Could-you-do-better-than-43%

Can You Do Better Than 43%? | Indirect Spend and Overheads

April, the beginning of the financial year for many businesses. Yet 2023/24 is likely to be another year of disruption, although we are seeing business confidence grow – a ‘return to normal’ is likely to be a bit further over the horizon. In 2023/24, controlling indirect spend and overheads will be crucial for businesses worldwide.

As you look at your budgets for next year, there is likely to be a gap between the margins and bottom-line numbers you want to deliver and what your current forecasts indicate.

You are left with two responses: accept the numbers and remember 2023/2024 as another transition year OR put something in place to close the gap. There is a risk you seek to close the gap solely through focusing on your cost of goods sold. These direct costs tend to be the most visible within an organisation, with a clear budget owner and accountability. These tend to be costs that are well controlled – you know the right suppliers, the right processes, and the price you should be paying.

There is a role here for maximising efficiency, but it’s not the only place to look. That leaves two places to look for efficiencies, one obvious and one that tends to be ignored.

The first is staffing. This tends to be one of the largest cost areas for any business, reducing headcount because of delivering efficiency gains, outsourcing or ceasing of operations is a sensible choice. Slashing staff costs as a kneejerk response to financial pressures is a bad choice, this will slow down the path to future growth and will disengage the employees you have left. Tread carefully with staff reductions.

The second is indirect spend and overheads which is often ignored. These costs tend not to have an accountable budget holder. There is often little control over the selection of these suppliers, how they are managed, and the price paid for these goods and services. Clarity at a granular level is one of the biggest challenges when it comes to reviewing overhead costs, it is one of the reasons they are often ignored. Often when these areas are reviewed, it’s a quick Google or ring around, a vastly different process compared to how organisations ensure best value across their direct costs.

This is not how a review of your overheads should be approached. Whilst overheads account for a smaller proportion of the cost base, a 15%-20% saving will help close the ‘CFO balancing line’.

A study from Gartner showed that only 43% of leaders achieve their savings targets. The same survey found that only 11% of businesses sustained these savings into year 3. These are two astonishing statistics. Businesses can prevent becoming a part of these numbers by engaging and reflecting on an in-depth analysis of their indirect spend and overheads.

So, what can you do to increase your savings delivery?

  • Focus upon the right costs, include targeting your overheads or any areas you don’t traditionally review.
  • Don’t look at cost reductions through just one lens, the airports slashed their staffing as a response to Covid through a finance lens but failed to look at the implications for the future.
  • Create capacity to take on growth and innovation opportunities, keep one eye on delivering your strategy.
  • Invest in a PMO to manage your savings, this is key to delivering higher than 43% of your target.
  • Undertake post-implementation reviews which will ensure you adopt learning ensuring that a higher percentage of savings than 11% make it to year 3.
  • Consider external support where it makes sense, experts that do this day in day out will know where to look to shortcut your learning curve and deliver savings quicker.
  • Don’t just plan for one year, look across a three-year rolling timeframe.

There are steps you can take to ensure your margins deliver, but leaders need to create a culture of change and innovation, encouraging ideas bottom up that align with the organisation’s strategy.

If you want to improve your savings delivery, then read on. That’s where my team and I might be able to help. Expense Reduction Analysts (ERA) are procurement and cost reduction experts, we work with small companies right through to instantly recognisable brands like BT, DFS and Ikea.

What makes us unique, our cost specialists, all devoted to their specific area of expertise which means we can use our knowledge and buying power to rapidly validate your suppliers, processes, and prices across a range of indirect cost categories. Unlike other consultancies, if we don’t deliver direct savings, there is no charge.

To ensure savings deliver, we stay alongside you for three years, reviewing and auditing your spend each quarter to ensure the savings and process improvements we promised, deliver.

If you would like an exploratory conversation then please email me at jrimmer@expensereduction.com