Essential service areas are costing UK businesses today around £350 billion annually, and across the board this increases every year, find out how cost management can help.
It is a fact that all organisations need to spend money to do business. Premises-related costs, fixed and mobile communications, information technology, utilities, waste management and finance such as insurance and bank borrowings are just some of their essential operational overheads. Without these services, a business cannot function.
Essential service areas are costing UK businesses today around £350 billion annually, and across the board this increases every year, squeezing profitability for organisations of every size. According to the Confederation of British Industry, “The cost of these key services is high today, but is set to grow even further.”
Given the vast expenditure involved, organisations need a way to identify all the potential service providers in the market and assess their respective offerings – not only in terms of price but also whether they can meet the required levels of service.
Are you thinking: ‘Yes. We know. And we have people in our company who look after all that.’ Well here’s the bad news. According to a global survey of 427 senior executives by The Economist Intelligence Unit earlier this year, ‘lack of broad commitment across the organisation to good cost management manifests itself in the patchy application of industry best practice in this area.’ Further, ‘One of the single biggest barriers to achieving targets is the lack of adequate internal processes to drive cost reduction.’
Accountants KPMG who sponsored the survey concluded: ‘Today’s businesses are under constant pressure to reduce cost, yet many find it hard to do so in a sustainable fashion. 9 out of 10 cost reduction programmes fail to achieve their targets, and the gains that are achieved appear to be short lived.’
So, we have established both the vital importance of managing costs and also that most companies do not have in place the internal resources to manage the fundamental issues. What would be the best solution for a successful outcome?
Well, one way to achieve the objective, of course, is to hire a full-time, in-house specialist. However the vast majority of organisations simply cannot afford to do this. Those having the resources to employ their own experts invariably need to focus on fulfilling their core procurement activities. In many smaller to medium-sized businesses the responsibility passes to Office Managers who have little relevant experience and more than enough duties anyway!
What this means is that these matters are routinely left in the hands of individuals whose expertise probably lies elsewhere in the organisation. As a result, many businesses opt for what appears on paper to be the ‘cheapest’ supplier.
Adopting this purely headline-cost based model may seem logical, but it fails to take into account a wide variety of additional factors contributing to the overall total cost of purchasing an essential business service. This traditional approach to service procurement is fundamentally flawed; so flawed, in fact, that many organisations throughout the UK are spending far more than they need.
Why is it so difficult to make ‘an effective and informed decision?’ Three major reasons - deregulation, privatisation and convergence. Since the late 1990’s, communication and utilities markets have continued to become more convoluted and confusing. Finance, too, is a mature and sophisticated market place, presenting organisations with a greater number of options than ever before in key business areas such as lending, insurance and employee benefits.
Thus few in-house personnel possess the comprehensive level of understanding or the time needed to make the right business decisions - never mind the material cost of their salary and workplace presence, which are all too often overlooked.
This is why more and more organisations are turning to outsourced providers of cost and purchase management services. By so doing, they can access specialist insider knowledge, eliminate the financial loss of taking key individuals away from their core responsibilities, mitigate the cost of employing in-house specialists and take advantage of a thorough methodical analysis of their expenditure.
Auditel is one of the leading consultancies of this kind. Their holistic Total Cost of Purchase Business Model means they provide their clients with a service that goes much further than a simple assessment of headline costs. Auditel review the total cost of procuring goods and services, then using their independence and experience in the marketplace, help their clients make intelligent and effective purchasing decisions that are right for them.
One of the most important things to consider when employing an outsourced cost management expert is their auditing procedures. A consultancy that adheres to cost management best practice review processes should include the following:
Achieving the projected savings (and rebates for overcharges in the past) should be just the beginning of the job. The consultant should continue to assess current expenditure against new tariffs and services as they become available, to ensure continuing benefits from optimum cost efficiencies across all essential business outgoings.
If you’re thinking ‘great stuff but is it really worth the effort?’ Lets look at it from another angle. Suppose your company has a gross profit margin of 25%. Now suppose that as a result of bringing in a cost management specialist you save £100,000 on your essential overhead expenditure. In order to generate this additional profit through Sales, you would have to increase turnover by £400,000. Try that on your Finance Director on a cold wintry Monday morning…
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