Our expert panel discuss cost control and the vital part it plays in every business's long-term strategy
Alasdair Northrop, Insider, chair
Robert Allison, managing director, Expense Reduction Analysts
Duncan Campbell, deputy chief executive, National Library of Scotland
David Cockburn, finance director, Innis & Gunn
Murray Falconer, group finance director, Highland Spring Group
Jim Hutchison, finance director, Mainetti Hanger Group
Angus MacLennan, finance director, Sharkey Group
Lorna Paterson, associate, Expense Reduction Analysts
Q What role does cost management currently have in the strategic planning of your organisation? And, as part of that, is it more than just a function by being an integral part of the board's business strategy in the same way as market share and sales are top of the board agenda every month?
Falconer: Cost management is absolutely core to our strategy. We have an overarching strategy which is sustainable profit growth. It is all about getting best value for every pound you spend throughout the company. It's the efficiencies, it's processes, it's manufacturing capability, it's the way we do procurement and how we spend our CAPEX. We have a senior management team that focuses specifically on driving efficiencies throughout the company by questioning the value of every pound that is spent. We are faced with consumers who have got less to spend and we cannot pass price rises on, so by definition you have to become more efficient.
MacLennan: Historically, sales has been our focus and that's what we are going for. But since probably 2008 cost has become the primary issue for our business and probably every other construction business because we are faced with a sales market that is contracting outwith our control. The easiest thing for people to stop is capital spend; therefore, if our market is contracting across the board, there is a limited amount of sales we can get, and those sales are currently going to be won on price.
Cockburn: We have been in business since 2003 and have experienced average annual growth of more than 40 per cent. We are growing quickly but we are also very conscious of growing profitably. If we ignore the cost agenda we change our cash generation and therefore we change the pace of the growth of the business quite significantly. We are a small business in terms of the number of people, and it's been ingrained in all the individuals of the organisation from day one; listen, we have got this lump of debt over our heads to buy the business out, we have got to be careful where we spend our money. So I think we are highly focused on cost control but it's to allow us to generate cash to reinvest into growing the business.
Hutchison: Our end user customer is the retailer. They have the most sophisticated buying departments so that means there is always a lot of pressure on us to be price competitive to make sure we are delivering good value for money to them. So we come against benchmarking exercises and online auctions in order to make sure we are price competitive. In terms of expenses, it becomes really important for us to be extremely cost-conscious, because if we are not we are going to become uncompetitive.
Retailers are very good at dropping people who are not competitive and bringing alternative suppliers in. So you have to be on your game all the time. We are constantly benchmarking what we do. We are constantly looking at our efficiencies and how we run the businesses and what we are doing. We are constantly trying to innovate. An example of that recently has been to take weight out of products. This satisfies two agendas; one is to make the product cheaper, and the other is sustainability - being environmentally friendly, using less plastic and being able to promote the whole green agenda.
There are lots of things we have to continually look at. We go through a very rigorous budget process. We go back down to every individual business, we spend time with the local management teams. Our budget process lasts probably three months and within that there is a month where the senior people in our business sit with the local management teams and go through line by line the items that are in there.
The other part of that is looking at the business model itself. Is what we are doing the right thing in the right part of the world? In Europe, we had a large manufacturing presence but we have shrunk that over the last decade or so and are down to three large production sites now. Our business model has changed entirely from being solely a manufacturing business to becoming much more a recycling business as far as Europe and the UK is concerned. Campbell: We are committed to making annual efficiency savings, which does involve driving out costs. We are funded by direct government grant and although we are continually developing services this is not necessarily reflected in increased funding. Effectively, the more success we have, the more customers we have, the more it costs to do it. So we have to drive out costs from existing processes.
Some 75 per cent of our costs are staffcosts, so our focus is really on effective budget management, about prioritising what we do so we are focused on achieving the Scottish Government's national performance standards. Year on year we are looking to drive out about five per cent and then reinvest that into things which will deliver further efficiency savings, so that's quite often technology or other capital investments that reduce future costs. Allison: 'Best value' is fundamentally at the heart of efficient purchasing, it's about getting the best value for money the whole time. And there is a very distinct difference there in most of our clients, we find, between a mindset for best value and one of cost cutting, and it is often driven by different motives. So there is an interesting discussion around the notion of cost cutting versus achieving best value; it is important to understand there is a marked difference between the two.
One of the key ways to achieve purchasing efficiency in any business is instilling the right cultural mindset. It doesn't matter how good your centralised policy created by finance or buying is, at the end of the day if the staff, the stakeholders, and the people in the business aren't in the right cultural mindset in terms of getting best value the whole time, it will never actually happen. A proper purchasing efficiency strategy should exist at board level - how do we ensure new staffare as dialled in to whatever cost-conscious culture we create? Paterson: All our clients prioritise cost management. In many cases they recognise that they don't have the internal expertise, resource or focus and so ask us to help. In other cases they may already have completed internal reviews and we add the niche expertise. We provide the management data for them to focus on achieved savings and actual spend ensuring initiatives don't run out of steam.
From my experience, it is very much the culture within each organisation that drives that change through. And in our cost review programmes, the greatest success comes where the cost conscious culture is throughout the organisation. Although we can be very successful when there is no history of cost consciousness but it can then be harder to implement throughout the organisation. MacLennan: The leadership aspect is extremely important in terms of the culture. No matter what it is you are trying to do the guys at the very top have to live it, breathe it, and every time they go out they have to emphasise the message they are trying to get over, again and again. You just can't keep saying it enough.
I was thinking of the difference between cost cutting and best value. And theoretically, and medium to longer term, when you talk about best value it all makes sense and I agree with it. But at the moment, it's entirely transactional because people are desperate for business or desperate to keep their businesses going. That's the reality of the way the world works just now. And it's very short-termism and it certainly isn't going to be sustainable medium to longer term.
Hutchison: That sometimes drives innovation, though. I know I have made unreasonable requests of people who worked with me, for example, in engineering where we used a certain type of material and I was unhappy with that. I specifically gave them a task to find a way to use a cheaper alternative, and I knew it was completely unreasonable. But by throwing that challenge out there, it's amazing what these guys suddenly came up with, they found a way to make it work, but they would never ever have done that if we hadn't challenged them.
Paterson: But you were asking only your internal guys to do that rather than also working with your suppliers.
Hutchison: But it works both ways. And we have done it the other way around as well. We have made unreasonable requests of suppliers, and it's amazing how, when you do that, they come back with a response. It's about challenging the status quo. Allison: I think providing they can see it isn't just a price-based request, coming back to this sort of differential we know, and getting into supplier relationship management, where you are able to go to them as their supply chain partner and look to let them understand the challenges in order to let them work with you to find the solution, rather than just hammering on a simple price. It's certainly something we see a lot in companies, even in some of the construction sectors.
Q Should organisations tackle costs as a transactional exercise - is it to achieve better pricing or is this not just a short fix solution as the better pricing achieved could quickly become not best value?
Falconer: The current situation for where we have got brand business and own-label business it's about half and half. There is no doubt in the own-label business, all of it we are doing on a transactional basis. If it covers your costs, it keeps the infrastructure in place, we get the distribution and we have got a chance when that distribution is renewed in a couple of years that we will be in a good place. We don't do it with the brand; on that side of the business we try and sustain the value there. So the reality is about keeping the infrastructure in place and that does mean compromise and you very much do things on a transactional basis.
Cockburn: At Innis & Gunn, we are at a big advantage in not having a large infrastructure to support, meaning we are not diverted from our main focus of trying to grow and develop the brand.
We are, however, always looking at ways to reduce costs through our supplier base. In the early stages of Innis & Gunn, good credit terms were the big issue - we are now on a much firmer footing there. Glass is very, very expensive and we have had to reformulate our bottles due to the rising price of glass, largely driven by energy costs. It wasn't purely a transaction because we had to invest in the tooling that we hope will save over the longer term.
Campbell: We are looking to drive the best bargains we can. I agree that the short-term thing often results in longer term problems. I've got a number of examples of that where we have done the transactional bit, achieved lower costs in one area but found that in the longer term it's costing more. Achieving best value is the focus.
Allison: Getting value for money defined right up front is important; what do we expect of the supply chain in terms of quality, service, delivery and environmental considerations? In this day and age, getting those right upfront is absolutely essential, and getting the stakeholder buy-in to all of those things will help to keep those savings in the bottom line for the long term.
I remember a particular client where they felt that - from a finance and procurement perspective - they had trimmed out pretty much all the fat they could but they wanted to try and find a way of incentivising the staff, to create that culture. Stafftraining and development was a big issue, it was something they were struggling for budget to do, but there was high demand from the staff.
So they set up a staffreward scheme where any innovation for cost saving that was measured they were able to take a share of that and put it back into a training budget to allow the individuals to develop and get something back personally out of the innovation they had shown. And culturally, just in terms of the people at the coalface making a difference, they found additional savings the finance and procurement teams had never unearthed. So there may well be an ability, if there is a demand for training, to use it as a motivator.
Hutchison: We have a few things we were pretty keen to emphasise in terms of this whole process. One thing that is an absolute dictate to all senior management is management by walking around. In other words, get out there, get in the factories, meet people, talk to people, get in front of customers, meet suppliers and find out what's going on. Open your eyes and see what's going on. And ask questions. Be seen. It's a massive part of what we do.
There is another big emphasis and that's on effective management. And by effective management I think what you have got to have are timely, accurate numbers first of all. You have then got to analyse these, find out where the problems are, come up with what the solution is and then implement that.
What we do throughout the year is pick a specific area and shine a light on it. It may be stock, for example, so we will decide April is going to be stock month and we will have a serious look at stock. We go round all the businesses in the group and shine a light on stock and it gets it under control. You turn a stone up and you maybe find one or two things you didn't like so you sort it out.
Campbell: I find that the marginal gains from driving out the costs are often not worth the effort. It's more effective to be clear about what you need, why you need it, ensuring that it does what it's supposed to and holding managers accountable for delivering the benefits.
The danger lies in the sub unit optimisation scenario, where one part of the organisation achieves cost reductions that impact negatively elsewhere and result in overall inefficiencies. It's important to understand how decisions impact on the overall objectives.
Q What else should companies do to keep a healthy bottom line in the current climate?
Falconer: Keep your workforce on side - they know it's tough but need to feel part of the solution. Like many companies, Highland Spring's initial reaction to the 2008 recession was to cut the training budget. We are now, despite ongoing pressure to keep employee costs down, reversing that trend by investing in people and leadership skills, which in turn improves morale for the recipients of the training and direct reports.
Involving all employees is a key part of engagement. One method we used was round table talks with all shop floor employees, sitting with the production manager. Everyone likes to be listened to and we got many good ideas that have been put into practise. That principle was replicated throughout the company.
Cockburn: Sometimes the low cost option is not the right option. The one that will free up time for people to do something else, somewhere else, could actually lower the overall cost of doing business.
Hutchison: I think you have to celebrate success, so if success is defined as profit and you make a profit, spend a bit of money and celebrate. Mainetti had their 50th anniversary last year and we decided every company would take all their employees out and have a big bash. Every company went out and did their own themed parties. It was amazing the impact it had on the staff. It was incredible how engaged they were with the business after that. So you have to celebrate. Define what success is, if you hit small milestones, celebrate and get people geed up for the fact that's a really good thing.
Campbell: Certainly in terms of the process driven, that for me is important; what are you doing, is it the best way of doing it, do you need to do it? In times where you may be downsizing it's important not to reduce working conditions that impact negatively on staff. I would probably invest more, rather than trying to go down a route where you could cut the size of the desk, the quality of their chairs, but you don't because you will end up with disengaged staff. Staffwho are not engaged are more likely to undermine you, particularly in times of change.
Paterson: I think that's very true. We see it's very important to work with stakeholders from the start of all projects Otherwise you can have somebody at the very bottom who can undermine, or really work very hard to undermine, a change and can cause serious problems. We also recommend asking suppliers about ideas to cut costs.
Allison: A business is made up of two things; what it earns at the top line and what it spends, and whatever's leftis its bottom line. Everybody is used to looking at market share and top line. But get the right measures in place so the board can keep an eye on the whole healthiness of procurement across all areas; procurement efficiency in everything they do, right the way down to even the tactical, everyday transactional stufflike office stationery.
If the right measures - and they don't need to be complicated - can be created, the board members begin to keep their eye on it, that naturally creates the leadership of cultural change. Culture works its way through the organisation and before they know it, the company is an organisation that believes in added value at all levels.
It's a simple circular process. But getting the boards to recognise that; that these transactional things are actually worth the time of day, is always a challenge.