COST MANAGEMENT STRATEGIES FOR BUSINESS

COST MANAGEMENT STRATEGIES FOR BUSINESS

Cost management can mean big savings down the road. In tough economic times, businesses often need to economize just as much as individuals. When you need to keep your costs in check in order to meet your business budget, implement strategies that are designed to reduce expenses or cut future costs. Choose solutions that will work with your business without sacrificing the uality of service delivered to your customers. 1. Reduce Utility Costs

!or a long"term cost management strategy, reduce the utility costs for office or business facility. Cut electricity costs by putting timers on lights, asking employees to turn off their computers at the end of the day and setting e uipment on a power strip that can turn off to prevent power leakage. #educe water usage by installing low"flow faucets and toilets. $o paperless in the office to cut costs for paper, ink and printer maintenance. %s an added benefit, these changes are environmentally friendly and can help the reputation of company. 2. Update Tech olo!y With advances in technology, can save on business costs. &y installing a video conferencing and screen"sharing system, can meet with clients on a regular basis and reduce travel costs. #eplace current phone system with a better Internet connection so can install a voice"over I' system that uses the Internet connection and allows individual phone extensions without adding extra phone lines. %lso improve customer service and reduce the time and staff spends putting out fires by adding instant messaging services for uick communication and uestions. ". Shop S#a$t (anage costs at work by changing the way to the shop. Work with the office manager or the person in charge of ordering supplies to find ways to reduce costs on products buy regularly or in large uantities. Choose off"brands for products that are not as important to save money over time, or switch to a supplier that can give a better deal. When purchasing new e uipment, shop around for the best deal and maintenance plan. %. Retai E#ployees )o keep a handle on the time and money that are re uired to seek out and train new employees and to avoid lost productivity when an employee leaves, focus on retention. (aintain open communication with the staff, provide cross"training, listen to their concerns and keep the workplace fun and friendly. &y making an effort now to keep employees happy and challenged, can extend the time they spend with the company. )he techni ues tend to involve significant upfront investment and a degree of uncertainty as to when, or even whether, they will pay off. %s a result, companies are reluctant to make use of them. )his month*s view from the &ridge describes five specific strategies for managing costs that have high potential and can be undertaken with relatively modest upfront investment, yet are often overlooked by insurance companies. % number of them can be made to pay off 2

uite rapidly " potentially of interest to companies battling a soft market, rising reinsurance premiums, and stagnant +at best, investment returns. Re e!otiate e&isti ! co t$acts -trategic sourcing is a discipline companies use to make the most of what they spend on the products and services they buy from third parties. While many insurance companies have become uite good at executing scheduled sourcing events, fewer realize the potential that exists, particularly in a deflationary environment, for renegotiation of existing contracts. )his is a price that suppliers in competitive markets will often be willing to pay to maintain customer good will. )he way to approach such an effort is to tap into personal and professional networks for directional pricing .benchmarks. from companies that have recently sourced targeted categories, and then compare these benchmarks with existing pricing to identify high potential contracts and suppliers. /ach category and supplier is deserving of its own strategy, but since these negotiations will not be overtly competitive, it*s generally best to ask for desired pricing at the outset and proceed from there. Contract renegotiation is among the most appealing cost management strategies, because savings drop right to a company*s bottom line, and it is not focused on headcount reduction at a time when employees are understandably nervous about job security. It can be applied to everything from roadside assistance and investigative services to office supplies. Focus #a$'eti ! spe d (he$e $etu$ is !$eatest Insurance companies have long wondered whether large and often growing expenditures on marketing were actually paying off, but lacked the tools to know with any confidence whether this was the case. 0irect writers dependent on advertising to steer customers to a website or call center saw little choice other than to pour ever larger sums into advertising if they were to grow, or in competitive markets just maintain, market share. (ore recently, analytical techni ues and software tools for determining the impact of various forms of advertising on revenue and profits have actually gotten uite good, particularly for measured media +e.g., click through on websites or dedicated phone numbers,. It is no longer the case that insurers must simply spend and hope for the best. %nalyzing which expenditures pay for themselves in increased revenue and profits and which don*t can free up funds to be directed to more productive uses, or simply drop to the bottom line.

Reassess a d update p$o)ect po$t*olio 1ver time, a company*s project portfolio can come to resemble a weekend sports enthusiast*s basement, with idle paraphernalia collecting dust, unlikely ever to be used as intended, if at all. It*s not hard to figure out why. 'rojects can take a long time to complete. (anagement changes. -trategies and priorities change. /ven companies that make it a practice to manage portfolios actively are slow to challenge politically powerful patrons, cancel or re"scope projects with materially changed business cases, or admit outright failure when that is the only reasonable course of action. )hey will, of course, eventually get around to terminating at least some of these projects, but not before a great deal of avoidable spending has occurred. Indiscriminate cancellation of projects is not the answer. )hat is a recipe for underperformance when the economy turns, as it undoubtedly will. )he goal, even in a recession as difficult as the one we*re currently experiencing, is to achieve attainable benefits at a substantially lower cost. )he key to this is a dispassionate process that plots up"to"date assessments of each project*s benefits against costs, risks, and barriers to implementation and eliminates " or re"scopes " those that fail to clear the necessary hurdles. It may also be advisable to delay projects with uncertain or intangible benefits, if greater clarity is likely to emerge and benefits unlikely to degrade over time. Co +e$t *i&ed to +a$ia,le costs 2ower claim counts and reduced severity should be good news for both customer and insurance company, but carriers may find profit margins dropping when they try to pass savings on to customers. )he primary culprit is fixed costs. Costs associated with !inance, I), and other forms of corporate overhead have historically been viewed as fixed, but this need no longer be the case. 1utsourcing is now a very viable option for insurance companies interested in relieving themselves of at least some of these responsibilities and, with the right provider and a properly structured contract, a way to transform previously fixed into variable costs. %ctivities like payroll and )3/ +travel and entertainment, reimbursement can be outsourced rapidly at manageable implementation cost. (ature markets now exist for core functions such as first notice of loss taking and claim adjusting as a whole " think )'%s and temporary adjusters. Cash strapped companies may welcome an injection of funds from the .sale. of existing operations and assets to a third party provider. 2arge scale outsourcing is not, of course, right for every company, but selective outsourcing is an option that all insurers interested in moving to a more variable cost base should seriously consider.

Re+ie( a d $eali! sha$ed se$+ice i ce ti+es (any companies have chosen to organize functions present in more than one business unit, for example customer service call centers, procurement, document production, and information technology, into shared services. )hose that haven*t might want to consider this idea, since it has proven an effective way of both managing costs and raising service levels. 4aving done this, some have then put in place cost recovery methods that are at best neutral and at worst actually incent behaviors the company should be trying to avoid, behaviors like overconsumption +transfer prices too low, or discontinuing use of infrastructure or services like procurement or mainframe capacity that benefit greatly from scale +prices too high,. Cost leakage can be significant, as in the case of one company that rewarded shared service leaders at bonus time when their operations produced .profits.. )his company found itself growing its capacity in a number of areas far faster than its revenue as shared service utilization dropped and usage of third parties rose dramatically. )ransfer pricing and chargeback can be very effective tools for helping a company to reduce its usage of products or services that are out of favor and to take maximum advantage of scale economies. )he key is to invest as much thought in internal as external pricing. 1ne note of caution5 pricing schemes that are difficult for users to decipher will fail to produce the desired result, as users will not be clear on exactly which behaviors the company is trying to incent. )his month*s 6iew from the &ridge discussed targeted cost management strategies, a topic much on the minds of insurance executives these days for obvious reasons. It should not, however, be the only topic occupying their attention. (uch has been made of the 1bama %dministration*s belief that a crisis should never be wasted. Insurance companies might also benefit from this line of thinking. 7ow, when even well managed companies find it virtually impossible to sustain earnings and revenue trajectories, might be the time to think the unthinkable. )his might be a once"in"a"career chance to launch initiatives and take other actions that in more normal times might be dismissed as too risky " introducing new services, exiting unprofitable businesses that may have helped to plug a revenue gap, shifting to more productive or cost effective channels, or even changing +e.g., via reinsurance, where the company chooses to take risk. 0ifficult times may bring with them extraordinary opportunity.

AREAS TO FOCUS COST MANAGEMENT STRATEGIES )here are two key decisions critical to successful execution of cost management strategies5 understanding cash flows and changing the how cash flows. !ailure to set these two elements as the foundation concepts for enterprise cost reduction guarantees failure of cost control implementation over the long term. 1ften, those two needs are complimentary. Implementing policies and systems that more carefully track spending often involve systems that can later expand to include an e"procurement platform. -uch centralization as opposed to haphazard local spending controls instill the spending discipline needed for cost management strategies. 1nce those are in place, there are many areas that the practical manager looks to for executable cost management strategies. )hese cost management strategies share one common thread5 only by improving demand forecasts and consolidating purchasing, processes, and people can long"term savings happen. I#p$o+e -e#a d Fo$ecasts 8nowing what you need to spend money on starts with knowing what you will need to produce or support based on your primary industry. !or information work, demand may primarily imply staffing decisions, while in manufacturing it may impact raw material and capital investment as much as staffing. .u$chasi ! Co solidatio )he first step in purchasing consolidation is to increase visibility on current expenditures. (any companies are looking to e"procurement systems that both track spending and offer contractual discounts through vendor agreements. 1thers use existing systems but put spending controls and preferred vendor systems into place. .$ocess Co solidatio #edundancy exists in every organization. It can be reduced by first mapping job functions within the company, analyzing workloads and determining what functions can be supported remotely and which re uire on"site presence. 1ften, functions clearly lend themselves to consolidation. .e$so el Co solidatio

Whether the consolidated process is product development, customer service, sales, information technology support, procurement or human resources, the result is generally fewer people fulfilling the function. -upporting multiple sites from central locations reduces a number of total support personnel and allows for more in depth knowledge.

The Role o* I *o$#atio Tech olo!y When evaluating cost management strategies, a critical task is forecasting both front and end and ongoing expenses associated with the strategy implementation. !or example, centralizing information technology support may re uire special remote monitoring software or increased network monitoring devices. )here also may be .soft costs.. )he lack of trained I) support personnel may result in additional system down time, negating the savings on the cost management strategies related to I) support consolidation with costs on worker productivity dependent on the system uptime. &oth hard and soft costs are critical considerations when determining which strategies to pursue. Critical to any decision is follow up and measuring of each strategy. Without measurement, no conclusions can be drawn about the success or failure.

#eference 5" internet access of Cost management strategies by www.google.com Internet access of (anagement strategies by www.wikipedia.com