Cost Controlling In An Era of Escalating Expenses11 Oct, 2011 By: Craig Stimmel, SPIA, Inc. imageSource
Without question, growing profits today is no longer a “slam dunk.” It is now critical in an era of escalating expenses, e.g. benefits, insurance, energy, cost of goods sold, labor costs, etc. It is unlikely that even the savviest business executive/entrepreneur can successfully impact the new facts of doing business without a strategy plan to do so.
Expenses can be chopped - but, typically, only over a period of time, e.g. you can’t chop fixed costs quickly. Even “variable” expenses are subject to short or long term commitments, e.g. insurance costs, benefit costs, facility costs, etc.
So what does a company need to do today to bring the costs back under control? There are only a few options:
- Add Profits
- Cut Costs
- Enhance Internal Systems/Procedures to Increase Profitable Revenue Production & Bottom Line Profits Without Adding Additional Costs
Adding profits is a viable option providing that you have the ability to impact the sales areas. Building sales/profits is usually a long-term exercise – certainly one that is should be included as you do your business plan. That is a separate article all on its own.
What business people need to do today is to make a commitment to spending enough time to identify where costs can be brought back into proportion to the profitable revenue producing ability of the company, in order to stay profitable and deliver a profit to the stockholders/owners. This isn’t a once-in-a-blue-moon kind of activity. It requires a long-term commitment. And it requires systems/procedures to enable you to monitor/manage and deal with costs out of proportion to the company’s ability to
Few companies can make large cuts in expenses without compromising the company’s viability and ability to continue operations. So what can I do now to begin to make changes ASAP?
Begin with the following:
You need to ask yourself these questions: Do I have the systems in place that enable me to closely monitor my costs, efficiencies and profit levels? If not, why not? If so and you’re not using them, start to do so soon. And if you don’t have the systems in place, get them installed and operational soon. The only one who will lose is the business executive/entrepreneur who continues to believe that “It will get better” or “I don’t think I need to do anything yet.” Expense escalation is a fact of life in today’s business and it isn’t going away anytime soon.
Consider the following:
Your company is looking for a way to improve its bottom line. As you evaluate your own performance, you look at sales and financial data; however, operating expenses are one of the biggest contributors to costs in companies.
A cursory look at the revenues of different industry verticals and the portion of money companies like your own spend on operating expenses reveals something startling. Across the board, except for a few information-intensive verticals, operating expenses are a big component of the costs of doing any business. And, remember, these costs are growing exponentially.
U.S. Revenues & Operating Expenses
Operating expenses as a percentage of revenue varies from a low of about 30 percent to as high as 80 percent depending on your business model and how you go to market. Internal business processes contribute almost all or at least a large part of the operating expenses in any company.
Even a 10 percent reduction in business process costs, reduces operating expenses and increases the bottom line directly. Quite often, it doubles or triples its profits right away! More efficient and effective business processes delight customers, increases sales, and contributes even more to the bottom line.
Process improvement is no longer a luxury or nice to have. If a company does not do it, its competitors will. Businesses such as Dell Computer Corporation are using the Internet to execute their order-build-deliver models for sales, often completing the whole cycle in 10 days or less.
Its competitors have been forced to radically change their own business processes to compete with them on an even footing.
Measuring A Company’s Performance:
Here we outline four sets of measures of a company’s performance:
Financial – This relates to the financial performance of the company. What are our financial objectives, measures, targets and initiatives? How did we actually do financially when compared to targets? The financial and accounting systems and the financial data warehouse help assess this perspective.
Customer – This focuses on the customer and how we’re doing with our efforts to serve them. Who are our customers? How did we do with respect to them? What are our objectives, measures, targets and initiatives e.g. are we successful in increasing our penetration of a commercial account or adding additional sku’s to an average order, etc. How did we actually do sales-wise, when compared to predetermined targets? The sales reporting systems should tell us if we spend the time to review them regularly.
Internal Systems - This relates to how we do business and our operating systems. What are our processes? What are our objectives, measures, targets and initiatives in the area of business processes? How did we do with respect to them? Have we identified areas where change could cut cost or add efficiencies? If not, why not?
Willingness To Learn And Make Changes - This pertains to the objectives of the company and its employees. Is the organization improving and learning to improve? What are the objectives, measures, targets and initiatives in the area of adapting current systems/procedures to more efficient alternatives? Have we made efforts to upgrade the skills/knowledge of our management/line staff? Currently few organizations have formalized and are tracking this area.
Your Scorecard and Process Warehouse
What is a Process Warehouse?
Definition: Bill Inmon coined the term “data warehouse” in 1990. His definition is: “A (data) warehouse is a subject-oriented, integrated, time-variant and non-volatile collection of data in support of management’s decision making process.” The system is defined as:
Subject-focused - Data that gives information about a particular subject instead of on a company’s ongoing operations.
Integrated Information - Data that is gathered into the data warehouse from a variety of sources and merged into a coherent whole.
Time-Variable Information - All data in the data warehouse is identified with a particular time period.
Non-Critical Information - Data is stable in a data warehouse. More data is added, but data is never removed. This enables management to gain a consistent picture of the business.
This definition could not be more appropriate in the context of processes in an organization
2). Process Warehouse - The process warehouse is a process-oriented, integrated, time-variant and non-volatile collection of data that helps management get a handle on its internal processes. Given the enormous amounts of its money it spends on processes, the first step toward improving them is to create and utilize the data that can support it in its efforts.
Components of a Process Warehouse
What would a useful process warehouse contain?
Process Catalog - This is an inventory of the processes that an organization uses in its business. This is a central place where all data about the processes is stored and retrieved as necessary.
In a typical telecom company, in customer service alone, there are hundreds of business processes that are in operation at any time, just for one line of business such as Landline or Mobile services.
Consider additional value - added services and additional businesses, and pretty soon you have many hundreds of business processes that are in operation. Names of processes, who designed them, dates they went into operation, location of the stored process documents, the names of the process owners, their e-mail addresses and phone numbers, the measures used on these processes, the calculations for the measurements are all natural parts of a process catalog.
Typically, for each process you may have a few hundred attributes and values you need to store and retrieve. Many companies formalize their processes with ISO 9000 standards, but the information is scattered throughout the company, quite often on the desktops of individual process owners. A process catalog centralizes all this information and enables anyone to access details of any one process or run reports across processes.
Process Models - In order for measures and targets to be instituted for a process, you need a model of the process and the different process steps involved. You also need a multidimensional cube to be associated with the process model for fine-grained process analysis. If a process does not meet its target measures, you need more information to analyze the problems. If a process does not meet turnaround times (TAT), you need to see what steps contributed more than others to the TAT not being met. Are there specific kinds of customers, specific kinds of products or services that cause the slips in TAT? The 80-20 rule applies very much to processes: Process Execution Information - You may need to collect info to see how a process is doing this week, this month, this quarter. Process Analysis Information - Once you have this info, you’re ready to create & use process analysis information.You have actual process execution information of TATs, accuracy and error rates to compare against targets for each process step. Process Capability Information- You’re able to go back & compare “before” and “after” snapshots of process performance.
Craig Stimmel is president of Planned Growth Business Development Solutions LLC + Craig is “Stimmel-ating” Business Development Success for Companies Large and Small. Contact him at firstname.lastname@example.org.