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COST CONTAINMENT DEFINED
If you are a manager, with his proverbial back against the
budget wall, this guide is for you, you're the Budget Manager.
If you are a manager looking for the means to save your
department or firm, looking for a way to preserve your
business and the jobs it provides, as possible, this guide is
for you.
If you are attempting to recover a sharp, competitive edge,
but have been told there are no additional funds to achieve
your desired, or mandated, level of productivity or consumer
service, than this guide is for you. If you are a salesman,
accustomed to obtaining above-market returns from buyers who
lack experience in your type of service, this guide could be
your worst nightmare.
I spent the past twenty years in various, operations
positions. More recently, I was hired to trim the corporate
budget fat, and still maintain the business and its employees.
In fact, my mandate at a 1,000+ employee, savings & loan
association was to keep as many jobs as feasible, by denying
revenue to suppliers.
Budget preparers will learn there are many methods of reducing
expenses and to cost-justifying much needed, capital
equipment, which enables Budget Managers to remain employed
and competitive.
This is not to say that every employee will remain employed,
but this process will allow you to have the right people with
the right skills, necessary to perform the desired tasks,
required by your organization.
While at Santa Barbara Savings & Loan, I was able to reduce my
department's expenses by approximately 29% in two years, while
increasing productivity dramatically. My department actually
exceeded greater demands with almost 50% less staff.
A Walk Down Memory Lane
The go-go 80s have been replaced by the go-slow 90s. Without a
doubt, almost any business can survive in a thriving economy.
The true test of a manager and/or a business is how well it
fares when times are tough. In good times or bad, firms that
are formed as "for profit" entities should consider (i) their
percentile of market share, (ii) comparison of business ratios
to industry leaders, and (iii) consumer satisfaction.
The value of measuring your percentage of market share can
never be over estimated. The result of determining your
percentile of the total available business is a firm's report
card. This report card takes your sales revenue and divides
that sum by the total revenue generated by your class of
business in a given geographic area. This information that is
available from your Chamber of Commerce or City taxing
authority. The ensuing figure and other information, including
the number of competing outlets and the number of recent
entries and/or exiting of firms, will allow you to determine
your relative success and allow long term planning. The
comparison of industry ratios will afford you the opportunity
to see how other firms perform in unbiased measures. The ratio
areas include cost of sales, equity, debt and, accounts
receivable. Ratio data is available in most large libraries.
Many managers shy away from this unbiased comparison to
industry leaders because the result may bruise sheltered egos.
Consumer satisfaction is a nice buzz word. Many managers like
the sound the two words make, but pay little genuine attention
to either measuring or achieving that goal. Staffers get so
wrapped up in petty politics and their imagined importance,
that they oftentimes forget just who pays their salaries.
Sadly enough, there are few firms that can see the gold at the
end of the service rainbow. Consumers are oftentimes faced
with two extremes of, obtaining great service at a high price,
or of getting practically no service at a discount price.
There is a simple formula for success that provides customers
with high levels of service and a discount price. One needs
only to look at either K's Merchandise Mart, an Illinois
catalog firm, to see consumer satisfaction practiced as a fine
art. For public agencies, the test is how well their
departments measure up, relative to the marketplace cost for
identical services. While working for Santa Barbara Savings &
Loan, I was given the goal by my good friend Michael Schley,
who was Senior Executive Vice President and Chief
Administrative Officer (and my supervisor) to compare the cost
of operating each of the five General Services Departments, to
private industry. If I could determine that a private firm
would provide printing, mail handling, records storage, etc.,
at the same or better level of service, and at the same or
lower cost then we were providing in-house, my duty was to
initiate a contract with that vendor and close our department.
Enlightened as Mike was, I was given a parallel opportunity of
improving our departmental efficiency to meet the market,
thereby preserving jobs. While our efforts did not result in
the saving of the firm, I am proud of my team's
accomplishments. No doubt, many firms did exactly that in
the high flying 80s. However, many of the people crying the
economic blues today did not receive either training or formal
education about the down-side of the business cycle. From
General Motors to the corner Nail Salon, it seems many failed
to realize that global trading conditions would eventually
become more competitive, as other nations rebuilt, following
World War II.
Too many managers felt our position as supplier to the
world would last forever, that the Pacific & Atlantic oceans
would protect us from the harsh reality of foreign
competition, and that consumers were their oyster. Businesses
felt comfortable giving consumers products with built-in
obsolescence or short, life cycles. For decades, United States
consumers have been abused and held captive by monopolistic
policies and forced to buy shoddy goods and accepting poor
service. We were educated, by way of extensive advertising
budgets, to consume and discard. More than ever, it seems
the United States businesses are heavily populated by
get-rich-quick types, types who value perception over
performance, and equity over ethics. Those types lack the
understanding of the basics in managing a business. They lack
what I term "sweat equity," meaning they did not spend enough
time in the trenches, opening boxes or answering the phones.
Those managers migrated from college to the office, without
obtaining a concept of why they were in business, oftentimes
believing the public owed them a living. On the other end of
the managerial spectrum, many did obtain sweat equity by
starting their own businesses, but did not find the time to
obtain the additional training necessary to comprehend what
kind of ocean they were swimming in. In far too many
instances, the college sharks thrashed and gnawed their way
through the small firm, eating the financial heart out of the
business in their feeding frenzy through corporate life. In
the middle are firms doing relatively fine. They are
successful business persons and are reasonably content with
the direction their firm is headed. For these managers, the
risk of complacency looms menacingly in the shadows. Lacking a
foresight of rough times ahead and, feeling "If it ain't
broke, then don't fix it," these complacent managers are
either unwilling or afraid to explore their comfortable
environment for mismanagement or wasteful spending.
Paradoxically, this type of manager will excuse himself from
action even when his corporate fat is in the fire. He will
often say he can't afford to fix the problem, or his Board is
too preoccupied with more pressing problems to seek solutions
to issues effecting the core of their misery. In these lean &
mean times, managers find solace by concentrating on
superficial solutions and on looking for scapegoats.
As a middle manager for two such firms, I watched senior
managers pay a great deal of attention to the pricing of
Certificates of Deposit and the spread between cost of funds
and the sale of funds, while ignoring the cost of running the
branches or other expenses. For example, bankers can quote
loan profits in a term known as "basis points." A basis point
is a percent of a percent, 12 basis points is equal to 12% of
1% or $0.0012. These same bankers could not be bothered to
understand that they were throwing away $40,000 worth of
obsolete forms a month or were paying too much for
maintenance. To a financial novice, it seems pretty impressive
that money can be viewed in so micro a term. And, it can seem
almost incomprehensible that someone can deal in billions of
dollars with a basis point magnifying glass. That illusion
of economic savvy was easily shattered by the banking crisis,
following de-regulation. For many of us learned that bankers
became fat and lazy, by following the 3-6-3 rule. Pre-1980
deregulation, bankers borrowed your money at 3% (the
traditional savings account), loaned it out at 6% and left for
golf at 3 p.m., thus 3-6-3. As Operations Manager for a $5
billion savings & loan in California, I was amazed to learn
that no one was minding the backdoor. In fact, the back office
was so mismanaged that I often compared it to a Charles
Dickens atmosphere with electricity. I discovered that people
were performing tasks and using procedures that were common
fifty or a hundred years ago. For example, their computer
systems were underutilized to such a high degree that the
units were no more than glorified typewriters. Bulky files
held multiple copies of the same documents, such as purchase
orders and requisitions. Any measures of productivity were
done manually. And, in an atmosphere of staff reduction, there
was little, to no time, for a department to unbiasedly
evaluate itself. This lack of measurement led to uninformed
business decisions and biased personnel reviews. The amount
of time and floor space devoted to filing and refiling was
downright gross! To give one a perspective on the labor
factor, as a result of judicious review of work procedures and
application of automation, we were able to provide more timely
services and add more services, while reducing staff by more
than 50%. That proved the burden of outmoded procedures and
paper files caused an unnecessary use of twice as many
associates as required.
In my evaluation of firms of various sizes and cultures,
while a business consultant, I discovered that this failure to
understand their entire business environment is more often the
norm than the exception. It used to be that some firms were
naturally recession-proof. Recent history indicates that all
past assumptions have been tossed out the window!
While managing a business is inherently stressful,
especially in the turbulent 90s, one should remember that: If
the stress of change and challenge does not kill you, it will
make you stronger. This idea is parallel to the practice of
obtaining a flu shot, which employs a dead flu virus to
protect you from a stronger version.
In the battle of the budgets, there are two extreme
positions taken between buyer and seller. In a perfect world
(according to the buyer), goods and services should be
received without liability or a payment due date. On the
opposite end (according to the seller), a perfect world
consists of receipt of desired payment with no delivery or
performance date. Not so different from the conflicting theory
and practice of capitalism versus communism, these extreme
positions are attempted and/or practiced by providers and
frequently accepted by unsuspecting buyers. For example,
service vendors generally request advance payment, of up to
twelve months in advance, for anticipated services. Vendors of
photo copier and office machine repair are the most visible of
these "perfect world" practitioners. In many instances, the
buyer is blind-sided by slick selling techniques, which
include boiler plate contracts that indicate "industry
standard" jargon, intended to impose limits upon the buyer's
rights to negotiate. Another way service vendors get their
way is through the buyer's office politics and long-term
familiarity with the suppliers that may prevent a firm from
obtaining the best value for its budget buck.
And finally, let's not forget the failure of managers to
review current practices and procedures, for productivity
gains and budget savings. Alarms should go off every time
someone says, "It's always been done that way."
With over twenty years of experience in cost-cutting,
negotiating and departmental restructuring, I will show you:
(a) how to get maximum performance from vendors; (b) how to
get the best value for each dollar spent; (c) how to review
proposals, looking out for hidden costs; and (d) how to reduce
your budget expense and improve service levels and/or
productivity. In discussing vendor performance, we will look
into Performance Penalty Clauses, when entering into service
contracts. When considering a service vendor, we'll uncover
issues of Time and Materials versus an Annual Contract. Volume
discounts and periodic service reports should also be a part
of your review. Another area of interest is negotiation
tactics. Salespersons learn how to present their products in
the best conceivable light, avoiding the negative aspects of
their offering. It is in your best interest to know how to
bring out the down-side of a deal. To reduce your liability in
a transaction, you must be thorough, and determined to
discover all of the pit falls. Last but not least, we will
examine how you are conducting your business. Far too often,
managers fall into a comfortable method of conducting
business. Many fear change, and defend the known and proven
procedures of the past. In a global economy, we cannot ignore
the fact that new procedures for transacting business have
evolved, from the judicious application of recent technology
and management practices. For some topics, a do-it-yourself
form is provided to complete your own review. The primary
rule to follow when managing expenses and individual
productivity is that WHATEVER GETS MEASURED GETS DONE. This
implies that you will never get a handle on anything if you
are unable or unwilling to get a complete picture of it. For
example, your firm handles a large, dollar volume in either
outbound or inbound freight. And you have elected to discover
whether any savings can be rung out of this area. In order to
determine your needs, to assist in vendor and service
selection, you first need to know what your needs are. This
will prevent the vendor from controlling you. Now, when
purchasing outbound freight services, you must know (a) how
many boxes are going out per day or month to (b) either local,
intra or interstate destinations, at (c) how many pounds, in
(d) what kind of package, with (e) what kind of delivery
demand by the recipient.
You must be able to (f) compare your needs to the alternate
types of available transportation (g) at what cost and
delivery schedule (h) and to determine if the shipment is
packaged correctly. Your failure to take the time to measure
all segments of a task will result in the proverbial tail
wagging the dog. You will never get to the most economical
method of conducting business, because:
1. Suppliers will almost never show you the most economical
method to conduct your business, as it could result in
negative revenue streams for them.
2. Many suppliers simply do not know how to advise you about
lowest cost alternatives.
3. Many suppliers have little information on alternative
solutions in which they don't deal. Few know about their
direct, and fewer know about their indirect, competition.
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