Savings: Soooo Much Better Than Revenue

Savings: Soooo Much Better Than Revenue

It’s very simple:

  • Savings increase profits by 100% ; Revenue growth increases profits by 5-10% 
  • Savings increase cash immediately (see below); Revenue growth is cash negative to start
  • Savings are certain and predictable; investing in Revenue growth is uncertain and risky
  • Savings increase enterprise value by a multiple immediately; Revenue growth increases enterprise value by a fraction…slowly
  • Savings avoid waste; revenue growth generates waste

No one is saying don’t grow but remember the old adage that Revenue is flattery; Profit is Sanity; Cash is Reality.

Given all the above it’s even more surprising that so many businesses spend more than is necessary in all sorts of areas? For a long time, the general mantra was “you can’t cut your way to growth” and obviously longer-term, sustainable growth is required for a company to thrive but if you want to improve profits in the short/medium-term and work smarter look at costs.

Cost-cutting activities are often initiated in companies that were struggling. The results were generally that companies either made cuts that were too deep or cuts in the wrong places, thus not achieving the desired result of growth.

But cost-reduction allied to more focus on finding the right suppliers – including working more with proven ones – will have a profound effect on business performance, value and growth. One business I know, with exports under threat as a result of Brexit, took a ruthless look at it’s customer-base, reduced turnover to 25% of previous levels and Is making the same profits. What’s more the owner-manager has a much healthier work-life balance.

The crucial priority isn’t the costs you cut, rather where you focus resources to identify savings opportunities and better performance – strategic cost reduction. Even companies with good procurement practices for their direct costs often fail to employ any of the same disciplines to their indirect costs.     

Many organisations will make cost control a priority, but often day-job pressure and competing priorities lead to missed opportunities, unseen risks, poor procurement decisions and money spent unnecessarily.  Those that recognise the missed opportunities will often bring in external advice.  But in many cases, external consultancies will apply historic bench-marking models or deploy relatively junior consultants and narrow thinking to identify savings.  Is this really optimising opportunity and adding value?

An Enlightened Approach

Our enlightened approach starts with establishing a clear understanding of your vision, strategy, operating model and cost structure.    

I came into procurement and cost-reduction from a background in accountancy, insolvency, corporate finance and operations.  For me, a commercial & cultural understanding of your business is of primary importance.

Incurring a consultancy cost to save other costs is often viewed as a risky bet.  For that reason, our client’s often prefer a gain-share approach – where we’re paid only for the savings we achieve for you. 

Uniquely we are happy to take this a couple of steps further and commit to only being paid when cash savings crystallise and further that you don’t have to Implement our recommendations.  We have enough confidence in our abilities that you will want to Implement them but If there’s a broader business consideration and it’s not right for the business long-term we don’t want you to do it. We want a long-term relationship and thriving clients.

We start with look at your overall spend – and take a deep-dive typically into around 8-12 categories.   Some of these will be tied up in long contracts and a couple will be controlled well already. This will likely leave around 7 focus areas.  We’ll provide an initial savings estimate and share our plan of how we intend to deliver it.

Our agreement with you will encompass:

  • A mutually agreed baseline – the level of spend that we will judge savings against
  • The gain-share model (what percentage of savings and over what length of time)
  • Transparency 
  • Allowing for us to negotiate
  • Instructing us to monitor and manage supplier contracts once we’ve implemented. This gives you operational control and holds us responsible for our savings forecasts. It allows us to ensure savings (and service levels) are delivered, enhanced & crystallised as cash as quickly as possible.

Our Enlightened Approach uses differing strategies for different costs categories based on your long-term requirements   

This is a topic I’ve discussed a number of times (Striking the Balanceand Engaging Suppliers for Competitive Advantage) and means that for those areas of essential spend, a lowest price approach is not always the answer.   

I’d like to think that this is one of my team’s biggest differentiators – we’re in for the long term. Unlike other consultancies, we don’t have an ‘ugly bench’ (the consultancy industry’s unfortunate term for non-utilised consultants) so we don’t have to win business with ‘masters’ and deliver the work with ‘slaves’.  All JMCL consultants are ‘masters’.

An Enlightened Approach is about sustainability.  Good for business, good for the environment and good for long term partnership. I’d like to think my clients agree: