process?

Parameters must be put in place for what is an acceptable scheme alongside a clear and transparent plan of the total savings required and how this aligns to the overall business strategy.

For example, if the business strategy is to invest in your sales staff to grow the business, cutting sales staff by 10% to save makes little sense.

Are You Doing Better Than 43%?

• A study from Gartner showed that only 43% of leaders achieve their savings targets.
• The same survey found that only 11% of businesses sustained these savings into year 3.

These are 2 astonishing statistics.

What Can You do to Increase Your Savings Delivery?

• Focus upon the right costs, include targeting your overheads or any areas you don’t traditionally review.
• Don’t look at cost reductions through just one lens, the airports slashed their staffing as a response to Covid through a finance lens but failed to look at the implications for the future.
• Create capacity to take on growth and innovation opportunities, keep one eye on delivering your strategy.
• Invest in a PMO to manage your savings, this is key to delivering higher than 43% of your target.
• Undertake post implementation reviews which will ensure you adopt learning ensuring that a higher percentage of savings than 11% make it to year 3.
• Consider external support where it makes sense, experts that do this day in day out will know where to look to shortcut your learning curve and deliver savings quicker.
• Give all parts of the business an efficiency target, but a differential one. All areas can drive efficiencies, but it makes no sense to give your most efficient line the same target as your least efficient one.
• Drive operational efficiencies rather than slashing costs, this is shown time and time again to be the best response because when growth returns, operational efficiency will give a strong base to build from.
• Cost avoidance, some CFOs exclude this as a saving, but for me if your costs are going up 5%, if you can do something to avoid this, it helps the business and should be encouraged.
• Don’t just plan for one year, look across a 3-year rolling timeframe.
• Have a process to impact asses your savings across the organization, there might be knock on impact that has been missed, so a process to review the impact across the organisation before the plan is approved should be in place.
• Look at spend to save options, pay for an energy review, invest in new capital, training or project management to ensure a return upon investment.
• Be clear on timescales for savings, savings plans that start on day 1 of the financial year and deliver evenly across the year should make you nervous, this rarely ever happens in practice.
• And finally monitor performance on at least monthly basis with clear lead and lag indicators to ensure you deliver.

There are steps you can take to ensure your margins deliver, but leaders need to create a culture of change and innovation, encouraging ideas bottom up that align with the organization's strategy.

If you want to improve your savings delivery, then read on.

That’s where my team and I might be able to help.

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Expense Reduction Analysts (ERA) are procurement and cost reduction experts, we work with small companies right through to instantly recognisable brands like BT, DFS and Ikea.

What makes us unique, our cost specialists, all devoted to their specific area of expertise which means we can use our knowledge and buying power to rapidly validate your suppliers, processes, and prices across a range of indirect cost categories.

Unlike other consultancies, if we don’t deliver direct savings, there is no charge.

To ensure savings deliver, we stay alongside you for 3 years, reviewing and auditing your spend each quarter to ensure the savings and process improvements we promised, deliver.

??If you would like an exploratory conversation then please email me at [email protected]??