Manage Occupancy Costs and Operating Expenses to Increase Agility During Economic Uncertainty
By: Expense Management Solutions Printed in: EMS Newsletter
Each year, The Conference Board, publisher of the often referenced Consumer Confidence Index and many other popular economic indices, publishes a report on the CEO agenda for the coming year. Invariably, top-line growth has ranked at or near the top of the agenda in recent years. The economic benefit of pursuing increased revenues has generally exceeded the economic benefit of investing in reductions in corporate operating expenses to bolster the bottom line and increase profits. That calculus is about to change.
The latest report, CEO Challenge 2008: Top 10 Challenges, was based on a survey originally conducted in July/August 2008, but was then subsequently updated in October 2008 as the global financial crisis unfolded. “Sustained and steady top-line growth” dropped from the 2nd highest concern of the 94 CEOs surveyed to 6th, while “speed, flexibility and adaptability to change” rose from 7th to 3rd.
Just last week, the Federal Reserve released minutes from the October Federal Open Market Committee, which reported lowered economic expectations and predicted negative growth in the final two quarters of 2008 and first two quarters of 2009. Across the country, uncertainty about the economic outlook is causing businesses to reduce capital and discretionary expenditures and lay-off workers.
As companies reduce capacity, shed jobs, dispose of assets and position themselves for an uncertain economic climate, how can corporate services executives, responsible for a wide range of functions from corporate real estate and facilities services to mail, food, travel, document management, print and copy centers take proactive steps to ensure that they are perceived as a strategic asset, rather than a disposable one? In recent years, many of the companies with whom we work have effectively positioned their corporate services organizations to have the “speed, flexibility and adaptability to change” that CEOs value. And although the correct delivery model for these critical functions may vary from one company to the next, the approach that an organization should take to develop and implement the right strategy will have many common elements.
Know Your Costs
True expense management begins with a clear understanding of the related costs, including those associated with finance and other administrative functions that contribute to total costs. Often, the corporate chart of accounts used to report a corporation’s financial status does not effectively capture or report on costs of a function like corporate real estate transaction management where some elements of the transaction may be performed by finance and accounting or legal departments. How much of your cost of providing mail services or security services are buried in HR or maybe even IT? Are other departments misallocating expenses into corporate services categories? Are the existing account categories too vague to even analyze? Unraveling these complicated threads to get to actual costs is critical to understand which of many options for corporate services delivery will be most effective.
Know Your Options
Options for increasing corporate agility and decreasing operating costs focus on a few critical components:
- Eliminating unnecessary costs or services
- Understanding required service levels
- Enhancing scalability
- Leveraging purchasing power
Over time redundancy can be built into corporate services organizations as companies inherit existing contracts through a merger or an acquisition, fail to eliminate an unneeded service when it is no longer required, or fail to identify duplicate layers of administration. Many large corporations are centralizing services, and eliminating costly and redundant layers of overhead and administration within business units. Standardization of service levels across business units and geography can streamline operations as well, increasing agility and reducing costs.
In a time of uncertainty, scalability may be the most critical aspect of the CEO’s concern with speed and adaptability. How quickly can you respond to capacity reductions or employee layoffs by adjusting your service delivery model? While outsourced services may be more readily adaptable and less costly than self-performance, there are actions that can be taken to make your self-performed corporate services organization more nimble as well, including more effective space utilization or out-tasking of specific aspects of the function where the need or requirements are more variable and uncertain.
Many companies have untapped leverage that can significantly reduce operating costs. Most obvious are situations where business units that purchase services independently can combine their collective purchasing power. Other opportunities exist as well. Not only can you bundle volume to achieve leverage, you can bundle a larger package of services under a single contract as many companies are doing through integrated sourcing initiatives. Increased leverage can be used to negotiate not only favorable pricing, but increased service levels, flexibility, innovation, and other critical corporate priorities. Can you leverage your purchasing power in a particular market to lower the cost to the supplier of providing a service to you? Indirectly, your market influence can be a source of leverage as well.
Know the Marketplace
Deep knowledge of the marketplace may never be more critical than it is today. Most companies conduct market research when developing a bid list for a sourcing initiative, but unless you are committed to market research or have teamed with an organization that monitors the true pulse of the marketplace, the results of your search may be suspect. How are last year’s failed sale/spin-off of Pitney Bowes Management Services and this year’s pull-out of DHL from the US domestic express delivery market impacting the marketplace for corporate mail services? If you rely on DHL, what are your options? What are the implications of C.B. Richard Ellis’ public stock offering of 50 million shares, the intense battle for control of the Board of Directors of Grubb & Ellis, or the worldwide consolidation of global real estate markets on the marketplace for corporate real estate services? Reliable marketplace intelligence is the key to making the right moves in uncertain times.
Rapid ROI
Corporate services executives who understand their costs, options and the marketplace can still face resistance. It is a common misconception that savings from initiatives to control operating expenses take years to recoup. Although a major sourcing initiative can take from 3 to 9 months and require a significant investment of resources, the savings generally begin to accrue immediately. This means that a sourcing initiative begun early in 2009 (whether it’s a renegotiation or full competitive bid) has the potential to recoup all related costs and push savings to the bottom line even before your fiscal year ends, while increasing the flexibility and adaptability of your organization. A current assessment focused on internal opportunities to improve efficiency and effectiveness may require as little as 30 – 60 days to complete and can begin to generate returns within the same quarter.
With prospects fading for any kind of economic recovery until late 2009 or 2010, this is a great time to consider options that have the potential to reduce your costs today and increase your competitive advantage in the long run.
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For additional reading:
Global IFM Sourcing Initiative Results in $45 Million Operating Cost Reduction
Food Services for 1,200 Outsourced and Implemented in 30 days
