Indirect Expense Management

The Challenge & Benefits

of

Improving “Indirect” Expense Management

July, 2012

Presented by:

Dave Pagedpage@expensereduction.com(314) 616-1154

Indirect Expense Management

Challenges in Recent Market Conditions

• Funding sources are becoming more difficult to obtain

• Government regulation & control is increasing

• Difficulty to “expand” business organically

• Growth in Sales requires larger amount of $ increase due to impact of Margin (see next slide)

Indirect Expense Management

• Column1

Column1

Column1

Current20% CostReduction

EquivalentIn Sales

Revenue $ 100 $ 100 $ 114

Direct material costs $ 35 $ 35 $ 40

Direct labor costs $ 35 $ 35 $ 40

Non-core indirect costs $ 20 $ 16 $ 20

Net profit $ 10 $ 14 $ 14

After tax (40%) $ 6 $ 8 $ 8

Business Value = 6 P/E $ 36 $ 48 $ 48

$4k Non-Core Expense Reduction = 40% increase in ProfitTo Achieve SAME 40% increase in Profit, $14k in Sales Required

Even GREATER increase in BUSINESS VALUE

Increase in Sales vs. Indirect Expense Reduction

Indirect Expense Management

Definition of “Indirect” Expenses

• Those “Required” expenses that ARE NOT directly related to providing the PRIMARY goods or services that the organization delivers to its clients

• However, they ARE required to conduct business

• Typically are areas of expense with little management focus due to other priorities in “Direct” expense areas

• Although “Indirect”, these expenses can have a direct impact on quality of services provided

Indirect Expense Management

Services

• Food Services

• Printing, Imaging and Reprographics

• Payroll Processing

• Janitorial Services

• Uniforms and Linens

• Waste Management

• Utilities and Energy

• Records Management

• Information Technology

• Facility and Equipment Maintenance

Logistics

• Small Package Freight

• Freight and LTL

Telecommunications

• Data

• Mobile

• Voice

Merchant Card Services

Recruiting and Contract Employees

Banking Services

Supplies

• Office and Stationery

• Cleaning and Janitorial

• Medical and Lab

Insurance

• General/Worker’s Comp

• Health

Examples of “Indirect” Expense Categories(depending on Industry)

Indirect Expense Management

Challenges of Managing Indirect Expenses Effectively

• Primary focus on revenue, margins, staff costs & direct expenses (i.e. fulfilling the Purpose & Mission of the business)

• Limited time for Senior management to address indirect costs

• Limited resources and/or knowledge to manage indirect costs

• Many companies “think” they are getting the best price for services offered with inadequate or no validation

• Believe the suppliers are looking out for their best interest

Indirect Expense Management

Nothing is EASY !

So, How Do Company Management Groups Respond?

Indirect Expense Management

Methods Often Used

• Multiple suppliers • Used in past• Referred by others

• Establish multiple ordering points within organization

• Delegates purchasing decision to “Best Available”

• Join Group Purchasing Organizations

• Primary focus is on price

Our Experience in Working with Other Clients

• Suppliers limit options • Those that benefit “them” the most• Fail to properly analyze YOUR needs

• Reduces savings potential and cash flow

• “Best Available” often lacks complete knowledge or in depth experience

• GPO’s pricing is based on a profile that may differ from yours. Result: higher pricing

• Other key business needs or ignored

Indirect Expense Management

Headcount Reduction – Lessons Learned• Many organizations focus on headcount reduction as a means

to generate extra profits•It may be emotionally difficult, but tactically easy to do

• There are times when headcount reduction is unavoidable, however at SOME point maximum staff reduction is reached

• However, cutting too deep creates long term difficulty•Good people are lost•Service and quality suffer

• Profits from indirect expense reductions can help keep your best people and maintain quality service

Indirect Expense Management

Do These Efforts Have REAL Impact?• These Indirect, non-strategic costs typically

represent on average 15% of revenue

• Savings Opportunities can Average 20% of what is being spent

The Opportunity IS REAL - 3% of Revenue!

Indirect Expense Management

Examples of Savings Opportunities by Category

Indirect Expense Management

Pitfalls of “Business as Usual”• Loss of good people

• Service and quality suffer

• Inefficiencies in indirect purchasing management

• Lack of control or alignment with organization needs

• Higher expenditures and/or impact on overall mission & purpose of meeting needs of YOUR Clients

• LOST OPPORTUNITIES in terms of Use of Funds – profit, shareholder distribution & return, allocation of limited sources of funds (contributions, financing, retained earnings from prior periods, etc.)

Indirect Expense Management

Effective Cost Management Strategy

• Must be part of company DNA

• Needs to be a clear cut strategy

• Indirect Cost Management is on-going

• Prevent complacency or over-confidence

• Benchmark with others that have similar profile to yours

• Understand what you are buying

• Talk with your suppliers regularly

• Monitor and measure

HOW is this BEST Done?

Indirect Expense Management

Look at what you pay for the goods and services you buy.

Indirect Expense Management

Review processes

Indirect Expense Management

Ask your suppliers what you can do to reduce costs

Indirect Expense Management

Supplier Relationships - What They Don’t Want You to Know• The largest spending clients don’t always get the best

price

• Three companies with the same suppliers don’t always get the same discount

• A level playing field between buyer and supplier is a misnomer

• Supplier loyalty doesn’t always equate to best price

Indirect Expense Management

Improved Indirect Cost Management leads to Increased Cash Flow

Summary• Handled correctly indirect cost management can be a major

contributor to increased cash flow

• Does not mean slashing budgets or eliminating business expenses – often more a matter of ALIGNMENT with your business needs and Supplier offerings

• Indirect cost management is an on-going process involving management, stakeholders, suppliers

• Equal emphasis on business mission, quality and reliability standards is crucial to successful indirect cost management improvement

Indirect Expense Management

Take a fresh look. . .Whether Your Management Team does this Alone or they Seek Support

Indirect Expense Management

Why Utilize Outside Indirect Cost Management Expertise?

• Have the time and resources to dedicate to indirect cost reduction and management – will get off your “to do” list

• Provide proper “benchmarking” capabilities to ensure you are getting the best price for service

• Help determine what categories should be reviewed

• Provide “best practices” to help maintain ongoing improved pricing and services

• Enhance your supplier relationships

• Your advisor, analyst and advocate in partnership with key stakeholders – suppliers may ATTEMPT to meet your specific needs, but simply not have an ALIGNED offering available

• Improve profits and cash flow more quickly - $ for $

Indirect Expense Management

A Global Cost Reduction ConsultancyArgentina Australia Austria Belgium Brazil Canada Chile Colombia Cyprus Ecuador Finland France Germany Greece Hungary Ireland Italy Jordan Korea Luxembourg Mexico Morocco Netherlands New Zealand Panama Portugal Spain Switzerland United Kingdom United States Uruguay

Expense Reduction Analysts

Indirect Expense Management

ERA – MORE than PRICE FOCUS

Indirect Expense Management

Wrap Up• Our Executives have held Senior Management roles –

understand your limited time, respect issues related to priority & are focused on relieving you and your staff from the “heavy lifting”

• All attempts are made to use data sources you already have in place – General Ledger, ERP systems, samples of vendor invoices, contracts, etc.

• Proprietary software in place to allow focus on issues other than simply price

• High respect for Confidential nature of your business activities, but similar to other Professional Service firms, we serve LARGE number of clients on a regular basis

• FINAL DECISIONS always are YOURS – it is YOUR business

Indirect Expense Management

Where and How Can we Best Support Your Efforts to Improve

Management of Indirect Expense?

Thank You!