Creating fresh control cultures

Inflation is forcing costs up, so enterprises need to think about the way they make cuts while looking beyond short-term gain.
  • Kate Mills (Unknown Publication)
  • 17 July, 2008 22:00

The pressure is on the finance team. As the costs of basic components such as oil and food continue to spiral up the production chain, just about every industry is under increased pressure to keep profits up. For the front line that means increasing sales. But for the back office it is all about keeping costs under control - a discipline that falls firmly into the chief financial officer's realm. In an era of higher commodity prices, companies are revisiting their approach to budget control. Cost cutting in the past was often reactive - bad profit results produced the shears - now companies are making cost-cutting a part of their cultures and a constant exercise.

"You have to rethink permanently what you're doing," finance chief Georg Chmiel says.

Chmiel has some innovative suggestions for companies wanting to cut costs. For example, he puts forward the idea that companies increase their buying power through informal relationships where they band together to compare quotes and even buy as a group to secure lower prices.

"That could really work," he says. "You could even have suppliers come in and present to the group and that would be really attractive to the supplier." He leverages his company's relationship with News Corp, as a subsidiary of the group, to secure cheaper insurance by buying it alongside the bigger company.

Chmiel also points to making changes in the way a company operates as another route to cutting costs., for example, has decided not to increase office floor space in Melbourne. "That moved us towards hot-desking in the sales team area," he says.

James Bennett, a company supplying books to libraries, is an example of a company that operates in an industry where the building blocks of profitability are shifting. "The emerging trend is a migration from print to ebooks," financial director Nandu Mehta says. "This means public libraries are becoming intensely cost-conscious because of a big erosion in their margins.

"There's a flight of funds to serial publications rather than books, and the emphasis now in libraries is to stock more magazines than books."

Freight cost burden

Furthermore, a characteristic specific to Mehta's industry means James Bennett is lumbered with delivery freight costs.

"Ours is the only industry where we can't recover freight costs," he says. "It's just the nature of the industry. Nobody charges it because our customers just won't accept any freight levy.

"We have to wear it - even as the price of oil, and therefore freight, continues to rise."

James Bennett looks at increasing sales as a response to market changes, but Mehta's department constantly surveys costs to ensure the best result. "It's in our culture," he says. "Over the years, we've successfully developed an ethos within the company of being cost conscious and it's deeply rooted in our corporate psyche."

That means a constant surveillance of financial figures. This, he says, is achieved through mindfulness. "If mindfulness is the spiritual mantra of the new age, then for us, corporate mindfulness takes the form of being always aware of the impact on the bottom line."

What that means is that every transaction at James Bennett is tied into the bottom line, requiring it to leap a series of hurdles, including a cost-benefit and payback period analysis.

Mehta also works at relaying the message that, while it may not be as glamorous as winning a big contract, cutting costs can actually have more impact on results.

"Every dollar of costs we save will have a direct impact on our bottom line," he says. "If we push up sales by a dollar, it will trickle down to be a few cents on the bottom line."

Mehta has also used external consultants to help achieve cost reductions.

To cut the company's stationery spending, for example, he worked with cost managers Expense Reduction Analysts.

"This was a case of letting the specialists do what they're good at and leaving us to do what we're best at," he says.

The result with ERA was a 30 per cent average savings across a range of areas, including a 70 per cent saving in printing costs.

What Mehta noticed about ERA was that it broke down everything James Bennett bought into its constituent parts - "right down to every paper clip" - before it built it back up again.

Consultants like ERA know this could be a fruitful period for them.

ERA's Australasian managing director Denis Stevens says an organisation like his can afford to work through a very detailed process.

"A lot of companies, just have a quick flick through the costs and then work at beating down their supplier," he says.

"What we do is the detailed grunt work that yields positive results."

Cost-cutting errors

Reducing costs is an area where most companies can be accused of making errors.

Typically, most research shows that expenses that are cut grow back within two years, and many cost-cutting exercises - such as reducing head count - affect a company's growth plans. This is something modern-day CFOs are very much attuned to. They know that costs cannot be looked at in isolation and that it is important not to sacrifice something for short-term gain that might be essential for long-term growth.

"The big mistake CFOs can make is that they can be too bound by their traditional role of number crunching and cost containment," Mehta says.

"The emerging role of finance requires an agile CFO. If we're to play a key part in innovation and strategy, then we have to be mindful of allowing an appropriate level of costs and overheads that develop an environment that will harbour and foster innovation.

"There comes a point where you have to stop looking at cost containment and make the necessary investment - even though the returns are unclear and the payback period is long. "This can be a difficult move for the traditional CFO but, unless we go with that, we're not going to play a key role in developing the company."

The price of sustainable practices

Another pressure CFOs face is integrating sustainable practices into the business. For some this can be a cost saving. For others it can increase costs.

At Jackgreen Energy, for example, CFO Andrew Woodward is reaping the benefits of moving from paper to online billing. "It was about cost cutting but also about getting back to our mission of reducing our carbon footprint," he says.

"We had this idea about getting everyone to receive everything by email and converting as many people as possible to the green message." (Customers can still opt to receive paper bills.)

This was a case where the two aims of reducing the company's costs and its carbon footprint were in symmetry. Generating paper bills was becoming an onerous task. "We were falling behind and I was allocating resources to generate bills," Woodward says. "The situation was not sustainable. If we'd continued producing invoices in-house, it would have involved 10 team members at $40,000 each."

Woodward used document delivery specialist Connexion to help with the migration to online billing. One feature of its system he particularly likes is that customers can click straight through to a payment gateway, avoiding the risk of the email languishing in the inbox to be paid at a later date.

"One of the catches with using online billing is that if you're just emailing it, there's no call to action," he says. "You don't have the action of them opening up their invoice paperwork."

He says that apart from the obvious cut in Jackgreen's paper and management costs, they have noticed that bills are being paid in a shorter time frame. Customers have 12 business days to pay the bill and online customers typically pay within seven. The savings on paper and postage run into thousands of dollars a year.

But online billing as a way of saving costs can be fraught with danger. When CFO Georg Chmiel moved to a new accounting platform that allowed the company to invoice online, he estimated there would be a $10,000 saving in postage and costs.

However, he found paper invoices tend to be paid faster. Collection time slowed and took more effort - actually costing the company more than $10,000.

Although moving to more sustainable practices can increase costs, some companies find it's desirable for the environment. The chicken shop franchisor Oporto Franchising has recently changed its packaging from plastic to paper. "The plastic packaging we were using was very cheap but it was not an environmentally friendly product," CFO Glen Lees says. "We're paying three times more for paper but it's an environmentally driven exercise." The pressure to change the packaging was coming from customers.

"You can't bury your head in the sand about things like that," he says.

Think outside the box ... cost-cutting tips:

  • Reset your assumptions regularly and completely.
"Some businesses do things for no other reason than that they've done the same thing in the past and it seemed to have worked," CFO Georg Chmiel says. "By regularly reviewing every aspect of your business and questioning each process and decision, you give yourself a chance to hit the reset button and make improvements that reduce costs."
  • Use your buying power.
Either leverage off a bigger parent, as has, or band together with like-minded companies. "Buying individually, but as a result of collective decisions, will give you a discount," Chmiel says.
  • Kill the sacred cow.
Sometimes you have to take action where it hurts. Chmiel recalls having to pull back on travel expenses and tweak conditions. The result was that costs and travel taken both fell.
  • Forge long-term partnerships.
Working long term with your suppliers can build loyal and financially fruitful relationships. "Many suppliers are willing to charge less in the interests of establishing a long-term partnership," Chmiel says. "Take advantage of this fact whenever you can - as long as you're happy with the quality of the supplier."
  • Haggle.
One mistake is not to ask a simple question, James Bennett CFO Nandu Mehta says. "That question is: 'Can you do a little better for me?'" He says Australians may be hampered by a British heritage that makes them think they cannot haggle. "But even at David Jones, if you're buying something expensive, you can ask for 10 per cent off," he says.
  • Look beyond price.
Mehta also says the level of qualitative services should not be ignored. "We sometimes make the mistake of putting a Hyundai on a par with a BMW," he says. "When you're comparing two quotes, bear in mind the services that go along with the product and don't look at cost in isolation."
  • Spend where it makes sense.
Chmiel describes a decision to invest in BlackBerrys for most of the staff. "We had to overcome the worry that it would cost the business much more than typical mobile phones," he says. Instead, he has found BlackBerrys so addictive, team members work all hours. Their increased productivity has more than amortised the investment. CFO Magazine

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