Has your ‘Sacred Cow’ become your ‘White Elephant’? Demand Management: A better way to reduce costs.
Updated: Sep 20, 2020
As countries start to emerge from the lock down, a top priority for businesses will be to trim costs in order to maximise their cash reserves. Many businesses are facing economic contractions on a scale they have never seen before, so will look to Procurement to run budget efficiency programmes.
Pre pandemic the standard approach would be for a business to look to reap some quick savings, through making reductions to their budgets. However, the world has changed and your businesses demands have likely changed too, so you will need to adapt fast. The real cost savings opportunities lie in examining the demands on these budgets to see if they are still relevant. Does the market still exist for the products or services you were previously providing in the same way, or should you be refocusing your investments elsewhere?
Also, there are a lot of ‘Sacred Cows’ in businesses that eat up a lot of resources, time and money to support them. Now is the golden opportunity for businesses to really look holistically at their strategies and see if the funding for these projects is justifiable. The world has moved on and adapted quickly and maybe what was once deemed a company's ‘Sacred Cow’ has now become their white elephant.
This 3 step approach sets out the way to analyse your total business expenditure while maximising the optimum savings available to you.
Step 1 - Demand Management
The first step to address the issue of liquidity tightening, is to appoint a ‘Cost Tsar’ within Finance or Procurement, whose role is to project manage a programme to not just trim the budgets from each business line as they traditionally would, but to take a more holistic view of the demands on the overall budget to see if they are still relevant.
It is recommended to have senior executive support for this initiative, getting the stakeholders onboard and to reinforce the message and condition the suppliers to help deliver the targets.
This crisis has provided businesses with an opportunity to realign their future strategy, to ensure it is in the right shape to come out of lockdown delivering the things that will be in demand in the new post Covid-19 world.
To do this your company will need to look holistically at what goods and services are making demands on your funding and, if you believe, that this is a product or service that is not meeting the criteria of being in your future plans you can take steps to cut that out.
A practical example is the future requirements for office space. Deloitte Switzerland recently canvassed their employees on whether they wanted to return to office working. Over 60% preferred to continue to work from home. This gives them the opportunity to reduce their real estate costs to be more in line with the new demands for it.
Step 2 - Do not fear the ‘Sacred Cows’
In the news recently BA and Virgin made statements that they may not be returning to Gatwick once this crisis is over. Preferring instead to consolidate their operations at Heathrow. This is a perfect example of businesses having taken bold action to examine their fundamental demand commitments and not being afraid to move away from their Sacred Cows that had previously been considered an absolute necessity.
The airline industry has been particularly affected by the global pandemic. Twelve months ago, UK airports were operating at near full capacity, the slow return to flights means that decisive steps had to be taken to ensure that the airlines remained viable. Consequently, Gatwick will now have to do the same, and adapt their strategy to encourage replacement airlines.
Make sure your business takes an honest and pragmatic approach at everything it spends its money on and to not be afraid of cutting the budget for products or services that in the past were considered untouchable, as maybe the world has changed and so has the market for them.
Step 3 – Now behave like a traditional Cost Tsar
The final step would be to look at the remaining budgets and to undertake an exercise to eliminate any wasteful spending. Normally this will save 5%-10%, but coupled with extended payments terms and possible vendor pricing haircuts (where you ask the suppliers to reduce their rates) these activities could deliver a further 15% reduction in spend.
Finally making this approach work
To make this work and to deliver this level of savings, it will require Executive level support. Looking at everything your business does and coming up with a list those lines to keep and which to get rid of is only the first step and inevitably there may be a lot of resistance to change. Without the full commitment from the top of the organisation this opportunity will be missed.
In addition, there needs to be a mechanism to look at what costs are coming back. As many companies have been forced to work from home, supply services online or remotely, this has driven a need for greater investment in things like remote IT support and improved cyber security.
This crisis has produced opportunities for businesses as well. The changes in customer demand for more online delivery, has driven companies to reprioritise their investment activities. For example, one company had embarked on an ecommerce transformation journey, that under pre-lockdown plans had been expected to be delivered in two to three years’ time. This project has now been made a top priority and will be ‘fast tracked’ through, with delivery expected by the end of this year.
One final point, not all costs are bad. Invest in the ‘good costs’ i.e. the markets, services, product lines that you need to succeed. Anything that will not play a part in your future success, should be cut out. It will save you a lot more than just running a standard efficiency programme.
If you would like to know more, please get in touch firstname.lastname@example.org
About the author
Rod Love – is an experienced Procurement director with a track record of 25 years working for global organisations in Financial Services, Insurance, Technology, Telecoms and Government. He specialises in operating process improvements, SRM/Vendor Management, 3rd party cost reduction, Supply chain, HR, Marketing, Travel services and large Procurement projects.