HOW TO CUT COSTS WITHOUT CUTTING PEOPLE By Todd Gavin The way most companies deal with cost-cutting is to fire people. But there are alternatives. One that’s very effective, though usually ignored, is attacking discretionary overhead costs. Much of what organizations think of as fixed overhead is actually variable. Overlooked Overhead Going into an organization, we look for non-people ways to cut costs. We’ve come up with a checklist of dozens of ways to do that. They include: printing, business forms, office products, maintenance contracts, Federal Express, and office coffee service. These are some of the overhead areas that few firms look at. I just worked with a bank in New York that has 14 branches. They buy the regular #10 envelopes all the time. Each branch bought its own envelopes any time it wanted. They would order individually whatever they needed – 5,000 or 15,000 – depending on the branch. Simply by requiring these branches to all order in one coordinated effort at one time, the cost dropped by 40 percent. Another example: a credit union we worked with did a lot of photo- copying. They should’ve used printing. It’s cheaper, looks better, and doesn’t wear out your photocopying machine. They were using more than 60 different forms. They photocopied one form more than 200,000 times in one year. By printing instead, we saved them $8,000 a year on their photocopying costs alone. We worked with a bank with 20 branches that ordered 30,000 calendars each year. The calendars were competitively priced, but we discovered that freight charges were $4,000 (calendars were being shipped to each branch). By sending all the calendars to the bank’s headquarters and allowing the bank’s own couriers to make the branch deliveries, we reduced their shipping costs to $1,000, saving them $3,000. Employees Take Ownership To get people to care about saving on overhead, you’ve got to get them to spend the company’s money as if it were their own. A strong incen- tive is an executive compensation plan. For example, a financial institution in Queens, NY, with 18 branches, has a plan based on executive performance. People are rewarded for cutting overhead expenses, costs not tied to interest-sensitive earnings or firing people. If you don’t have such a compensation plan, you’re overlooking a good chance to reduce costs. Procurement Procedures One of the first things we provide to a company is a Procurement Procedures and Policy Manual. What goes on in purchasing needs to be codified. Purchasing agents are often not trained. In fact, in most organizations, there’s no single purchaser. Buying office supplies is handled by a secretary. Someone else buys bolts and wire. A Procurement Manual guides whomever does the buying through the maze or purchasing issues: * Where’s the buying authority? * What’s the annual bid policy? * Who’s watching freight costs? * Who takes care of inventory? * How do you negotiate maintenance contracts? * How do you do an 80-20 analysis? 80-20 Analysis We always recommend an 80-20 analysis. You take the invoices of everything bought and separate out the 20 percent that represents 80 percent of the purchases. Put that out for bid every year and you’ll knock your annual costs down 25 to 40 percent. Todd Gavin is a Valley-based financial analyst.
