I don’t know of any private or publicly listed organization that is in business only to break-even. Among others, the main goal for these entities is to deliver a profitable return to the owners of the business. This desire to make profit with the least resources inherently makes cost management across the business a strategic imperative.
As strategic business partners, finance teams are suitably positioned to help their organizations manage costs and focus spending only on those activities and/or initiatives that enable business performance.
In my experience of working with diverse organizations and business leaders, I have come to the realization that quite a number of them lack a precise understanding of what “cost management” really involves. There is a common perception that managing costs is all about cutting costs or merely a matter of buying fewer goods and services. This is seldom true.
Cost management is not simply a euphemism for “cost cutting”. The discipline is about understanding the true cost drivers of the business and ensuring that a company acquires only goods and services that it needs to execute its strategic priorities at a known and managed cost. One of the areas I see organizations often struggle with is identifying those activities, processes and investments responsible for rising cost levels.
Because of this misunderstanding of the real cost drivers, many companies end up taking the obvious route of cost control: they reduce payroll-related expenses, cut direct costs and capital expenditures. Rarely do companies focus their attention on improving indirect expense management to drive savings and boost profitability with the same resources.
Inadequate Spending Information Acting as a Barrier Against Savings Delivery
In today’s digital-enabled business environment the ability of an organization to consolidate and analyze its indirect spending patterns is key to acquiring crucial insights essential to pursue better deals with vendors. Simply having information is not enough. What golden nuggets are you harvesting from this sea of information and you are able to use them as sources of leverage when dealing directly with suppliers?
Unfortunately, in my dealings with diverse finance teams, many of them are not analyzing their organization’s spending data and are therefore losing out on achieving substantial cost savings. One of the reasons often given by these teams on why they are not able to do so is lack of time and resources needed to analyze spending data and recognize the benefits. A significant amount of their time is spent on balancing the books and justifying the numbers.
I was surprised with the manner in which procurement reports are generated and delivered in one of the companies I recently worked with. Their procurement processes are still highly manual, all invoices are stored in lever arch files and there is no spend visibility across the organization. Each business function records its own spending and there is no overall aggregation of this spending information.
As a result of these highly manual processes, it is seemingly impossible for the finance manager to obtain a clearer picture of how much is being spent on each vendor and on what, say per month, quarter, half-yearly or yearly. Technology and e-procurement systems have evolved and because of these advancements CFOs and their organizations can gather this procurement information in an accessible, easy-to-use format and in real-time.
Lack of financial resources should therefore not be given as an excuse, there are now cheaper tools that an organization can invest in and achieve its spend analytics ambitions and these SaaS and/or cloud-based solutions do not require huge initial capital outlays.
When you have ready access to information and are able to analyze your company’s’ major spending categories, you will be able prioritize the use of your scarce time and resources, consolidate spending with selected vendors, negotiate better terms and realize substantial benefits.
Close Scrutiny of Discretionary Spending
Many at times I have heard people say in order to make money you have to spend money. As much as we would like to accept this statement in its entirety and pay attention to the advice, I think we should heed the advice with a pinch of salt. Not all spending is necessary. In addition to direct expenditures which are linked directly to the goods and services a company is producing or providing there will always be discretionary expenditures not tied to business performance.
However, uncontrolled spending simply for the sake of spending often leads to depleted margins and cash woes. Am I therefore advocating against discretionary spending? No. Responding to business opportunities often calls for flexibility and judgement. There are times where the organization has to leverage its cash position, take advantage of emerging opportunities to enhance its competitive position and improve productivity.
Close scrutiny of discretionary spending on things that are perhaps nice to have, but not enabling business performance is therefore critical. Finance business partners can help instill spending discipline and good judgement across the enterprise by educating employees on the How, What and Where of spending carefully as well as setting up spending policies to encourage productivity and enhanced performance.
Spending policies play a significant role in directing employee behaviour and generating useful information on what goods and services are purchased, how and where. For example, they help an organization drive savings through documenting and substantiating purchases, discouraging excessive acquisitions and prescribing exactly where and how employees may procure items.
Any off-policy spending patterns are quickly identified and addressed. However, in implementing these spending policies care must be taken that a right balance between control and latitude is struck. You want your employees to have a sense of empowerment and responsibility.
In other words, the company’s spending policies should not be viewed as punitive measures, but rather, allow employees the appropriate degree of flexibility, and nothing extra. This fosters compliance.
The Effectiveness of Any Spending Policy Rests on Its Widespread Adoption
Implementing the right spending policies is only part of the equation. In order for policies to be effective, employees must comply with them. In most cases you will realize that an organization has well-defined policies on spending, the finance executive is leading the pack garnering support for its enterprise-wide adoption and yet despite all his efforts the positive message falls on deaf ears.
Compliance often falls short and as a result the organization fails to achieve the intended benefits. As with almost every other aspect of everyday running of the business, senior management support is central to the success of any organizations’ spending policies. Senior management determines company culture and sets the tone for employee behaviour.
No matter how hard the finance executive tries to convert the positive message of disciplined spending, if the other senior leaders are failing to set a good example then we shouldn’t be surprised to see significant low levels of employee compliance.
Many organizations often suffer from a lack of consistent approach when implementing and upholding spending policies. For instance, you will find out that there is a clear prescription of the exact steps to follow when dealing with employee expense reimbursements. By default, the approach should be the same across the enterprise but then you start noticing some employees getting reimbursed for expenses that other employees are not.
Moreover, the senior manager approves the reimbursement of an expense without seeing the backing documentation even though the policy clearly specifies that a physical receipt or invoice must support the expense claim. This inconsistency sets a bad precedence resulting in finger-pointing as well as favoritism gestures. Rather, management should take the lead by enforcing policies uniformly throughout the employee hierarchy, and by demonstrating good compliance behaviour.
Furthermore, in order to ensure effective compliance, senior management should also communicate policies effectively as well as the business rationale and the more tangible benefits that the new spending policy would provide. Employees need to know what policies they will be held accountable for and why they are being held accountable.
I don’t believe there is an employee acting in their normal capacity who would join an organization just to do wrong. Employees, generally want to do the right thing and what a better way to support this ambition other than explaining to them all the nitty-gritty of the company’s spending policies.
Ideally, once the policies are enforced it is a good idea to regularly provide employees with feedback on their performance, the benefits that are being realized as a result of the policy changes and offer rewards where necessary. Following this approach bolsters the rationale for making the decisions and gives employees an interest in the company’s performance as well as a greater incentive to do well.
As finance executives step up to an expanded, more strategic role and seek to drive profitability across their organizations, it’s critical that they establish efficient and effective means to provide employees with the right tools, processes and structures they need to successfully perform their jobs without opening the door to spendthrift behaviour, poor controls, and irregular expenditures.