www.advancedcomputersoftware.com/absVersion 2.1 Copyright Advanced Business Software and Solutions Limited

Introduction Repeatedly reducing operating costs is becoming a depressingly familiar condition of staying in business as the economy continues to show little sign of improvement. While in the public sector, the severity of a new round of savage cost-cutting has left organisations reeling, business leaders in the private sector are now complaining that recovery isn’t coming quickly enough. Having made numerous rounds of cuts already, they are understandably frustrated to find that the market has barely moved and that sales remain depressed.

With no significant upturn in sight, many companies now find themselves facing the unthinkable: having to take out a further level of costs to achieve their financial performance targets or, in the more extreme instances, just to stay solvent. But how do they do this without damaging the business? Given that most organisations will have already taken drastic measures to get themselves commercially lean and fit, there is a real risk that as they seek to make deeper and wider cuts, they could cut into the muscle of the business.

If ever there was a case for a more strategic approach to cost-cutting, it is now.

Cost-cutting now a critical business risk

According to Ernst & Young’s latest annual survey of business leaders, cost-cutting is now perceived to be the second most significant business risk after regulatory compliance (Source: Ernst & Young fifth annual Global Business Risk Report, December 2010). In 2009, it was ranked sixth. This advancement up the rankings suggests that, within just a year, organisations have become increasingly aware of the need to cut costs and how this could potentially impact their business.

The dominance of other business risks mentioned in the current survey all related to this theme: the slow recovery (in third place), market risks (fourth), and pricing pressures (which climbed 10 places in the rankings to assume fifth place), all confirm how cost management is increasing in importance in the boardroom.

UK businesses are now operating in a more volatile and more varied environment than before the financial crisis. As a result the risks facing organisations are increasing, with the biggest danger being that if companies cut too far - or in the wrong places - the impact on the business could undermine all of its other objectives.

Where superfluous activities have already been curtailed, ambitious projects put on hold, and staff numbers reduced, organisations are right to be concerned about the long-term impact of any further cuts they might make. If they look to retire senior staff on large salaries, they risk losing valuable experience – an asset they may find hard to replace when the recovery does eventually come. If they slim down customer-facing teams, or outsource customer services’ activities to offshore providers, they may impact service quality – often one of the key differentiators of a business. If they halt innovation initiatives they could be jeopardising their competitive position in the race to capture new markets.

How to cut costs without damaging your business

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Maintaining the business value triangle Successful cost-cutting relies on having a clear strategy for change which manages the business value triangle of cost, service and risk holistically, a clear strategy for change, which means it is vital that a focus on one side does not distort or weaken the remaining structure. Focus too heavily on solely cost reduction without considering the impact on the other two dimensions and service levels may go down and the ability to easily identify potential business risks will reduce.

Yet this kind of business logic often falls by the wayside when a company is panicking, for example where costs are being cut out of fear for survival. More typically, in this kind of fire-fighting mode, a company will make seemingly random cuts in order to hit equally random targets as quickly as they can. It is not until the situation plays out that the individual manager, department or the organisation as a whole realises the wider ramifications of its actions.

A report from Source for Consulting, which provides market research and thought leadership to management consulting firms, highlights the importance of intelligent cost-cutting by businesses (source: Intelligent Cost-Cutting, Source for Consulting, 2009).

The report, which explores what can go wrong in cost-cutting projects before going on to identify critical success factors, concludes that too many companies are preoccupied with numbers and percentages when they should be focusing on what they are doing and why. This approach can strip an organisation of critical resources, leaving it nothing to fight with. If a business is stripped back to its basic mechanics, how can it differentiate itself and impress customers?

The study notes that a strategic, intelligent approach to cost-cutting requires a 360 degree view of the business and its value proposition so that the right elements are protected when making cuts. Companies going down this road will typically recognise the need to retain value despite cutting costs. They will also appreciate the merit of investing in a new way of doing things, or in supporting a new IT system, if it means securing longer-term savings. Therefore, rather than arbitrarily slashing a percentage off spend in each department, making another layer of staff redundant, or indiscriminately stopping all new projects, companies need to be more selective in where, why and how they attempt to make savings.

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Predicting the impact of cutsA critical success factor in any cost efficiency programme is the ability to measure and understand the implications of any cuts to the business as a whole, not just to the department or project that will be directly affected, before the cuts are made and irrevocable damage is done to the business.

Often, a company will set targets for each business function, expecting them to achieve a specified reduction in spend (defined as a percentage of current spend). This assumes that each department still carries a layer of fat and can cut back by losing 1-2 more employees, asking everyone to take an X% pay cut, by reducing overtime, or by using less paper. No consideration is given to the differing level of impact that a single decision could affect different parts of the business. If the knock-on effect is overworked and demoralised staff, longer supplier payment cycles, slower delivery times and/or poorer customer service, the cost to the business could outweigh any benefits of reducing costs within the business.

When this happens, the business may have failed to take into account the domino effect caused when cuts to one department ripple through from one function to the next, whether from marketing to sales, finance to HR, or distribution to customer services. Evolving decisions about cuts to departmental managers can be counterproductive for this very reason.

The target cost saving figures set out on a spreadsheet at the planning stage may not materialise in quite the way the company imagined. While most organisations are able to forecast how a 0.5% increase in interest rates will affect the forecasted profits over the next few years, there are many variables that could influence the way a cost-cutting plan plays out. These might include, for example, the threat of rising interest rates and higher inflation; pricing fluctuations for raw materials and labour; legislative changes in employers’ national insurance and minimum wage responsibilities; even rising utilities costs and currency exchange variations. It is often when multiple variables come into play at the same time that many planning and forecasting models come undone.

Ultimately, organisations must evaluate the extent to which they can realistically expect current cost-cutting exercises to have a lasting, positive impact, rather than merely relieving the balance sheet in the short term.

Beware the ‘big bang’ approachThe mistake organisations often make is to look for, and to expect, a ‘big bang’ impact such as quick results from extreme measures. Arguing in favour of short-term pain for long-term gain, they believe that by introducing cuts in one fell swoop they will avoid prolonging the effect on staff morale.

However, trying to do too much too quickly can be devastating to an organisation. The aftershock is likely to be felt long after the initial decision.

Advanced Business Solutions has 2,000 commercial sector customers in the UK facing just this dilemma. The indication from them is that organisations now more than ever need to be able to:

• Do more with less;

• Achieve greater value for money;

• See a clear and measurable return on any investment over a shorter timeframe.

In practice, this means:

• Taking on smaller projects with lower risks;

• Maximising return from prior investments;

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• Deploying standardised, best-of-breed software;

• Harnessing a hosted software-as-a-service model, as appropriate, for maximum efficiency;

• Incorporating any value-added features as bolt-on components, reducing the associated risk and cost.

Rapid payback rulesAlthough an all-encompassing strategy is clearly important, organisations are now looking for direct results associated with key processes: savings which add up to a significant overall impact on a company’s cost base by streamlining processes, increasing productivity and enhancing visibility of the business, without requiring indiscriminate compromises to staff or service levels.

Again, the key is to view the associated cost cutting strategically as part of an over-arching initiative which draws all of the different strands together. The examples below highlight how a holistic strategy to automate, streamline and drive cost out of routine business processes can be executed on a modular basis to ensure rapid execution and payback.

Poignantly, the examples highlighted below involve the removal of cost from the cost management process itself, achieving two goals in one.

Automating expenses claimsOf the £2.2 billion a year spent by UK commerce and industry on employee expenses (source: http://www.expenses-software.com/uploads/files/Expenses%20Brochure.pdf ), almost a quarter is accounted for by processing costs – a breath-taking £500 million. Indeed, companies using a paper-based system could be paying up to £40 to process each claim, even if the claim itself is only for a few pounds.

Streamlining and automating inefficient manual processes including enabling staff to enter their travel and subsistence expense claims online, can result in considerable cost savings while enabling suspicious claims and errors to be identified more easily.

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In an automated scenario, claims are checked and validated against an organisation’s expenses policy and errors are captured and flagged before they reach the payment phase, allowing authorisers to quickly approve, decline or query a claim. Organisations experience significant cost benefits from taking this approach, a leading UK NHS Trust achieved savings of £98,000 within just 10 months (20% of its previous outlay on expense management).

An online ROI calculator, providing an instant snapshot of the potential savings for individual organisations through automating expenses management, can be found at www.advancedexpenses.com.

Budgeting & planning“We didn’t actually overspend our budget. The allocation simply fell short of our expenditure.” - Keith Davis (1926–), Australian administrator and physician

Accurate budgeting and planning is another significant area for automation, enabling costs to be eliminated not only from the process itself, but also from the business in general as the discipline of budgeting and planning itself becomes more intelligently managed.

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Highlighting the inefficiencies of the traditional budgeting process, CFO Magazine estimates that “the average budget contains 230 line items and takes up an average of 4.5 months of valuable company time.”

Streamlining and automating the process offers numerous benefits with a direct financial impact, including:

• Avoidance of ‘spreadsheet mayhem’

• Achievement of a single version of the truth

• Significant time saved in the budgeting and forecasting process

• Greater control over and trust in data integrity

• Introduction of process control and visibility into the budgeting function

• Further efficiency gains through integration with back-office finance systems

A case in point: Saville Audio-VisualThe Saville Group Ltd is one of the UK’s largest specialist suppliers of audio visual, multimedia and video conferencing technology, with around 300 personnel in fourteen locations.

The limitations of Excel had become apparent to the Financial Controller at Saville, after he inherited an Excel budget model from a previous colleague which was ‘very time consuming and had the potential for too many errors’.

Not only were there doubts over the spreadsheets’ integrity but they were becoming too unwieldy, and it had previously taken three to four months to produce the budget. Simply by overhauling the budget process, Saville will be spending maybe two to three days a month, if that, extracting management information.

Since reviewing the use of spreadsheets one positive outcome of using the new model is that the Financial Controller “no longer dreads the budget round, which in Excel was a mammoth task, with ABS’ OpenPlanning I am actually quite excited about it.”

The success of reviewing which technology is used in this manner can inspire more confidence and prompt strategic decision-making about cost-cutting elsewhere in the business.

Automation should add valueWhen organisations invest strategically in IT, they gain two-fold – reducing operational costs while adding new value to the business.

The simple step of eliminating paper from an organisation by converting documents to electronic formats can remove significant costs in paper storage and handling, including the inefficiencies of having to photocopy and send on duplicates where multiple employees need access to the same content.

Once the content has been converted to electronic form, it can be shared effortlessly from a single central point and processed more efficiently thanks to workflow tools.

A case in point: Bonhams Bonhams, one of the oldest and largest auctioneers of fine art and antiques, has transformed its worldwide purchase-to-pay efficiency (P2P), including significantly cutting costs and reducing manual data entry by 80%, with the implementation of a document management and imaging system.

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These systems, which are tightly integrated into Bonhams’ financial management system, have been made available to authorised staff in the UK and the USA.

Bonhams’ previous purchase-to-pay processes used to be extremely time-consuming and involved the manual data entry of invoice information and passing invoices around different sites for signatory approval. This resulted in delays due to data entry errors, invoices going missing and the time-consuming internal distribution of documents. Bonhams also incurred significant costs through printing, photocopying and posting paper in addition to employing a third party storage facility to store copy documents.

The 36,000 purchase invoices Bonhams receives each year are now scanned centrally, tagged to the appropriate record in the financial management system and electronically stored. ABS’ optical character recognition (OCR) technology enables the data on these invoices to be automatically captured and verified before being uploaded to the finance system, significantly reducing manual data entry.

Anthony Adewumi, Systems Accountant from Bonhams, comments, “ABS’ document management and imaging systems have significantly reduced paper use as well as administration, including cutting manual data entry by 80%, saving us at least £60,000 each year. ABS’ technology has also freed-up storage space including eliminating the need for us to use an expensive third party supplier to store thousands of paper invoices off-site, saving us further costs.”

Conclusion: cut costs, not cornersWith new swathes of cuts expected across many businesses, all eyes will be looking to the finance departments to see how severe those measures will need to be. Will business units be closed, staff lost, or new initiatives withdrawn?

For the finance department to maintain credibility and prevent a decline in staff morale, it must be seen to lead by example, looking at its own inefficiencies and getting its own house in order before looking to the business to make more sacrifices – sacrifices that could cause lasting damage.

To see where new cuts should come, business leaders will need a clear line of sight across the organisation to see where any remaining waste still exists and to identify opportunities for strategic operational improvement and selective investment.

Automating broader aspects of the finance department offers them at least two benefits for the price of one – Firstly, a clearer, more joined-up picture of the business’s expenditure and secondly, slicker, more accurate financial controls which cost less to manage while delivering greater value to the business. Not only is the finance department now able to lead by example, it is also in a position to champion the next wave of cuts in an authoritative way because it has the evidence to support its plans.

Most importantly, this strategy does not demand wholesale, radical change. It provides an organisation with incremental improvements with rapid results, all united by an over-arching plan to transform business efficiency from the inside out. As each new cost cutting measure or software application is rolled out, the benefits multiply and additional layers of new value are introduced, with the impact across the business growing and multiplying at an accelerating pace.

Business leaders are then able to take the company and its employees on a journey with a clear purpose – a positive transition which everyone buys into because the desired end point is known and any unfounded fears have been dispelled.

Finally, by doing all of the important groundwork now, while market conditions are subdued, businesses are able to buy themselves new confidence that everything will be in order and the business will be well positioned for the economic upturn when it finally comes.

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Sources & resourcesErnst & Young fifth annual Global Business Risk Report, December 2010: http://www.ey.com/GL/en/Newsroom/News-releases/Cost-cutting-and-pricing-pressures-fastest-growing-risks-to-global-business-in-2011

Ernst & Young: Competing for Growth – Winning in the new economy: http://www.ey.com/GL/en/Issues/Business-environment/Competing-for-growth--Winning-in-the-new-economy---Competing-for-growth--the-framework

Source for Consulting: Intelligent Cost-Cutting (2009): http://www.sourceforconsulting.com/files/file/Source%20Trinity%20Horne%20Intelligent%20Cost%20Cutting%20(09).pdf

Over-reliance on spreadsheets for budgeting by finance professionals – Advanced Business Solutions research, May 2011: http://www.advancedcomputersoftware.com/abs//news/spreadsheets-for-budgeting-processes.php

For more informationAdvanced Business Solutions is a brand name of Advanced Business Software and Solutions Limited, registered in England, company number 03214465. Registered office: Munro House I Portsmouth Road I Cobham I Surrey I KT11 1TF.t: +44 (0) 08451 606 162 f: +44 (0) 1932 584 001 e: marketing@advancedcomputersoftware.com www.advancedcomputersoftware.com/abs

Advanced Business Software and Solutions Limited recognises the trademarks of other companies and their respective products in this document.

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