How Back-Office Transformations can increase your EBITDA

Businesses often overlook their back-office when strategizing growth. Companies primarily consider their frontlines when planning their growth strategy, looking for ways to increase sales or cut costs. Back-Office transformations seem less impactful but can have a substantial effect on a company’s EBITDA by improving operation efficiencies, propelling cost savings, and increasing indirect revenue. If your organization is finding itself recycling growth ideas year after year, it may be time to consider a back-office transformation to drive the financial impact your organization is seeking.

Why Are Back-Office Transformations Overlooked?

Before delving into back-office transformations, let’s review why they’re so rarely considered. It largely boils down to the “if it ain’t broke, don’t fix it” mentality, often recited in business, sports, and everyday routines. Decision-makers may be hesitant to consider transformations if they feel comfortable with their current ways of doing things. Factors that influence this hesitance include:

• Comfort with the current routine
• Long-tenured employees and processes
• Lack of trust in outside opinions
• Lack of trust in technology
• Poor past experiences
• Appears to be expensive
• Belief there is a lack of time & resources
• Unable to see the financial impact

Change can be difficult, especially when it feels like a gamble. Now, I am not an advocate for gambling, especially when the odds of success are low. However, a transformation is less of a gamble, as it is high-reward and low-risk. The worst that could happen is low adoption and the transformation never comes to fruition. On the other hand, putting a transformation on the back burner leaves massive growth potential on the table. Think about developing as a child when your parents make you eat vegetables to ensure proper growth and development. It does not sound fun, and clashes with your plans of going straight to dessert. Yet eating those vegetables was instrumental to your long-term health and growth development. Back-office transformations are the same. Sometimes you need to roll the dice and eat the vegetables.

Aspects of Back-Office Transformations

A few aspects of back-office transformations we want to focus on will net the best results:?

1. Operational Efficiency
2. Procurement Cost Savings
3. Indirect Revenue Generation

Operational Efficiency

To improve operational efficiency, organizations must apply process best practices. These best practices can be found throughout an organization.

Technology & Automation: More than half of procurement and supply chain leaders say workload issues and inefficiencies are their top threats that could be better addressed if they were equipped with the correct technology and time. Most of the P2P process can be automated, leading to drastic time savings. With technology, procurement professionals can conduct deeper analysis and identify cost savings opportunities that are more difficult to recognize over email or on the phone. The benefit of transparency is also captured in the checks and balances automation creates. Technology will catch data entry errors and ensure there are approval steps in your back-office processes. Ultimately, automating the procurement process can reduce the cost of processing a PO by 20% and reduce errors by close to 40%.

Inventory Management: Inventory management struggles are common and lead to major negative impacts. Transforming the procurement practice to focus on on-demand purchasing lowers holding costs and eliminates obsolete materials. Many businesses do not do a good enough job homing in on demand purchasing strategies. Personally, I have seen many companies purchase inventory due to favorable pricing only to have it end up stuck sitting on the shelves due to low demand taking up valuable space. These companies then eat the cost and sell the inventory at a discounted price just to get it off their shelves. This is highly wasteful, and no one ends up happy. To improve inventory management, companies should focus on implementing the following strategies.

• Utilize the 80/20 rule – 80% of your sales come from 20% of your product. Focus on restocking this inventory rather than product that does not frequently sell.
• Demand Trend History – Demand can fluctuate based on time of the year as well as market trends. It is important to conduct a thorough analysis on time-of-year demand swings and market trends.
• Create a Forecasting Strategy – Developing a strategy to forecast what products will be in demand and when they will be in demand is critical to optimizing inventory levels and reducing cost.
• JIT (Just in Time) – This is a well-known strategy in lean manufacturing, most commonly known from Toyota’s best practice Kaizen manufacturing process. Just in time is an inventory management technique that has a relationship with manufacturing, supply chain, and sales as you are only producing product when needed. This requires thorough analysis and usually a software system.
• EOQ (Economic Order Quantity) – Economic Order Quantity is a strategy where companies order the minimum amount of product a supplier is willing to sell. This strategy can minimize holding costs, but companies need to know the minimum amount of product they need to meet customer demand.

Standardized Process, Policies, & Procedures: Many companies lack documented Standard Operating Procedures or Policies to govern their processes. When this is the case, employees are trained once and then left to figure out their own routine to complete their tasks without guides to help them. Many end up confused about how much authority they have to make decisions, the way tasks are to be completed, or when they need to seek approval. By implementing proper governance, employees are set up for success as they will know exactly what they need to do, who they need to seek approval from, and give them a sense of autonomy. Such governance also generates indirect cost savings and a reduction in wasteful spend.

Revamped Procurement Strategy

Once the best practice processes have been put in place, it is time to execute and drive cost savings. Studies show that a 1% decrease in spend will increase EBITDA by more than 1% if a company’s spend on non-payroll expenses is greater than its EBITDA. This is commonly the case of most procurement-managed spend. To put the impact of procurement cost savings in perspective, since most companies procurement spend is much greater than its EBITDA, a 10% reduction in spend could result in a 20-40% increase in EBITDA. Procurement strategies to drive cost savings include:

• Direct Negotiation – Ensures no agreement is reached until the terms are mutually agreed upon by both the buyer and seller. This generally results in the buyer achieving favorable pricing and terms.
• Bulk Buying – Generates cost savings through purchasing large quantities of product at a lower unit price. Generally, gives the buyer leverage to negotiate favorable prices and terms.
• GPO (Group Purchasing Organization) – Uses collective purchasing power to obtain favorable or reduced prices, and advantageous terms.
• Creating Competitive Marketplaces – Create a bidding competition between suppliers in the market that drives prices down and improves the terms of the deal to earn your business.
• Utilizing Leverage – Utilize the purchasing power at hand which could include time, supplier financial health, supplier market competition such as alternative suppliers, supplier historical performance, or supplier financial health to gain competitive advantages that drive reduced prices and better terms.?
• Run an RFP (Request for Proposal) – Creates competition in the marketplace that strongly encourages suppliers to make competitive bids.
• Host Sourcing Events – Suppliers compete with each other in a formal process with structured bidding and negotiation rounds, potentially multiple rounds, that can lead to reduced pricing for the host.

Indirect Revenue Generation

While back-office processes do not directly generate revenue, they can generate indirect revenue through increased efficiency and revamped strategy. Organizations can increase their indirect revenue through the following channels.

• Improved Product Availability – There really is a marriage between procurement and sales, although this isn’t always clear between the two functions. It is sales’ responsibility to generate direct revenue, and it is procurement’s responsibility to purchase the materials or services that are needed to fulfill the sale. With that being said, it is imperative that procurement has an effective strategy in place to ensure product availability, while also ensuring that they are maintaining inventory management best practices and avoid buying too much inventory.
• Faster Time to Market – Effective procurement teams that understand their impact on revenue place an emphasis on time and strategize how to get their product or service on the market as quickly as possible. Faster time to market reduces the chances of missed sales opportunities and it lengthens the revenue generation period. A back-office transformation that implements procurement strategies will speed up time to market and help the organization be a leader in the marketplace.
• Stronger or Developed Strategic Supplier Relationships – Stronger relationships with suppliers, or strategic supplier relationships can help businesses generate revenue by enabling the organization to receive added benefits. These benefits could be access to new products/services, or exclusive deals not offered to other organizations.
• Gained Value-Added Services – Value-added services can contribute to indirect revenue growth by giving organizations competitive advantages. Examples of value-added services that embody this are faster shipping, premium customer support, loyalty programs, supplier-managed inventory, and personalized marketing. It is important for organizations to negotiate for value-added services as it can improve the way they operate, indirectly generating revenue.

As organizations formulate their growth strategies, they should consider evaluating their back-office and the impact a transformation could have on their EBITDA.