TOP 1000:COST REDUCTION strategies have once again come centre stage as the economy continues to contract. Accountants and management consultants are reporting a sea-change in corporate practice over recent months as companies attempt to reduce their operating costs.

Garrett Cronin, of accountants PricewaterhouseCoopers, says that there has been a surge in demand from clients since December for ideas and information on how to “right size” for a shrinking market. The good news is that many organisations have significant scope for cost savings, some of which can be implemented within a day, he says.

“A lot of little corporate perks, for example, grew during the good times when it was difficult to recruit talent and in the new environment many of these can be eliminated without much resistance,” he suggests. Implementing new policies on areas of office expenditure can also produce quick results. Examples include setting photocopiers and printers to a default double-sided and limiting access to colour copying which is 14 times more expensive than black and white, he says.

Each of these changes involve small savings which all add up but, apart from that, they can help to change the mindset in an organisation to one where practical steps on cost control are seen as important. Waste elimination can also be promoted as an environmentally-friendly initiative.

On a broader level, he says, businesses need to undertake a thorough review of their operations to determine where profitability lies. For example, in a strong market, volume might have sustained profitability but with this in decline, particular product lines may be less viable than before.

The important thing is knowing. “Sales staff, in particular, need to be more attuned to margins than before so that they know which product lines to push. The best way to do this is to align their commission with what produces the best margin for the business,” he suggests.

Cronin suggests that business managers should focus on a small number of financial metrics, such as cost, margin and working capital with green, amber and red settings. “One of our clients had 49 metrics to measure their business and this is far too many. We reduced it to nine to create a much clearer picture.” Many cost-reduction strategies focus on payroll. Employers, especially in non-unionised environments, have a wide range of options here, all of which are now widely in evidence in the private sector.

Apart from redundancy, these include non-replacement of departing staff, restricting overtime and bonuses, reduced working hours, pay cuts, changing status from employee to contractor and outsourcing business functions such as accounts and payroll.

Joey Boland, of accountants Russell Brennan Keane, says that while controlling payroll is vital to achieve cost savings, businesses need to manage the readjustment carefully. “Organisations must not take their eye off long-term strategic goals.

They have invested time and money in recruiting and training staff, and it is during difficult times that they need to see real return from their investment. When resizing you need to ensure that you do not lose key people in the business.”

Boland says that there are a number of non-payroll items firms should look at including production

levels, high levels of debtors with badly-managed credit and poor deployment of technology.

A waste audit clearly identifies what can be eliminated over a short period and can yield savings of up to 30 per cent. “There’s no point pushing more business through an inefficient system,” he notes.

“You need to manage cash and debtors to ensure that you don’t become a banker for your customer and look at alternative sources and options for funding such as factoring debtors and attractive terms for cash payments. At the same time you should continue to grow sales by looking at new markets and products but don’t be a busy fool – make sure the sales are profitable,” he advises.

Another practical suggestion Boland makes is that businesses ditch their cheque books and make electronic payments instead. Government stamp duty on cheques is now 50 cent whereas the average electronic payment will cost approximately five cent, he points out.

HUGE SAVINGS can be made in areas such as print buying to take advantage of strong competition in the market. Advances in technology can also be capitalised upon. If business travel is a significant expense, teleconferencing could be used as an alternative on some occasions and Voice over IP systems could be considered to make savings on long distance calls.

“You should focus on every cost driver that is not essential for your core business. and identify what the Japanese call muda (wastefulness). You will be surprised how many things you won’t need for serving your customers,” says German-based management consultant Guido Quelle.

Quelle says different strategies need to be adopted for core and non-core suppliers. “Talk with your non-core suppliers about additional rebates for payment in advance or payment within a week after delivery. Reduce the number of non-core suppliers dramatically. Talk with your core suppliers – these are the suppliers you need to build your products or deliver your services – about a long-term strategy.

They are probably having a hard time too and you depend on each other.” Traditional service contracts that have been built up over the years should also be reviewed. Employee benefits are one example. “The market for group risk and private healthcare has become extremely competitive in recent years,” says Kevin Kinsella, of Mercer.

“A regular review of these areas can deliver significant savings which are seamless to the employee and often do not require a change in provider.” He cites an example of a large IT company with 3,000 employees that changed its benefit plan from a traditional hospital plan to one with excess which it funded for an extra €30,000. The company achieved a net reduction of €400,000 per annum without reducing employee benefits.

According to a recent report from international consultancy firm the Hackett Group, the top 1,000 global firms could decrease their cash outflow by more than four per cent of their annual revenues by managing their inventory to the same levels of efficiency as their top performing industry peers. Such a reduction could have a huge influence on overall profit margins.

“In a tight credit market, a company’s first priority has to be funding its cash needs at the lowest possible cost from the most readily available sources.

The first place to look for cash is in excess inventory,” the report says. Experts agree that cost-cutting should be part of a more broader based review of how a company is run. The aim should be to position the company to take advantage of current market conditions while at the same time keeping one eye on the future for when the market improves.

“When companies are facing a downturn, they too often solely focus on cost reduction. Especially in a crisis, it is crucial to focus on the customer’s needs and on the quality of the products and services,” notes Quelle.

“Cost-cutting can’t save a business’s future. It can only be a supportive means on the path of creating profitable growth again,” he adds. Cronin says that the smart companies are those who will look beyond the negativity associated with downsizing to achieve more flexible and responsive business models.

Outsourcing and shared services centres can play a valuable role here, he believes. Traditionally, outsourcing was the preserve of larger organisations but he notes increased interest from mid-sized organisations who can see the attraction that include accessing functional expertise and having scalability to react quickly to changes in market demand.