The Four P’s of Cost

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Counter-Sales Training: The Four P’s of Cost
You can’t fight an enemy that you can’t see; if your goal is to reduce costs, you have to first locate the costs.

Expense management generally focuses on purchased spend,  which is easy to locate in accounts payable to other
companies. Your purchases drive near term cash flow, and reductions there drop straight to the bottom line… so payables is
a fine place to start. But if you look beyond the bills, a comprehensive view of the company’s resources reveals
thatPurchase is just one of four main areas of cost:

 Planning - Where you compete in the marketplace, where you invest, what you build vs. buy
 People – Whom you hire (and keep), where you place people, level of engagement
 Process – How you do things, what you automate, how you standardize and optimize
 Purchase – What you buy, what you pay
Quick Example: Cozy House Painting, Inc. decides to offer power washing as a complementary service (Planning). The company
buys a high pressure washer (Purchase). Todd, one of the painters is assigned to be the washer three days a week (People). Todd
learns how to operate the washer, and the sales team starts including a sales pitch for power washing (Process).
The decision to offer power washing – the Planning – may have only taken a few minutes. Yet Planning is often the most
critical part of cost, as it drives the scope, scale, and direction of a project. If twenty companies already offer power washing
near Cozy House and margins are razor-thin, then no amount of excellence in the other three P’s of Cost can overcome the
Plan.
IN REALITY the Four P’s are not equal parts, and each one can bleed into the others. But let’s assume for a minute that
they each cleanly represent 25% of the total cost for an organization. In that case, a 20% reduction in purchased spend is
only a 5% reduction in total spend. (Pie A below – still good.)
Things get dodgy in pie B, where a 20% reduction in spend creates a 10% increase in people and process cost. That means
your well-intentioned cost-cutting didn’t actually save any money. (And it did cost you time & energy.) Sadly, we don’t have
to look far to find examples of pie C, where budget cuts led to increased spending requirements. (You fire your accounting
firm, and the CFO and his team have to spend many more hours doing accounting.)
The point is: Effective expense management encompasses all Four Ps of Cost.
Reducing vendor spend doesn’t happen in a vacuum; if you reduce your purchases by 50% while the company makes a
major investment that goes south, you may be re-arranging deck chairs on the proverbial sinking ocean liner.

The Cost of a Jerk

To illustrate cost that doesn’t show up on any invoices, let’s say there’s a real jerk at the company across the office park.
Maybe – for the sake of argument – he does great work himself, but everyone knows he is a jerk and nobody likes it. How
does that impact the company’s cost? Let’s check some P’s:
 Planning – We can still make the same plans, but 5% of the CEO’s time has to be spent on jerk management & cleanup.
That delays planning.
 People – We’ve granted that the jerk himself does good work (no cost there) but what about others around him? There’s
at least some jerk-discussion time and venting/complaining that impacts performance, and in some cases they may even lose
a great person (or not be able to hire a great person) because of the jerk.
 Process – People don’t like to work with the jerk, to the point where they start building and amending processes that
avoid him. The jerk-work-arounds are less efficient.
So before a dime of Purchase, they’ve spent a lot of time and money on this jerk.

The moral: fire the jerk. If you run the numbers, you can’t afford to keep him.
Whether it’s a jerk or simply a bad fit, many company leaders consistently under-value the time of their people, and the hard costs
associated with team under-performance. We can talk payables all you want, but until your team is solid, engaged and aligned in
the right direction, you might get a better return on your “expense management” resources fixing the  humanresources.
When You Don’t Control the P’s…
If your appointed sandbox is the P of Purchase or operational Process, then making jerks available to the industry may be
beyond your jurisdiction. Does that mean you should narrow your view? No way – it’s everyone’s job to monitor value and
cost, so here are a few ideas:
 In your next project update run through all four P’s of Cost. If you can’t be specific with numbers, at least be directional
(will it go up or down, by a little or a lot) and provide reasons. If you want the Powerpoint slides, send me a note: jack at
3qstrategies.com.
 Ask your vendors how their best customers are saving on People and Process costs through their solutions. (Vendors
LOVE that discussion). If it makes sense, let them share it with your C-suite.
 Meet with your internal customers to ask them about the four Ps; and whether Purchase savings have corresponded to
lower costs on People and Process. Ask for honesty and you’ll get it.
 Run through the Wheel of Savings with the project budget owner.
Now that you know the Four P’s of Cost, will the world ever look the same?   If not… I apologize. But at least you can help
your team see that reducing expenses goes way beyond the bills.