Cost reduction can be key to business success. The digital and on-demand economy mean there are more ways than ever of keeping costs down and improving the bottom line, says Ed Cross of procurement consultancy Odesma
The principles of the cloud and the on-demand economy are fundamentally changing the way business can be done cost effectively. New and innovative approaches to business operation are opening up, along with greater insight through analytics and improved productivity through automation and robotics.
Clearly when it comes to reducing costs in a business there remains a continuing trend for reorganising and reducing headcount as well as cutting budgets across the operation to shore up the P&L, improve competitiveness and meet shareholder expectations.
This reactive attitude remains necessary, but reflects a tactical approach to cost reduction. The digital and on-demand economy are driving a range of proactive ongoing cost management opportunities that can be taken to deliver an effective business foundation while maintaining the essence of the proposition to the end customer.
Allied to this, an ongoing and focused management of third-party costs and a rigorous approach to customer profitability will ensure margin security.
There are five major opportunities for maintaining a competitive position:
1. Effective procurement
Often overlooked or misunderstood, a professional approach to managing third-party spend will typically deliver 11–13 per cent in price savings across the total external spend. A longer-term collaboration could deliver double this number without detriment to quality and service.
2. Customer profitability management
For most organisations, potentially only 20 per cent of the customer base provide the target return. This is sometimes a product of over-zealous selling with too limited an understanding of the actual cost to serve, and for longer-term customers changing dynamics affecting deal profitability.
All organisations should regularly review each customer’s profitability and either eliminate loss-making customers, renegotiate or create get-well plans.
3. Harnessing new or bleeding-edge technology
The B2C world is heading towards convergence with B2B. Businesses continue to operate in the old world, while the new one offers solutions on an on-demand call-off basis with no tie-in at low cost. Freeware/open source is readily available with CRM solutions at a fraction of the corporate cost and with greater security. New suppliers entering the market offer much stronger easy-to-use interfaces at much lower prices.
4. Outsourcing non-critical activities
There are a range of onshore, near-shore and offshore service providers covering a range of non-core services, from telephone call handling to financial processing management on a per-transaction or fixed-fee basis much more effectively than in-house functions. In the UK, there are businesses of all sizes providing these services, again at cheaper rates.
5. The flexible workforce
Like outsourcing, utilising experts on-demand is possible thanks to the range of highly talented interims and fixed-term contractors. Not all business tasks need a full-time resource – supplanting permanent staff with non-permanent can be highly effective means of cost reduction.
Ed Cross is a fellow of the IoD.