Optimizing Spending on Services

Introduction

There is a famous phrase attributed to John Wanamaker, a pioneer in retail and advertising, "Half the money I spend on advertising is wasted; the trouble is I don't know which half." While Wanamaker was referring to only one category of vendor services, the problem of hidden wasteful spending is common in categories as diverse as telecom, banking services, health care, private jet maintenance and management, and waste, scrap, and recycling. The root cause of wasteful spending is the lack of relevant information in the hands of decision makers. When given the relevant information decision makers can see painless savings as high as 50% in some categories of services, with no drop in the level of service. For substantial six and seven figure spends, even annually recurring savings of 10% to 30% can be a victory.

 

This article will help finance professionals:

• Find the red flags that indicate categories with probable high levels of waste.
• Understand and communicate processes to eliminate the waste.
• Delegate the work and minimize decision maker’s time.
• Find high ROI solutions that reduce investment of time and money.

 

Goal

The goal is to painlessly decrease costs of services while maintaining or possibly increasing service levels. There are three possible ways to do this.

1. Eliminate billing errors.
2. Eliminate services you don’t need, or replace underutilized services with cheaper ones.
3. Negotiate better rates on the remaining services where possible.

 

Barriers

This should raise the question – why haven’t all the painless cost savings been captured already? Why is there an opportunity to save money?

 

The answer is that decision makers have been given only some of the relevant information. Vendors almost never tell their clients about all the billing errors, the services their clients don’t need and shouldn’t be buying, and how much the vendor can lower their prices and still be profitable. 

 

To gain more of the relevant information this means someone in your organization must have the time and expertise to find these cost savings, and make sure they are implemented. With many spends this does happen, but in many cases the time and expertise is simply not there to discover and implement everything and money is left on the table. This is a quintessential example of rational ignorance: “Rational ignorance occurs when the [opportunity] cost of educating oneself on an issue exceeds the potential benefit that the knowledge would provide.” [ https://en.wikipedia.org/wiki/Rational_ignorance ]

 

Our suggestion is that decision makers should make decisions. With the proper delegation, other people, including outside experts, can do the research and implementation. This lowers the opportunity costs and eliminates the last barrier.

 

Red Flags

Here are some key red flag questions decision makers should look out for:

1. Do we know what we are spending in each category of services? Is that total amount significant to us?
2. Do we have an inventory of all our services? Do we have granular visibility?
3. How do we know that each item is billed correctly?
4. Is each service we pay for a service we’re actually using? How do we know that?
5. How do we know each service is fairly priced? Do we have an outside advisor or expert who knows the industry and can tell us if each of our services are fairly priced?

 

The Process

The process is very simple.

1. Gain granular visibility in to spending by creating a database that inventories every single service.

2. Then check each service billed to see if there is:

• A billing error.
• An unused service, or one that can be replaced with a cheaper one.
• A cheaper rate to negotiate

3. Each time the answer is yes, implement a fix, tracking it to completion.

 

Visibility

Without visibility into costs one can’t manage them optimally. Visibility is the key to managing any cost. Without it optimal management of a cost category is nearly impossible and excess spending is inevitable. Services unlike materials are intangible. Services are often recurring, so they can be bought month after month without piling up in a warehouse attracting attention.

 

Many firms work as follows.

 

This is a great way to overpay. A vague pool of services is paid for by a bill, and the pool of services collectively helps keep the business running.

 

Few firms if any have something in place similar to the following diagram:

 

 

Many companies will pay every month for services such as telecom. The IT department for example keeps a list (if only mental) of all their important services. The finance department keeps track of the monthly bills. If there is no visibility, never the twain shall meet.

 

With Visibility

Bills are consolidated and broken down.

We can see connections, without always having to flip through paper bills.

 

 

With Visibility we can manage each cost

Eliminating or consolidating unused and underutilized services, fixing errors, and renegotiating rates.

The above example is very simplified. In reality you will need multiple data points for every service. The question is – what are the relevant data points for that service and have they been tracked? Whoever is in charge should be able to answer this question. Then steps can be made to obtain any missing data.

 

A complete inventory of services will have enough relevant data points so that you can answer at least the following questions about each service:

• What does the service cost?
• What is the service? What does it do?
• What business need does it serve?
• Who are we buying it from?
• How much is it really being used?
• Is it serving something we don’t even have any more?
• Where is it being delivered to?

An incomplete inventory is a sign of hidden waste.

 

Without the inventory you don’t have visibility. Without visibility in to what you’re buying, (including the business need, and what it costs,) you can’t manage it.

 

The nature of the inventory reflects the nature of the goods and services being purchased. Inventories help determine if there is a disconnect between the contractual and current market price of the key services the business needs and the actual charges on the bill. They can assist with the RFP process and the accounts payable process.

 

Without visibility companies will have a disconnect between the optimal price of the services that the business wants and the total dollar amount accounts payable is actually paying.

 

Year after year we find most companies pay 100% more than they need to for telecom due to visibility issues, including lack of market data.

 

Gaining visibility is time intensive. To track complex services purchased you can have dozens of data points for every service, and we’ve seen that even 60 person offices can have 100 to 200 services in a complex category such as telecom.

 

Once you have visibility, fixing issues can also be time intensive. Vendors in some categories are notorious for not fixing billing issues and not applying the pricing in new contracts. In other categories prices are subject to creep – increases in price that the vendor in practice obscures from the client. All issues must also be tracked over several months until resolution. Not fixing billing issues in just one vendor category can cost even the small companies we’ve worked with tens of thousands of dollars.

 

Sign of Low Visibility

To review some signs of low visibility include –

• Does your company have processes and the time to actively manage ALL vendor costs?
• Is there an ‘inventory,’ some kind of database giving a granular view in to all services purchased in each category?
• Billing Errors - are your people frustrated with confusing bills, overcharges, and time wasted dealing with vendors?
• Confusing Bills – do your people really understand everything they are being billed for? How do they know and verify the services being purchased, including the true nature of every service?
• Unused Goods and Services - are they unable to know EXACTLY what you’re paying for and if you need all of it? Is detail vague?
• Above Market Pricing - do you know if you’re getting the best rates available? Is it hard to find out?
• Is further time spent just not worth the hassle? Does it seem like a black hole?
• Can the contradiction between “waste of time” and “waste of money” not be solved?

 

Areas with these red flags may be good candidates for intensive review every few years (if not every month if automation is possible.) This is especially true if saving 10% or more would be a win for you. However a consistent process and follow through is needed.

 

If your decision makers in charge of spending decisions can honestly answer that these are not relevant to a spend category, then you have little to worry about. This is almost certainly the case in some categories. Given the quality of vendor data, and how busy decision makers are today, it is unlikely the firm has full visibility in all expensive categories.

 

After Visibility

Once you have visibility, each of the services is analyzed and three questions are asked of each service.

• What is the business need, is it unused or underused?
• Is the charge the one contractually agreed to?
• Is the service over priced in today’s market?

Unused services are discovered and terminated and underutilized services are consolidated or replaced as needed. Vendor’s billing errors are discovered and fixed. Better rates can be negotiated and implemented.

 

Documentation and Tracking

The inventory is used to document what each month’s bill should look like. Alternatively, a document is created explaining what each bill should look like.

 

Whenever a change request is made to the bill, each change is tracked. A change is primarily defined as:

• Fixing a billing error.
• MAC – Moving, Adding, or Changing a service.
• Removing a service.
• Signing a new contract with new pricing.

To track changes, a spreadsheet can be used, or a ticketing or other workflow system.

 

Each time a change is requested from the vendor a new tracking issue is created, and there should be a corresponding ticket or document. It should list the change, when the change was requested, from whom, at what time, the tracking # from the vendor, whether there are any e-mails documenting the request.

 

The next bill is then checked to verify that the change happened. The tracking system or spreadsheet is checked every month for any changes that have not been verified.

 

None of these steps are particularly complex, but they must be performed accurately.

 

As should be clear by now, there is a lot of detailed work to be performed. How can the organization most efficiently remove the money off the table and back in to the organization?

 

Creating Visibility and Lowering Costs Efficiently

There are two solutions -

Delegation and Outsourcing

 

Basically these are two sides of the same coin.

 

The primary constraint is decision makers’ time. Decision makers should prioritize decision making.

 

If cutting a cost no longer takes up a lot of a decision maker’s time, it can move rapidly up the priority list. There is a low opportunity cost. However if making a cost cutting decision takes too much time, it won’t be done. The opportunity cost is too high. Most decision makers have to spend too much time on research in order to make a decision and too much time on implementation of the decision. If decision makers educate vendors and subordinates to properly present information and to implement decisions, they can accomplish much more.

 

Delegation

Depending on your organization the role of the people to delegate to can vary - Internal Auditors, Business Analysts, Network Admin, HR, Accounts Payable, Project Manager, etc. You’ll probably need two people working together. One person will understand the business needs for purchasing the service, the other will understand the process of correctly paying for the service.

 

What you don’t want is an accountant recommending removing services you need because they don’t understand what they’re for. Nor do you want someone in the business approving a bill because they assume it is error free and charging only for services they want.

 

When delegating this process a key point is making sure the people doing the work understand the services, the needs they serve, and the bills for the services. The reason there is an opportunity is because the people buying the services don’t have all the information they need to understand everything. This doesn’t mean everyone needs to understand everything – but it does mean at least one person helping the organization does, and can easily communicate the information as needed to others.

 

Let’s use Telecom as an example, but it could be Waste and Recycling costs or IT support and maintenance charges.

1. For example find an IT person (who understands why telecom is purchased) and someone in accounts payable (who understands paying the vendors) to create an inventory in their spare time. Insist that they make the time.
2. Make sure they understand and account for every service being purchased and what is really being purchased, why it is needed and if it is being billed correctly. Suggest they push back on the telecom vendors for help.
3. They have to make sure the costs listed on the inventory equal the costs listed on the bills. Insist they figure this out, and help if needed.
4. Have them fix any billing errors.
5. Have them withhold payment from firms who refuse to fix billing errors or explain bills.
6. Have them submit to the decision maker any unused or underutilized services. The decision maker approves, the lower level staff executes.
7. The staff should figure out how to easily determine if a quote is worth pursuing, then be open to new quotes or give targets / demands to potential vendors. If a deal is found the decision maker will be given a clear presentation as to why it is a deal.
8. The staff will determine what the cost of the needed services should be based on the existing contract or any new ones. This will be used to document for accounts payable if a bill should be flagged for review. Everyone will know what each month’s bill should look like when -

• Old billing errors are fixed.
• There are no unused services
• New pricing is implemented.

1. Each month’s bill will be easily checked to make sure it is the expected amount. Some firms create purchase orders.
2. Whenever services are added or subtracted the documentation will be updated.
3. Issue tracking must be implemented. Every time a change is made, the change should be tracked. Spreadsheets can be used, as well as other tracking systems (trouble tickets, CRM, etc. that facilitate tracking issues for a year.)

 

While this can be time consuming, if your employees save $1,000 a month for the next four years, or $48,000, wouldn't it be worth them spending many hours every week last quarter? Maybe, maybe not. Sometimes ignorance is rational.

 

If your staffed is too busy on higher priority projects, you’ll have to look at outsourcing – make your existing vendors or new ones do the work for you.

 

The Role of Expertise:

One of the key conditions for reducing waste is not just a process but expertise. There are three key types:

1. Someone must be able to understand the services enough to know what is billed for, why people buy them and what they do, and to evaluate them in context. This implies someone who is a category expert with years of experience and domain knowledge. Such a category expert can be at your company or outside of it.
2. Someone must also be able to figure out why your organization needs the specific services being purchased. While a category expert from outside can often figure this out quickly, at the end of the day this knowledge is known by the decision makers and stake holders in that category of services.
3. Someone must know what prices vendors can and will sell services in the category for, and how to get you contracts at lower rates. This usually means the person has somehow worked inside the vendor’s industry, not in your industry. For example we have colleagues who are ex-bankers, formerly in charge of bank profitability models, so they know where banks are willing and able to cut prices and where they aren’t and how to get those prices reduced without damaging the relationship.

Notice how expertise is very likely divided between people internal and external to your organization. Even if you delegate within the organization, outside sources of expertise will probably be needed.

 

Outsourcing

Making someone outside the company do the work can be even better, they can do all the delegation steps listed above. Or you can have someone else create visibility, and have a motivated outside expert in the field suggest actions for cost cutting, and pay someone else to execute and document the new standard.

 

For outsourcing the key problem is that you don't have an inventory. You need to get usable documentation so you can gain visibility. This is the first step to outsource.

 

Vendor Assistance with Visibility

One possible expertise source is account managers and sales reps. Their firms have the data to give you visibility in to what you are buying. The down side is that their management is motivated to keep you spending money. The other down side is that in areas like telecom the account reps often don’t understand in detail what you’re really buying either. User friendly data or information is often not available. In some cases if you make it about trust and make it clear you’re willing to walk if your visibility issues aren’t resolved, they may be willing to play ball. Of course if they’re like some phone companies we know they’ll let you walk – management may not give the reps the time and resources to help. In that case you’ll have to ask a new vendor to resolve your visibility issues for you. In some cases though no vendors will give you visibility in to your costs, which means their systems will become your problem.

 

Also remember that your vendor may not be able to tell you how their services serve your business needs – this is something that will require research.

 

Getting an expert who isn’t a vendor can give them incentives to have your best interests at heart.

 

Regardless of whether your expert is a consultant, a firm, or a vendor, here are some suggestions for making sure you get results without spending a lot of your valuable time. Hold them to this.

• Make sure they can give you full visibility in to what you are purchasing and should be purchasing. You need an inventory both of you can understand. Without this they won’t be very effective.
• Ask them to make suggestions based on the inventory. Ask them to clearly explain what each suggestion will save and how it won’t affect service levels.
• Similarly, if you have visibility already, but you want to make sure you’re not overspending, you can give the expert the inventory to make good suggestions, saving their expensive time and decreasing time to savings.
• Approve the suggestions you like.
• Have them implement the suggestions you approve.
• Make sure they provide documentation showing real results and explaining what the savings are, where they are in the bills, etc.
• Make sure you have some guarantee of results before you agree to pay them – unless the amount seems trivial.

 

Case Study: Telecom

An accounting firm we worked with, the 5th largest in the USA, had 800 people in one its main offices. They had bought intelligently from their vendors. With so many people they had economies of scale, and could use techniques like Least Cost Routing. The result was that they had a very low spend per employee.

 

What they did not have was visibility in to their costs. There was no inventory document listing all their vendor services, what they were for, what they cost, etc. We created one for them. With visibility we found the following cost savings.

1. They had sufficient capacity to remove an expensive Voice T1 line, and use a less expensive unutilized Voice T1 line they were contractually obligated to purchase.
2. They were paying for 720 phone numbers / DIDs that they weren’t aware of.
3. They were paying substantially over the market rate for International calls.
4. We verified the physical location of all services, and discovered they were paying for large numbers of phone lines that were still at an office they’d moved out of.
5. They’d recently signed a three year contract obligating them to spend a certain amount each month on outbound calls. If they didn’t, they’d be charged a substantial monthly minimum. However they were making no outbound calls on those lines. We discovered that by rerouting all outbound calls to NY State they’d be charged less per minute and recover the money they were wasting.
6. We discovered large numbers of unused phone lines at their office.
7. They had not noticed a large discount on one bill for making outbound calls. If they re-routed more outbound calls down the line they could see a substantial reduction in their long distance bill.

 

With visibility they were able to find nearly 50% savings in their already low telecom spend.

[To touch on health care. Health care costs go up in part because organizations don’t have ways to control:

1. Are we getting our employees the right health care? Are our providers charging us for services that weren’t actually helpful? Do employees have to go back to receive the right care?
2. How do we know we’re paying a fair price for the care received? Would other providers have been better for expensive services?

Since most companies basically get charged by their insurance company based on how much they spent last year – keeping down unnecessary health care spending would decrease one of the biggest expenses. ]

 

There are many areas where vendor services are hard to manage and additional processes and expertise, supplied internally or externally, could result in large savings without reducing service levels.

• Insurance (including health)
• Freight
• IT Contracts
• Print
• Banking (Treasury, Credit Card / Payment Processing)
• Private Jet Maintenance and Management
• Travel and Expenses
• Waste and Recycling
• Office Supplies

 

With this guide we hope more finance and other professionals will see the hidden opportunities to reduce waste in vendor spending.

 

After noticing red flags in large vendor spends, finance can help decision makers understand: What is the key process? What additional metrics and information do I need? How can this be efficiently delegated? What kind of outside help do I need?

 

With the right process and people in place, costs can be dramatically and painlessly reduced in a wide variety of services spends without using up management's valuable time.