Now we’re officially in recession, how does a business keep costs in check to maintain a healthy bottom line? A recent study by the Chartered Institute of Personnel & Development concluded that job cuts should be the last resort, since the cost of laying off an employee can be more than £16,000. Expense Reduction Analysts, the world’s largest specialist cost improvement consultancy, claims that most organisations can save up to 20% of their operating costs by trimming non-core expenditure – so MT asked them to supply our readers with their top ten tips. See what you think.
1. Create a cost-conscious workplace culture
The economic boom over the last ten years may have affected your employees’ focus on cost control. Develop a culture where everybody within the organisation is responsible for challenging costs, from the receptionist booking a courier to senior management reviewing their nationwide logistics provision.
Celebrate cost reductions as you do business wins. Even create an internal awards scheme for cost reductions made by employees.
Make staff aware that savings go straight on the bottom line. Also, use powerful and simple monetary examples to educate your workforce regarding the quick and significant impact that cost savings can have on profitability. For example, based on a typical 8% profit margin, for £50,000 of savings a company would have to increase sales by £625,000 to have the same positive impact on the bottom line.
It is critical to start caring about cost management before the situation becomes critical and hasty decisions have to be made.
2. Lead by example
Business leaders need to set an example by demonstrating to employees that they care about saving money, even on the smallest items. Don’t book the most expensive flights and hotels when you are asking your own management teams to take the budget option in both cases. As a business leader you will need to open your organisation to scrutiny and examine every cost.
3. Keep the green light flashing
Instil a sense of urgency, so employees act immediately to reduce costs and maximise profitability. If it does not remain high on the boardroom agenda, employees will see the directors’ crusades as ‘the flavour of the month’ and the drive to cut costs will fall to the bottom of everyone’s in-tray.
4. Establish what your costs really are
You may believe your costs are under control, but your perceived ‘well-kept ship’ may not be as leak-proof as you thought. Forensically examine and benchmark your costs line-by-line. In our experience, this is often the major barrier to making cost improvements, since it demands significant resource. So it could reap significant dividends to look at using outside agencies, consultants and benchmarking services to establish your costs by getting comparisons against competitors and other suppliers.
In doing so you will highlight the areas that have the most potential for improvement, helping you set cost-saving priorities.
5. Be market-wise
It is critical that you are aware of the constantly-changing supplier market for your costs, so you can identify developments that you may be able to capitalise on (for example, the fact that energy prices are currently going down and paper costs are on the up). Establish a supplier market intelligence system and update that system at regular intervals.
To have any chance of negotiating favourable arrangements with suppliers, you must have knowledge of the prevailing market prices and practices. Do not rely on your supplier for this information.
Also don’t waste time and energy on looking at individual item costs from different suppliers. By enhancing your knowledge of the supplier marketplace, you will have more confidence to use one supplier for a number of items, and thus benefit from a ‘basket’ cost rate.
Part Two, with five more cost-cutting tips, will follow tomorrow...