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How to Prepare Simple, Effective Cost Management Reports (part 1)

hudgeon12By Doug Hudgeon

The Cost Reduction Tip

Effective management accounts are critical to a cost reduction initiative. Without it, your stakeholders can’t see that their pain is justified. It’s like the difference between running on a treadmill (without a watch or odometer) and running through the countryside. If you have a destination and can track your progress, your motivation will be higher.

Good management accounts are different from good financial accounting in that management accounts in a cost reduction initiative are concerned with real money out the door right now whereas financial accounts are often reporting on expenditure decisions made years ago (depreciation). I’ve prepared a sample data set that I’ll use for the upcoming series of posts.

The management accounts are from the fictional company ABC Services who provide software and consulting in the facilities management sector. They have one office in Sydney and another in Melbourne and the bulk of their revenue comes from the sale of asset management software but have an active consulting arm. They kicked off a cost management initiative in November 2010.

The management accounts tracks their expenses and revenue over the 12 months from July 2010 to June 2011. 1-296x300You can see from the orange line above that revenue has consistently increased throughout the year and from January 2011 their cost reduction program has made some headway.

Now let’s take a look at the impact of this on their profit: 2-300x255As you can see from the above chart, moderate to strong revenue growth combined with a high impact cost reduction initiative can create some stellar results.

In the next post, we’ll look at the data elements underlying the above charts and slice and dice the monthly data by location, division, expense type and headcount to see what areas of the company contributed most to this turnaround and which areas require further work.

Note that I’ll be changing the underlying data throughout the series of posts to highlight the importance of certain elements of the data set so don’t look for consistency across these posts. I’ll do a wrap up post at the end.

Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

Teach Your Old Vendors New Tricks

hudgeon12By Doug Hudgeon The Cost Reduction Tip In the 1970s and 80′s, skateboarding went through a renaissance. Difficult tricks became commonplace and impossible tricks became possible. The invention of polyurethane wheels in 1972 and the US drought in 1976 (which led to the draining of concrete pools) kicked off these advances but it was not until groups of skaters such as the Z-Boys began challenging each other to innovate that we saw an explosion of new tricks. A good example is the Ollie. Within days of Alan Gelfand’s arrival in California in 1976, the Ollie became a standard part of every skateboarders repertoire. The Ollie is a trick performed off a vertical wall (such as a swimming pool wall) where the skateboard sticks to the rider’s feet as he or she flys above the lip of the wall. Every half-decent skater can do the Ollie but it’s not until you’ve seen it that you even realize it can be done. We’re at this same stage with enterprise software. New entrants into the enterprise software space are performing impossible feats. Some of these new tricks such as SAAS delivery require new technology but many tricks simply require you and your existing vendors to re-conceive your service requirements and their service offering. This can both improve your vendor’s capabilities and significantly reduce your costs. Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

How to Identify Cost Reduction Opportunities

hudgeon12By Doug Hudgeon The Cost Reduction Tip Certain problems when you first look at them seem intractable. But once you understand their natural fracture lines, breaking them up and solving them is actually quite easy. Most business process problems fall into this category and cost reduction problems are no exception. The natural fracture line for cost reduction opportunities are people and COGS. It’s easy to get lost in arguments about what is and what is not included in COGS so it’s best to simply think of COGS as costs that do not vary with the number of staff you have. In fact, I’ll call these non-People costs in this and subsequent posts. For example, desktop support costs are driven by People costs whilst marketing expenses are driven by non-People costs. Certain expenses can fall into both or either category such as data centre costs where your data centres support both your intranet and internet sites. For these, you can split them by percentage or just lump the entire expense into the biggest driver – People or non-People Identifying your cost reduction opportunities then is just a matter of categorising each expense line in your management accounts as being driven by People or non-People. Tackle the former by considering how you can deliver the same value with fewer people and the latter by identifying the drivers of that cost and looking at ways of minimising it. Sound simple. It is. Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

Cost Reduction – Start by Looking for Game-Changing Opportunities

hudgeon12By Doug Hudgeon The Cost Reduction Tip When looking at cost reduction opportunities in an area, you should start by assuming that you can remove 100% of the cost. If that’s not possible, then look at ways to remove 90% of the cost. If you don’t start ambitiously, you’ll miss some real plum cost reduction opportunities. Internal IT hardware logistics are a good example. You may have staff engaged in building and deploying hardware on site. Instead of looking at how you can improve the process, first ask yourself: Why are we doing this at all? Why can’t we get our vendor to build the hardware and ship it straight to our user’s desks. If the user can’t plug it into the network themselves then give them a help desk number to call for assistance. Speaking of help desks, the internet provides countless opportunities to reduce your cost of service by an order of magnitude. Multi-million dollar help desk ticketing systems from BMC Software and others can be largely replaced with SAAS (or ‘cloud’ in the newest lingo) providers such as Assistly. Now, before you start defending the functionality of Remedy (BMC’s product) sit back and imagine a world where Assistly was the only option: What changes would you need to make to your processes and people? How much would you save and what would your end users have to give up? My bet is that you could deliver an equivalent service to your end users (perhaps better?) and cut your costs by 90%. Unless you dream big, and act on those dreams, you’ll never realise dramatic cost reductions. Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

Doug Hudgeon – The Cost Reduction Tip: Fix Core Problems

By Doug Hudgeon

The Cost Reduction Tip

Some problems just need to be fixed, regardless of cost. Last year, near our apartment in South Delhi, maintenance workers spent more than two months resurfacing our road. Every fortnight thereafter (and possible continuing to this day), a sinkhole would appear in the road and a roadwork crew would come and resurface the road.

Shortly before we left Delhi, the wheels of a water truck broke through the road surface into a cavity that everyone aside from the road works department suspected was there.

What did the department of roads do?

They sent another road crew to resurface the road. The problem, of course, is not with the surface of the road but with what’s underneath (or what’s not underneath in this case); and even if they permanently stationed a road crew next to this intersection, they would not fix the problem.

Tackling the core problem – the sinkhole created by leaking water pipes – is simply too frightening to contemplate and so the endless road repair work continues.

One of Delhi’s core problems is the poor quality of its water infrastructure. Many thousands of Delhi residents go without enough water not because of inadequate supply but because of inadequate distribution (more info).

Fixing this problem will be costly and difficult but Delhi must do it before it will be considered a world-class city.

Delaying the repairs will not make the work less expensive or easier to do. In fact, each day’s delay costs the city dearly in more road works, water distribution by trucks, and lost productivity from households spending part of their day securing an adequate water supply. Not spending the money to fix it now is false economy.

Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

Assign Clear Personal Responsibility for Each Cost Line to a Single Individual

By Doug Hudgeon The Cost Management Tiphudgeon12 As I’ve planned my upcoming tips, I’ve been pondering which tip will be the most important. I now think this is it. You cannot reduce cost in your organisation unless you assign a single person the task of, and regularly hold them to account for, improving each cost line – and if you have to change your chart of accounts to do so then do it. Who you select as the responsible person for each cost line will depend on what you want to accomplish. If your cost reduction programme is urgent and necessary for your corporate survival, you should assign responsibility to a small group within Finance who are solely focussed on taking cost out of your organisation. However, if you are looking to improve operating efficiency as an ongoing practice within your organisation, you should assign responsibility to front line managers. Building a cost conscious culture requires empowering your managers to impact cost and valuing their success at doing so. Your managers must see themselves as personally responsible for cost reduction. Related web sources The bystander effect is well researched social psychology phenomenon. It was first studied following the killing Kitty Genovese in 1964 where her neighbours failed to intervene in her murder because they thought that someone else would. Whist this interpretation of that incident is probably flawed, you don’t want your company to die because your managers were all bystanders. Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

Cost Management Tip – Simplify Requirements Before Embarking on a Change Program

By Doug Hudgeon

The weekend cost management tiphudgeon12

On the weekends, I’ll give a short cost management tip without web or book references.

Today’s tip is prompted by an article in the Sydney Morning Herald describing the woes and hopes of Sydney’s public transport e-ticketing project.

In 1999, the NSW government signed a contract to put in a single ticketing system across trains, busses and ferries. In 2008, the project was binned.

Documents from the ensuing court case show that the project could not be delivered because of the refusal of successive governments to agree to simplify the fare system.

Whilst this is undoubtedly the fault of the NSW government, in my experience, vendors are almost always complicit in pandering to a client’s desire to change as little as possible from their current practices.

As a case in point, after discussing the key role in the original project’s demise played by the failure simplify the fare system, the Sydney Morning Herald article humorously includes this quote from the CEO of Cubic, the vendor leading the new project (I’ve highlighted my all-time favourite vendor phrase):

Irrespective of how the fare system is structured, Cole believes Cubic will not face a problem. ”Whether it is distance-based or flat fare, zonal, multi zonal or multi modal, all of that stuff we’ve done before,” he says. ”It is all configurable within the system. Really whichever way the government here chooses to go, the system will be capable of doing it.”

Read more: http://www.smh.com.au/nsw/a-hopon-hopoff-journey-to-nowhere-20110805-1ifbq.html#ixzz1UCSObfv5

Perhaps it is. But at what cost?

Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

Create a High Profile Internal Team to Identify Best Practices and Embed a Cost Conscious Culture

By Doug Hudgeonhudgeon12

The Cost Reduction Tip

In this tip I discuss embedding a cost conscious culture where you have a number of comparable operating units. Examples include retail banks or multi-site operations such as a national insurance brokerages, consulting firms, law firms, or logistics providers. Where you have the multiple operating units, you have the opportunity to compare their cost profiles, identify best practice, build relationships between key staff and embed best practice across the organisation. Whilst this sounds somewhat utopian, it is achievable when you meet the following pre-conditions:

  1. The operating units view themselves as somewhat analogous,
  2. The management accounts are comparable across the units,
  3. The cost reduction initiative has CEO/Board support, and
  4. The designated managers are key staff in their units – you will get great value from selecting the heir-apparent for each unit for this role. Not only does this prove to the staff in each unit the importance of the initiative but it provides the heir apparent with the opportunity to build deep relationships with heirs in other units and see the entire range of operating models across the organisation.

Once you have met these pre-conditions, the steps are pretty obvious: get the designated managers together monthly to do a guided review of their cost lines. In these reviews, across each cost line, identify and highlight the practices of the best performers and call out the practices of the worst performers. The job of the person guiding these reviews is to set targets for the worst performers and hold them to it next month.

The key to making this work is unrelenting persistence in assessing performance against targets in subsequent sessions. See also Tip 1 and Tip 5 . Related web sources When creating a cost conscious culture in your organisation, you need to enlist your key staff. Without their support, you will not embed a new culture. Academics studying this areas refer to it as Normative Social Influence.

This area of research has shown that you can use social or peer pressure to influence behaviour when the person highly values the members of the influential group and is regularly updated on their activities. This dynamic is easily created by putting an influential team in place and updating staff regularly on progress. A future tip will focus on why you must not be squeamish about making this a high-profile activity in your organisation if you are going to embed a cost conscious culture. Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.