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This article is an abstract of ideas presented during a panel presentation at the 2012 Not For Profit Symposium presented by the Greater Washington Society of CPAs. Panelists included Polly Heath of DC PBS station WETA, Bob Berdelle of United Way Worldwide, Mark Reed of AARP, and Robert Michaels of Rose Financial Services. The panel was moderated by Phil Gross of Expense Reduction Analysts.
What is the role of corporate culture in expense management? Corporate culture is key to expense management. Culture is set at the top and sets the stage for policies and procedures to be effective. In many organizations, senior management finds poor expense management offensive because misspent funds could have been used to further the organization’s mission. Cost effectiveness should provide psychic rewards throughout the organization since funds are focused on furthering the mission of the enterprise.
What is the role of financial transparency in driving cost savings? Financial transparency is essential. People need to understand the economics of the organization and how their efforts contribute to achieving its mission. Accountability is also a key component; people need to understand the financial ramifications of the revenues and expenses of their efforts if they are to be held accountable. They not only need their department’s information but they need to understand the organizations “revenue flow” and where money is spent throughout the organization to look for synergistic opportunities to work together and leverage supplier relationships.
What steps do you take to attack expenses and control costs? You need to understand where you spend money – take different cuts of the data, e.g., your spending by expense type, by supplier and by department. You may find that different departments are buying the same items from different suppliers at difference prices, thus validating that the organization is not leveraging the benefits of consolidation and good supplier management. The biggest opportunity may not be where you spend the largest dollars since those expenditures may have gotten the greatest scrutiny. Look for expense areas that have not been “bid out” recently, that may have long-term supplier relationships that have not been subject to a recent market review, where you lack the internal expertise or the time for in-depth reviews.
Go to the market to determine if your incumbents are still competitive in terms of price and service. Are there new, more cost-effective technologies or products available that your current supplier hasn’t brought to your attention? Suppliers expect you to test the market periodically. Sometimes just asking a supplier for a price reduction will yield results.
While cost savings are important, you must look at the full ramifications of cost-saving decisions to ensure there aren’t potential costly side effects. For example, the savings on telecommunications services that turn out to be unreliable could be more than negated by the operational disruptions that occur.
What role do suppliers play in cost-reduction efforts? Talk to your current suppliers first. Ask what you can do to help reduce their costs so that they can reduce your costs. For example, can you reduce the number of deliveries by increasing your average order size? Can you substitute house brands of similar quality for name brands? Think of your suppliers as partners, not vendors. As part of the RFP process let the suppliers educate you. Get several perspectives.
After conducting an RFP, provide suppliers who don’t win your business with feedback to maintain a positive relationship with them. They may be the right supplier the next time around. Consider group purchase organizations for those items that make sense. Check out www.nationalassembly.org and www.uscommunities.org, as examples.
What role can consultants play in finding savings? Use consultants to help if you don’t have the time or in-house expertise. Some consultants will do an initial analysis at no cost to help you identify opportunities. Others work on a contingent fee basis – you only pay based on savings realized. Be clear with the consultant about your requirements and criteria for changing suppliers, particularly in mission- critical areas. Having clear expectations with the consultant is key to a successful relationship. Another benefit of using consultants is that they can provide third-party validation, thus enhancing good governance.
Don’t make assumptions. Don’t assume your long-time supplier is necessarily giving you competitive pricing. Don’t assume your requirements are the same as they were in the past. Challenge how you do business. Test the market. And, most important, set the tone and culture for effective expense management from the top.
Gross is managing director of Expense Reduction Analysts. Contact him at email@example.com.