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Cutting expenses but not your own throat

December 15, 2008

The best way to preserve cash is to stop spending. But, obviously, you have to be strategic and cut in such a way that it also builds the company for the future.

Based on my experiences at various clients over the years, by taking a reasonable and strategic approach, you should be able to cut 9% – 22% off your Expense lines while most likely making your company a better competitor. It might also help a company beat the odds and emerge from Bankruptcy. By the way – this is high stakes poker – if you go too aggressive and cut muscle, the returns will be a short term ‘false positive’.

Who should do the cutting? Generally, we recommend an outsider, mainly because as I often say “we’re the people everyone can agree to hate” or as a client once put it “you’re a first class SOB but you’re our SOB”. Insiders often do not have the broader cross-industry exposure, are used to doing things “our way-it just is” or are afraid of the ramifications to themselves. Your employees and executives/senior leaders should be represented on the Approval /Steering Committee.

Assuming you are using an outsider, how do you contract? There’s a bunch of people out there right now who will go for a straight percent of the save identified, but this often leads less to savings and more to amputation without regard for life- after. The better way is to put a bit of skin in the game as a 1-month billable project to bake this initiative into the staff, structure the Governance model, etc, followed by 20% of the amount mutually agreed to as identified potential saves (this means a business model, identified vendors, terms, etc.). If you wish the outsiders to perform the saves, then expect to pay an additional 15-20% (for a total of 35-40% to the outsiders, 60-65% of the saves stay with you) once the saves are completed. Make sure they teach your employees how to re-run a cost savings initiative on their own.

Where are the savings? As an example, the items listed below are a sub-set of what we, and presumably others, would examine in the IT arena which is usually a large % of spend:

Applications Development, Maintenance, Licenses
• Review all quotation software to ensure the edits/rules are current and tight enough to prevent overly aggressive quotes, i.e. ‘revenue leaks’
• Ensure licenses are used and return all shelf licenses which will not be used for 24-36 months. Why pay now? They’ll be glad to give discounts anytime.
• Are we getting value for maintenance dollars and can we lower the cost based on value received? Can we use 3rd party certified providers for routine maintenance?
• Are we overusing any online applications and can we cut back to a controlled level? Many people see online as ‘free’
• Can we not renew non-strategic licenses coming due in 2009?
• Are there avenues where implementing technology will provide MEASURABLE saving in 2009? Examples would be implementing workflow to replace field FTEs
• By implementing Shared Services, can we reduce the number of licenses, hardware footprints, business unit staffs, etc?

Projects, new and In-flight

• Review all projects to see if they are properly scoped, structured and have a measurable payback within 12-24 months. If not, is the project sufficiently strategic to remain active?
• If implementing any Enterprise software such as ERP, most vendors will supply significant resources gratis to ensure the project is successful. If early on and the vendor is uncooperative, introduce competition if possible and revisit.

Network Infrastructure
• Review contracts to ensure best deal.
• Review bills – often leads to 10-30% savings
• Deploy VoIP to save 50-90 %
• Review which sites need 99.99% uptime vs. 99.9%. This often saves in excess of 20% of WAN expenses

Hardware Infrastructure

• Defer Windows upgrades unless cost free
• Defer PC replacements; do not go to Vista or Windows 7 in 2009
• Virtualize and consolidate servers, use Linux for servers
• Review and standardize business intelligence and reporting software vendors
• Postpone all architecture pilots, evaluations and upgrades
• Review data management requirements to avoid adding online capacity, also reduce duplicate data storage by various systems in favor of Master Files callable by all. For example, save Customer info once, use many.

Purchasing
• Set and enforce strict rules on purchasing new services, equipment, etc.
• Immediately consolidate ALL procurement to the Procurement Dept. No credit cards purchases by units or people
• Start Vendor Management process, including tracking and adherence to SLAs and Master agreements
• Buy used first, new only if absolutely required
• Review if remote offices need full infrastructures or it they can use online versions of a central application – reduce hardware, infrastructure and licenses accordingly


People

• Review required staffing levels, reduce as required
• Review which non-essential services can be moved to a 3rd party vendor
• Stop all conferences and courses

Rich Eichen is the Founder and a Managing Principal of Return on Efficiency, LLC, who’s website is http://www.growroe.com and is one of their senior turnaround leaders/CROs, Program and Interim Executives with over 25 years’ experience reshaping companies, Operations, IT and key initiatives. He can be reached atrichard.eichen@growroe.com

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