ONE OF THE BEST REVENUE YEARS we ever had wasn't very profitable. We grew 40%, broke every month's revenue record, and staged the largest single event in our history. Our clients and employees were all happy, the gear was new with more on the way, and the cash was flowing. We should have been making a lot of money but we weren't. So as the dust settled we sat down and looked closely at the numbers, thinking we'd find one big problem to fix. Instead, there were all sorts of problems, everything seemed to be interconnected, and every expense seemed to need attention. It quickly became clear that our first order of business was a better plan of attack. This is what we learned about taming the beast of costs.
A Plan
Reviewing and managing costs is not a job for one person in even the smallest of companies. Costs tend to take on a life of their own when under the scrutiny of only one individual. A fresh set of eyes is an important tool when tackling the first phase of cost reduction, which is to investigate. Using folks from all departments as team members will not only give you a broader perspective and a wider range of solutions, you will automatically have the support you need for the next two steps. The second step is to explore alternative sources and processes. Next, the education process ensures everyone in your company understands what good and bad costs look like. And finally the most important step when it comes to making wise spending part of everyday life, is to continually reinforce the concept.
Investigate
You will need to assemble a team, the more folks the better. Divide all the cost lines on your profit and loss statement among appropriate leaders and pair them with one or more additional people. It will help if these employees will be empowered to manage some of the costs they investigate. What you are looking for are opportunities for better value. For instance, telephony is a highly negotiable and competitive commodity. It would not be unusual to find 25-50% savings on long distance, data, and cell phones if you have not renegotiated those contracts in the past 24 months. If you buy or lease trucks annually, could you save money if some of them were hired seasonally instead? Look for any supplier where you represent more than 5% of their revenue — there's probably some savings to be negotiated.
Explore Alternatives
Cost control is also about using costs more wisely. That is the reason for exploring alternative costs. For instance, we know labor can't always be replaced. But is that labor being utilized to improve your product or simply to “get the work done?” This is where outsourcing becomes a consideration. Areas such as building maintenance, IT support, marketing, and repair are candidates for partial or total outsourcing. I know one company that hires part-time workers to load and unload trucks on busy days, saving the staff for tasks that require more experience. Another rental business contracted with a delivery firm to handle all transportation. When outsourcing works, there is a cost savings plus the added benefit that employees are refocused on tasks that help customers.
Educate
When your investigation is over and alternatives have been thoroughly explored, it is time to let everyone in the company know what you learned, what you changed, what you didn't change, and why. Try turning the process into a story:
“Our cell phone costs have skyrocketed. In our investigation we found that many employees go above their monthly plan and that roaming charges are killing us. We changed the existing plan levels and coverage where it made sense. Since our contract is up in six months we asked several providers to bid on our business. Initial responses show we will save 30-40% on minutes and receive all new phones. Cell phones are an important part of customer service and daily operations and every employee who needs a phone will have that resource now that we have a better rate.”
In another example, there was no net cost savings but the company made better use of its costs:
“Our records show that we often use over 100 employee overtime hours loading and unloading trucks in a busy month. We have now contracted with a labor provider to send loaders at a lower cost on an as-needed basis. We have reduced staff overtime and at the same time have refocused those individuals to better customer support. Whenever possible our employees and resources should be dedicated to tasks that only employees can perform, such as quality control and customer service.”
These cost-cutting stories paint a picture of companies that appreciate good costs as a necessity and bad costs as an opportunity to improve. Note how these communications reassure employees that customer service comes first.
Reinforce
Cost control is a never-ending process. By including a cross section of your staff in the process and empowering them to continue their role, you can spread the culture of wise costs more effectively. Once employees learn which costs are good and which are bad, they will find their own ways to save. A lighting department found savings by buying gel in larger quantities and ordering less often. In another company, a delivery driver found a mobile truck wash service that came to the shop. It cost a little more than driving to the truck wash facility, but it saved two hours of the driver's time for other tasks that were more important.
A good cost control process will not only improve your bottom line, it can streamline customer service and make every employee part of the solution. A bad cost control process will throw up roadblocks that will stifle decision-making, frustrate your employees, and alienate your customers. In the end, our plan worked very well and very quickly. Within six months we saw significant results. And because we made this process part of our routine, we have seen continual improvements over the years. While it may be tempting to skip the evaluation this year, we know that even profitable companies can benefit from reviewing their costs. There is no such thing as being too profitable.
Tom Stimson, MBA, is director of sales and operations at Alford Media Services in Dallas, TX. He has over 25 years experience in corporate theatre and is a member of the ICIA Board of Governors and the ETCP Certification Council.