Cost Control Checklist from Financial Director magazine. Identify, sustain, measure and celebrate your savings!

1. JANUARY 2010
THE F INANCIAL DI RECTOR GUIDE
COST CONTROL CHECKLIST
IN ASSOCIATION WITH

3. JANUARY 2010
THE F INANCIAL DI RECTOR GUIDE
COST CONTROL CHECKLIST
01
CONTENTS
2 INTRODUCTION
How to make savings
8 PURCHASE LEDGER
Considerable savings can
13 INCENTIVES
Incentivising awareness
and influence people be made if FDs are willing among non-financial staff
to delve deeper will focus their minds
4 COST AWARENESS
How to ensure cost control
10 LEADERSHIP
FDs can take the lead
14 SUSTAINABILITY
Embedding cost control
discipline lasts beyond the role in creating a culture will help you survive the
end of the recession of cost awareness recession and beyond
6 LOCAL SUPPLIERS
Using local suppliers could
12 PROCUREMENT
Forging a relationship with
16 BENCHMARKING
Demonstrate the
help to keep costs down the head of procurement effectiveness of your
pays dividends successes to the board
EDITOR Melanie Stern GROUP PRODUCTION EDITOR Dan Parker ART EDITOR Chris Gardner CONTRIBUTORS Carolyn Bresh, Andrew Hibbert, Liz Loxton, David Rae,
Malcolm Wheatley EDITORIAL ENQUIRIES (020) 7316 9808 SALES MANAGER Kevin Sinclair (020) 7316 9591 KEY ACCOUNTS MANAGER Richard Beagley (020) 7316 9564
EVENT MANAGER Briony Thompson (020) 7316 9820 DIGITAL PRODUCTION CONTROLLER Ross Brooks CIRCULATION MANAGER Tim Martin PRINTERS Headley Brothers Ltd.
Mailed by Headley Brothers Ltd. Financial Director is printed on paper from sustainable sources in Scandinavia/Germany. CIRCULATION ENQUIRIES 0845 155 1846 email:
incisivemedia@optimabiz.co.uk Subscriptions: UK £68; Europe £88; RoW £118 INTERNET REGISTRATION www.wdis.co.uk/financialdirector LICENSING Financial Director is available for
international licensing. Contact Joanna Mitchell at joanna.mitchell@incisivemedia.com FINANCIAL DIRECTOR is published by Incisive Media © Incisive Media, 2009 FINANCIAL DIRECTOR is available on
the internet at www.financialdirector.co.uk

4. INTRODUCTION
Sustainable savings
OUR COST CONTROL CHECKLIST ISN’T JUST ABOUT IDENTIFYING SAVINGS, IT’S ALSO
ABOUT SUSTAINING, MEASURING AND SHOUTING ABOUT THEM, SAYS MELANIE STERN
Make cost awareness a business-wide
1 uitting smoking or sticking
discipline
How can FDs turn good cost control practice into something that lasts
beyond recession?
Consider local suppliers
Q on a jumper instead of
turning up the central
heating are both good
ideas that will save you money every
day. But they both involve making a
2 Why unbundling contracts from one large supplier and divvying them up
across a bunch of smaller players may save you money
commitment to regime change, forcing
oneself to drop familiar habits in order
to squeeze a bit of betterment from the
way we live. They can also irritate those
Look at the bottom two-thirds of your
3 purchase ledger
Why stop at the first few lines of expenditure when the bottom of the list
around us, demanding they also
change their ways – making you
unpopular. But the means justify the
could be hiding the sustainable savings? ends, and do so over a lifetime.
Our Cost Control Checklist moves
Lead the creation of a cost control culture along the same principle. Mindful of
4 Making friends and influencing people is as important in cost control as
finding the cost hotspots
the increasing influence finance
directors have across their
businesses while cash remains king,
we’ve come up with a list of ten
Forge a strong finance-procurement
5 relationship
Often seen as a problematic relationship, FDs need to get friendly
simple ways to instil the habit of cost
awareness now and preserve it
through better economic days – and
with procurement we’ve got ideas on how to bring
non-financial departments with you.
Make our list part of your corporate
Incentivise cost awareness
6 Influencing non-financial staff to build in cost awareness responsibilities
can be made easier if the rewards are made clear
New Year’s resolutions and with any
luck, both the health of your bottom
line and your reputation will see
lasting dividends.
Benchmark your savings
7 Making cost savings sustainable means compiling the right data on
where you are and where you’re headed
Melanie Stern
Editor, Financial Director
Communicate your achievements
8 Communicating your wins and your leadership skills is crucial if
you want to command the respect of the board and build evidence
of your achievements
Instil long-term practices
9 A lot of bad habits have been strangled by the recession and the necessity
to be leaner. How can you preserve this mindset?
10 Don’t get complacent when sun’s back out
Putting a long-term cost control mindset in place should be a priority as
the UK economy prepares to exit the recession
2 THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST

5. 2010

6. Fly the
flag
IT IS EASY TO GET TO GRIPS WITH COST REDUCTION IN A
CRISIS, BUT IT WILL TAKE A CO-ORDINATED EFFORT TO KEEP
IT GOING WHEN THE UPTURN KICKS IN, WRITES DAVID RAE
here’s nothing quite like a Swiss-based pharmaceutical giant
T global economic crash to
sharpen financial minds
– after all, recessions as
tough the one we are going through
tend to bring unnecessary corporate
Novartis, Jonathan Peacock, is an
example of a CFO who understands
why this makes sense. “It’s really the
partnership of the CFO and the head of
procurement that we found to be quite
waste into sharp focus. powerful,” he says.
They also help to foster better And it’s something Peacock puts his
cross-functional relations: a siege full weight behind to ensure that the
mentality is adopted and those who rest of the business is also bought into
remain after redundancy rounds pull the vision.
together to get the job done. “For a sourcing organisation to be
The difficulty is making such successful, it has to be integrated
behaviour stick. It’s one thing to weed into the business,” he explains. “I try
out bad practice when cash is tight to act as a support in ensuring we get
– the secret is to keep it out when the that integration.”
good times return. And it’s an issue This is often easier said than done
that finance directors would be wise to because, traditionally, procurement staff
get on top of now, as implementing have been seen as junior partners in the
processes that resist a return to old average business and treated as ‘PO
ways will reap huge benefits in the pushers’ who are only to be brought in
long term. after deals have been done. While this
The first step that FDs must take has changed significantly in recent
to instil sustainable cost-control years, there remain huge differences in
throughout their organisation is to put the maturity levels between companies
in place a well-structured framework and industries.
that is centrally managed, but has
representation in every function or Off limits
department and a method of Black spots include areas of traditional
measurement everyone can power within an organisation such as
understand and access. marketing, legal and those
Group finance is a good place for departments that are seen as the the long term can be a difficult nut to
this to be managed but, increasingly, lifeblood of the company. For example, crack – a particular bugbear of Neil
centrally-led procurement functions the research and development people Deverill, who has served as global chief
are playing a fundamental role in such would hold all the cards in procurement officer at both Anglo
strategies with the chief procurement pharmaceuticals and high-technology Americas and Royal Philips.
officer or purchasing director assuming industries and only with full board “Certainly, it is easier to observe
ultimate responsibility. They are, in support – in particular, the CFO’s – will lasting change when there are systems
effect, the rising star of the corporate procurement be able to successfully in place that prevent recourse to
world, and close relations between tackle these problem areas. alternative or prior practice,” he says.
procurement and finance is a recipe for But even with a centralised “Of course, standardisation will bring
sustainable savings. procurement function that enjoys full about common systems, processes
The CFO of the pharma division at board support, sustaining savings into and cost efficiencies, but I still detect
4 THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST

7. MAKE COST AWARENESS A BUSINESS-WIDE DISCIPLINE
and material impact on external
expenditure and the bottom line.
By managing the behaviour of staff
rather than telling them what suppliers
to use, or demanding 10% budget
cuts, huge benefits can be realised
without damaging productivity.
A good example is travel
management. Do six people really have
to attend a meeting in New York? Can it
be held in Europe? Can it be combined
with other meetings planned for later in
the year? Can it be conducted by video
conference instead?
These might seem like obvious
points, but there are a frightening
number of companies that don’t have
robust policies in place to manage
even this level of behaviour.
Technology solutions
There are also a multitude of
technology solutions that can help.
The adoption of e-procurement
systems, linked to pre-approved
catalogues provided by suppliers,
means that only approved vendors
are used, that price can be centrally
managed and external spend
accurately tracked.
Spend analysis allows corporate-wide
expenditure to be analysed down to the
line-item level, meaning that inefficiencies
can be ironed out relatively easily.
It is not uncommon for different
departments in the same organisation
to be buying exactly the same product
from the same supplier at wildly
different rates, for example.
Also important to the process is to
conduct regular measurement, with
relevant key performance indicators of
success, such as annual savings as a
percentage of sales, visible
improvements in margin at the profit
Four tips same well
Low-hanging fruit
hostility and resentment to new and loss level.
In 2009, is often targeted practices, even when they’ve been in It’s one thing driving savings,
Pricewaterhouse- multiple times place for five years or more.” quite another making sure it falls
Coopers published a rather than larger
report that identified opportunities Key, therefore, to instilling long-term to the bottom line and doesn’t
why cost reduction G Failure to address cost control and margin improvement get absorbed by the business
attempts fail cost management
G Lack of a strong and control
is to embed processes by which the unit. This includes year-on-year
foundation Companies focus entire organisation must work to. And productivity improvements.
Companies that don’t on reducing costs these processes must be developed But, as Deverill notes, not all FDs
have a full not spend culture
understanding of their G Inability to and managed centrally. see the potential that such strategies
cost baseline will have measure results Successful demand management and processes hold. FDs “are good at
difficulty identifying Cost-reduction is
opportunities often lost in annual is a good example of a strategic getting cuts,” he says, “but for the most
G Dipping into the operating results process which can have immediate part they are blind to the other side.” I
THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST 5

8. Local
fare
COULD SPREADING CONTRACTS AMONG
LOCAL SUPPLIERS SAVE YOU MONEY AND
REDUCE SUPPLY CHAIN RISK? ASKS DAVID RAE
hink global, act local’ is a businesses that buy there, while
T well-worn cliché used by
everyone from chief executives
to town planners to describe
an approach which encourages
decisions to be made only when the
currency fluctuations have also had an
impact. As a result, finance directors
would be wise to carry out total cost of
ownership calculations on current
sourcing strategies – because the
complete picture has been taken into original calculations that the decisions
account. But in today’s economy, it were based upon may no longer be
adopts a more literal meaning. valid (see box).
The biggest impact on business Research carried out earlier this
during the past thirty years has been year by the Procurement Leaders
the relentless growth of globalisation, Network and BrainNet Supply
made possible by huge advances in Management Group among more
containerisation and port technology than 150 chief procurement officers,
and ever-more complex supply chains. Changing tides in global purchasing:
But if the past 24 months has focus on cost-efficiency and
done nothing else, it has brought into sustainability, paints a picture of
sharp relief the risks inherent in such how purchasing decisions are set to
models. Massive commodity price change subtly over the coming years.
volatility has led to the cost of fuel, at The research found that while
best, being difficult to predict and, at quantitative factors such as labour
worst, to become crippling. Product and raw-material costs continue to
quality problems, such as Mattel’s dominate the decisions, less tangible
infamous recall of hundreds of factors such as flexibility in production
thousands of toys due to a lead-based and logistics and access to a highly
paint being used in their production, qualified workforce and innovation are
have brought into focus the risks more to the fore. And while ethical and
inherent in such relationships. environmental considerations still play
Often, the financial stability of a relatively small role, this is set to grow third of the CPOs surveyed in the study
far-flung suppliers is also difficult to considerably in the coming years. said that the local-for-local approach
predict and reputational issues of would take on a more important role in
dealing with suppliers in other corners Local sourcing their company in the next few years.
of the world, which western customers But one development which continues “For several years now, many large
know little about, seem to crop up to gain momentum is local-for-local multinational companies have been
daily. In short, the risks in global supply sourcing – where local markets are employing a strategy where they act as
chains are huge — and growing. served by local suppliers. It’s a a local player in their target markets,”
Neither can the benefits of global relatively new concept which is being says Sven Marlinghaus, partner and
sourcing be taken for granted, as they driven by a combination of the risks managing director at BrainNet Supply
once could. Increasing inflation and the and increased costs listed above, Management. “Over the next few
rise of the middle classes in developing combined with demand from emerging years, we’ll see this trend intensify.” As
countries has led to subsequent economies and an increased tendency such, Marlinghaus recommends that
increases in the costs to western towards protectionism. More than a large companies develop sustainable
6 THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST

9. CONSIDER LOCAL SUPPLIERS
India and China) and Mint (Mexico,
Indonesia, Nigeria and Turkey) countries.
“Basically, we are looking to do
everything locally – product planning,
design, development, production and
parts procurement,” he says.
But while local buying certainly has
its place, large organisations must be
aware that it can only form part of a
much wider product-sourcing strategy.
Recent research conducted by IBM,
Sourcing in a demanding economic
environment: generating value in
challenging times, points to the clear
challenges caused by “uncontrolled
local buying” which the report claims
results in a “loss of leverage, leading to
higher prices, reduced quality and
service issues”.
Cultural needs
And one executive from a US
consumer products company
summed up the approach that most
organisations should strive for, “We’re
using centrally defined and controlled
processes but with local sourcing
organisations that understand the local
business and cultural needs.”
Understanding those cultural
intricacies are key to building
sustainable businesses in what can
often be complex overseas markets,
and here local procurement activity,
which embraces local suppliers and
technologies, can give companies an
excellent head start.
And this is exactly the approach
taken by financial services giant AXA,
which has even coined the word ‘glocal’
to describe its approach. “Of course
procurement is centralised,” says Heinz
Schaeffer, chief procurement officer of
procurement models which include emerging markets. its northern, central and eastern
both international and local solutions. According to the company’s CFO, European business.
Panasonic has certainly benefited. Makoto Uenoyama, local sourcing “But we decentralise our technical
The electronics giant is using local-for- efforts will play a big part in the future of experts, like facilities management
local sourcing to meet the demands of its growth in the Bric (Brazil, Russia, and even marketing or IT. We have
established a central basket where all
Cost control and inflation requests are going in, we process it
Low-cost country sourcing decisions made on basic volatile over the past two years, reaching a peak of and then give it back.”
cost considerations are no longer valid. Rather, total almost 12,000 in June 2008, before plummeting to In theory, governance and control
cost of ownership calculations, which take into 650 in December and rallying to the 5,000 mark as
account the impact of inflation, currency fluctuations, this supplement went to press.
is maintained centrally, while the
freight and transport rates, staff retention issues, Costs for transporting a standard 40-foot benefits of local sourcing in categories
supplier on-boarding and risk mitigation must be used. container between China and the UK are now of spend which are strongly influenced
The Baltic Dry Index, for example, which is used hovering at $3,000. In the dark days of the
as a measure of the cost of dry freight, has been downturn the rates were, literally, zero. by local markets, such as marketing,
are still accrued. I
THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST 7

10. What lies
beneath
BUSINESSES ARE MISSING OUT ON SAVINGS IN THE
PURCHASE LEDGER. THEY RUN OUT OF STEAM AFTER THE
FIRST FEW LINES OF EXPENDITURE, SAYS MALCOLM WHEATLEY
n any business, the provision of In practice, it turns out, under-pressure
I drinking water from water coolers is
an essential, though not a major,
item of expenditure. Even so, at
Moorfields Eye Hospital in London,
contracts officer Aitor Cisneros wanted
procurement functions often stick to
just to the top one-third of the
purchase ledger to generate cost
savings, leaving the bottom two-thirds
untapped. The result: significant
to be sure that the hospital was getting potential for cost reduction, with
the best possible deal. no clear route to achieving it.
With 43 coolers in and around the
hospital and its outreach clinics – each Anything’s possible
typically costing £6 to refill with a So how can FDs and the finance
19-litre bottle of water – the annual cost function get involved? How can they
of around £1,000 per cooler quickly work with purchasing to identify
mounted. There were operational costs savings? What kinds of savings are
too. “We were tied to having lorry possible – and how can they best
deliveries of water cooler bottles every be achieved?
two weeks,” says Cisneros. “We had to Talk to FDs – and procurement
find space to store the bottles and the functions – and some clear messages business. And it’s in the bottom
empties were an eyesore.” quickly emerge. two-thirds of the purchase ledger where
The solution: mainsfed water coolers To begin with, purchasing functions the potential is greatest. There are more
from Tana Water, each equipped with must first accept that there’s a case to suppliers, and more ‘maverick buying’
hi-tech carbon block filters and answer. Many buyers focus their but because it’s been so neglected,
ultraviolet lamps to filter out and kill attention on negotiating new contracts there’s so much more potential.
any mains-borne contaminants. with suppliers, supplemented by “Once you start diving into the detail,
The impact on cost? Instead of periodic ‘category reviews’ of major there are invariably savings to be
paying £6 or so for 19 litres of water, spend items. And if the potential made,” agrees Julian Seidman, client
the hospital pays about two pence. savings tied up in the lower reaches of finance director at FD Solutions, a
A ‘sleep mode’ incorporated in each the purchase ledger are to be tapped, provider of part-time finance directors.
cooler also reduces the hospital’s that needs to change. “On their own, they might not be
energy consumption. “All too frequently, purchasers either significant, but are often easily made
“We only have one bottle fed cooler think that the bottom two-thirds are and quickly add up to a big number.”
left in the hospital,” says Cisneros. inconsequential, or that they’re already Precisely how those savings will be
“Where you’ve got about 30 regular achieving best-value pricing,” says made is down to individual situations,
users of one cooler, it definitely Graeme McKinnon, commercial director and once focused on the task, buyers
amounts to a huge cost difference if at Expense Reduction Analysts. “They will be quick to spot opportunities.
you switch to mainsfed coolers.” couldn’t be more wrong.” In some cases, re-opening price
It’s a story that will warm any finance The figures speak for themselves. A negotiations will be the answer. In
director’s heart – especially in times thorough procurement review can yield others, it will be a policy decision: does
like these when budgets are under an average saving of between 5 and everyone with a business-provided
so much pressure. Yet, in many 10% of its cash spend, research mobile phone or Blackberry actually
businesses, these stories are as rare suggests – equivalent to a 20% boost in need that provision, for instance?
as they are welcome. profit for the average FTSE-350 Elsewhere, as at Moorfields Eye
8 THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST

11. EXAMINE YOUR PURCHASE LEDGER
Hospital, cheaper alternatives may be provide such insights as a matter of don’t, in fact, work well together at all.
the answer. routine, the prosaic reality in most Research by Professor Adrian Done
In some cases, supplier consolidation companies is that obtaining that data is of Spain’s IESE Business School,
will be the route to savings. At Allied a work in progress. published in 2009 by finance system
Bakeries, explains its procurement The problem: while procurement vendor Basware, for instance, talks
director Nigel Draper, an annual £5m takes a transactional item-by-item view openly of tensions between the two
spend on building services across the of purchasing, it’s finance that pays the functions and contains hard-hitting
company’s 11 bakeries — involving a bills and has the supplier-centric quotes from a number of the
number of plumbers, painters and small purchase ledger perspective. procurement executives on the tension
builders – is prompting the start of contained in this relationship.
just such a programme. Common view “While procurement is typically the
“The question to ask is why the One idea is a business intelligence leader across the organisation for
suppliers in question are on the books platform that provides the FD and the spend management initiatives, only
in the first place,” stresses Tony Morris, procurement function with a common 33% of procurement departments
principal business consultant within the data viewpoint, enabling them to work partner with finance groups to develop
procurement centre of excellence at together to identify cost savings. and execute improvement initiatives
finance software vendor, Coda. “Are QlikView is one such platform. Pulling that further the success of their
there savings to be made by taking the disparate data sources together in company,” Mickey North Rizza,
business away from them and real-time, businesses can ‘drill down’ to research director in the procurement
awarding it to a bigger supplier at a minute detail, such as the amount and sourcing practice at analysts AMR
better discount?” spent on paperclips last year. You never Research, reveals.
But, whichever tack is taken, data is know where you’ll find savings. In short, the prize contained in the
vital. What is being bought, and from The only difficulty: a relative wealth of quieter parts of your purchase ledger is
which suppliers? While e-procurement survey data suggesting that worth the effort – but will finance and
platforms and spend analysis systems procurement and finance functions procurement jointly seize it? I
THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST 9

12. In the
same boat
MALCOLM WHEATLEY EXAMINES HOW THE FD CAN
LEVERAGE A NEW COMPANY-WIDE COST
AWARENESS TO CREATE A LONG-TERM CULTURE
running joke in the Daily expenses. A whole series of choices
A Telegraph’s ‘Alex’ cartoon
strip is the amount of money
the two protagonists, Clive
and Alex, charge to expenses – a joke
given fresh impetus in the banking crisis
– ranging from the selection of
suppliers to the preferred brands of
stationery and office equipment – have
considerable cost consequences. Even
simple decisions about turning off lights
as the two seek to circumvent the or air conditioning, or how much water
various strictures placed on them by to boil for coffee, eventually influence
senior management. the bottom line.
But the corporate austerity heralded For FDs, who are the custodians
by the ‘bash the bankers’ climate of the bottom line, the challenge is
contains uncomfortable echoes of simply-stated. Taking away the power
the collapse of the dotcom boom a to make such decisions from others is
decade ago. impractical and probably impossible.
Then, as now, it was easy to So, how can you set in place a
lampoon what was widely seen as a corporate culture in which employees
culture of excess. Boo.com, for throughout the business – at all levels
example – which became the first high- – become more aware of the cost
profile dotcom implosion – famously consequences of the decisions that
ploughed its way through £125m in they take? And how can they extend
expenditure in just six months. Staff this awareness to whole departments
and contractors were recruited in large and functions – many of which
numbers, with one contractor alone jealously guard their budgets and
reputed to be earning over £100 an enshrined practices?
hour. Employees were encouraged to
delay taking holidays by inducements Setting an example
that included 5-star hotels and One rule is immediately clear: lead
first-class flights. by example. “Credibility is an issue,”
says Peter Lunio, Bristol-based
To excess associate director at Baker Tilly
It’s easy to dismiss such excesses as, Management Consultancy.
well, excessive. They aren’t typical “It’s difficult for an FD to bang the
and most businesses have policies drum about cost control when the
and procedures in place to guard finance function – and its leadership – is
against the wilder enthusiasms of itself seen as lacking in that respect.”
employees with a corporate FDs “set the standard”, adds Claire
expense account. In the real world, Arnold, partner in London-based
the charge-it-to-expenses mindset Maxxim Consulting.
of the Alex cartoon has few parallels. “Good FDs don’t just merely
But employees can influence your count the cost of the existing status
business’s cost base in many more quo. They lead from the front in terms
ways than simply charging too much to of setting expectations: is lunch a
10 THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST

13. LEAD THE CREATION OF COST-AWARE CULTURE
plate of sandwiches, or a trip to a At Salford Royal NHS Foundation Trust,
four-star restaurant?” for instance, finance director and
Equally, it’s important to involve and deputy chief executive Tony Whitfield
incentivise people, rather than swoop is careful to link achieved savings to the
down from on high to lecture them. organisation’s frontline deliverables. “I
“Make people aware of the cost say to people: ‘I want you to save
targets that the business is aiming for, money – not for the sake of saving
how staff can help make this happen money, but to create the means for us
and what this will ultimately mean to to deliver better patient services,” he
them,” urges John Judge, of Judge 3D, stresses. “You really have to place the
a commercial management specialist objective in context.”
working with a number financial And what of the FD’s interaction
directors and teams within FTSE-listed with the functions and departments
companies and government bodies. within the business, as opposed to
“If you work for a large company, individual employees?
you have no real incentive to save Here, say the experts, it’s time to be
the company money, so businesses realistic about the perception of an FD
should really think about giving within the business – and involve the
employees incentives to provide CEO, early on.
the company with ideas to both save “The FD is the co-pilot, with the
– and make – money. CEO as pilot,” is how Sensei’s Follos
“A ‘cost aware’ culture isn’t just puts it.
about scaling back spending – it’s “The FD has a role to play, but the
about creating opportunities for the chief executive has a bigger role,”
company to innovate and grow.” agrees Ian Mackinnon, chief executive
of AIM-listed cosmetics, personal care
Any suggestions? and household goods contract
Indeed, as Siobhan Riggott, a senior manufacturer, Swallowfield.
research analyst at working capital “The FD keeps the scorecard, and
consultantcy REL notes, research prods and pokes the function heads
among the world’s top 1000 but, if the operational managers aren’t
companies by revenue repeatedly on-message, it becomes like pushing
shows those that offer incentives to water uphill.”
employees – and companies that Which isn’t to say that operational
solicit their help through suggestion managers – and their departments
schemes and improvement initiatives – necessarily have the skills to run a
– tend to perform better at cash and ‘cost aware’ function. Willingness is
cost management. one thing; skills in budgeting and
And don’t forget to tailor the procurement quite another.
message to the audience. Malcolm “Be prepared to have finance
Follos, managing director of the UK people go out into the organisation,
arm of leadership consultancy Sensei, and demonstrate to people the right
warns that FDs can sometimes budgetary control skills, and where they
struggle to articulate ‘big picture’ can find the information and resources
objectives in simple, clear terms. that they need,” says Baker Tilly’s Peter
A favourite story he relates concerns Lunio. “Finance has an education and
a potato crisp factory seeking to cut support role to play, helping people to
costs by minimising waste. do a better job of budgetary control.”
Shop floor employees couldn’t really And finally, don’t forget to praise –
identify with waste levels expressed in and reward – that better job.
terms of percentages – but got the “Use positive praise, and
message when those percentages communicate great examples of cost
were converted into bags of crisps. saving,” urges Arabella Ellis, director of
“Just by expressing the measure in a consultancy The Thinking Partnership.
different way, the waste figure halved,” “Build relationships by setting
he notes. expectations – not by telling people
Likewise, make the motivation clear. what to do.” I
THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST 11

14. FORGE A STRONG PROCUREMENT RELATIONSHIP
Love thy
neighbour
FDs AND PROCUREMENT HEADS ARE FAMOUS FOR NOT
SEEING EYE TO EYE. HERE, TWO EXPERIENCED FINANCE
HEADS SHARE HOW THEY WORK WITH PROCUREMENT
s director of finance for Great is available to spend on charitable
A Ormond Street Hospital
Children’s Charity, I’m
responsible for ensuring our
£15m annual budget is managed
efficiently and focused on achieving
objectives or more fundraising. We
have been reviewing service levels in
contracts and renegotiated a number
of those contracts to deliver cost
savings as a result.
charitable objectives. Implementing a framework for good
Our charity does not have an in- procurement practice hasn’t been all
house procurement specialist, so we that difficult, but has reaped dividends.
rely on the skills and talents of our staff Andrew Hibbert is director of
to negotiate the best deals with finance, information technology,
suppliers. Each department has its own operations and human resources
procurement procedures tailored to for Great Ormond Street Hospital
their needs, competitive tendering Children’s Charity
taking place within a framework agreed
with finance. Two sides of the same coin
Our activities, including campaigns, I value the perspective procurement must be crystal clear on one question:
developing corporate partnerships, brought to the business. But not unlike what are savings measured against?
major gifts, community fundraising, X Factor’s Jedward, finance and One saving against a probable
legacies and special events, are well procurement make a double act that overspend could be a triumph for the
diversified and this decentralised can misfire badly. buying department, but might show
approach to fiscal responsibility works Only when they each concentrate on as minor favourable variance against
well for us. their specialism to complement the budget. Finance should work with
A collaborative approach to good other can they make effective common procurement to ensure it gets fair
procurement practice engenders a cause. It’s also helpful to hand off to the credit and credibility.
sense of responsibility at the ‘nasty cop’, tenaciously working Beating suppliers up on payment
departmental level. Each departmental through the detail and driving a hard terms to the point they have
director ensures that local procedures but fair bargain, leaving operating cashflow problems and can’t supply
are adhered to and encourages their relationships unsullied. is clearly counterproductive.
staff to challenge all costs, irrespective Three areas where strong If procurement operates in
of origin. collaboration is crucial to both isolation, this can happen. I’ve
All departmental budgets are created procurement and the business are seen procurement brought in at the
from the bottom up. This detailed reporting savings, business perspective eleventh hour to shave another 20%
approach is essential when we and data provision. and impose a plethora of conditions.
challenge cost variances during our Nothing rankles like puffed-up Finance is well placed to keep the
quarterly reforecasting exercise. ‘savings’ that never seem to flow buying department in the know –
The internal audit annual work through to a thumping end of year ensuring this never happens. I
programme includes a procurement surplus and I strongly believe in ‘one set Carolyn Bresh is co-founder of
practices audit, giving the directors of authentic numbers produced by Everymind, a consultancy to
assurance that agreed procedures are finance’ – that means procurement too. finance functions and was
being followed. Savings claimed must tie in to these previously group financial
Every pound we save on overheads recognisable figures. Procurement controller at Reuters
12 THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST

15. INCENTIVISE COST AWARENESS
being met. They will also need to spend
time in different divisions to understand
people’s priorities and pressures.
Samson has seen organisations set
Quid
up business-wide forums to bring cost
saving ideas to the forefront, an
environment in which the FD can apply
sound financial tests. But if businesses
are to create a culture of continuous
pro quo improvement, cost awareness needs
to be linked to career advancement
and reward, he argues.
Deloitte’s Samson says bonus
arrangements that are performance
PERSUADING NON-FINANCIAL PEOPLE TO TAKE NOTE OF related rather than solely profit related
EXPENDITURE AND FIND SAVINGS IS NO EASY TASK, BUT are effective and, to be transparent,
YOU CAN INCENTIVISE THEM, LIZ LOXTON DISCOVERS these bonuses need to be clearly
linked to the delivery of cost savings.
An even more powerful mechanism, in
he past two years have made means putting the message front and his view, is to link career advancement
T businesses aware of the need
to eradicate waste and
become cost efficient like
never before. The lesson enlightened
organisations will be seeking to carry
centre and becoming an ambassador
for cost awareness at every turn.
He makes use of any opportunity to
advocate cost-awareness. Any and all
meetings and presentations to board
to cost-reduction programmes.
“Some organisations link
[cost-reduction] with their efforts
to retain key talent. They would
typically identify key people and put
forward is the need to make these members, managers and staff include them into transformational roles.
hard-won disciplines permanent ones. his key message: “Would you spend “These kinds of change programmes
Chris Samson, a director in Deloitte’s this if it was your own money? That’s can’t be done off the side of someone’s
financial services consulting practice, the best test. Every time you meet desk. Some people need to live and
advises companies on large-scale someone, or have a chance to present, breathe this. In some instances, people
cost reduction programmes. He says or receive a capital expenditure are released from their day role and go
that in order to embed a long-term request, then you apply that logic.” through huge learning curves. And
cost-saving mentality within an As guardian of the company’s ultimately you end up with stronger
organisation you need leadership and financial information, the FD will help organisations when people go back
accountability. “A large-scale cost test whether targets are genuinely to their line roles.” I
reduction programme can often require
significant cultural change and can be
a fundamental test of leadership,” he
says. “Targets need to be allocated to
key divisional directors with transparent
processes for reporting back.”
In an ideal setup, the CEO and
CFO will take the lead, with the CEO
providing the mandate and the CFO
playing a crucial role by offering
independent challenge to ensure
the robustness of all business cases,
making sure the finance function
plays a central role and providing
transparency. Actually achieving those
savings and effecting change, however,
is down to the foot soldiers – the
managers and divisional directors.
So what can finance directors
do to underpin that process and
help put a cost-aware culture on
a permanent footing?
Martyn Wates, CFO at The
Co-operative Group, says getting the
cost-saving message through to an
organisation that is 120,000-strong
THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST 13

16. In it for the
long haul
ROBERT ALLISON, MD AT EXPENSE REDUCTION ANALYSTS,
TELLS MELANIE STERN HOW FDS CAN EMBED COST
CONTROL TO SURVIVE THE RECESSION — AND FAR BEYOND
What do you think we’ve learned purchase management processes
most keenly from the last – and culture – in order to ensure
couple of years, in terms of absolute best value from all areas of
cost cutting? supply within the company. These
With many board directors facing the processes also ensure true cost savings
first downturn of their careers, the last are achieved in the future through
couple of years have brought cost effective supplier management, rather
management and purchasing back to than settling for large headline savings
the boardroom table as serious issues today, which very often do not
that carry real influence over the materialise in the future.
company’s ability to reach its strategic
objectives. In spite of this, though, Has the relationship between
I still see over a third of businesses FDs and procurement changed
doing little to tackle the majority of as pressures on businesses to
their cost areas. find cost savings have increased
amid recession?
In which areas are businesses More and more FDs are now seeing the
and FDs focusing regards cost importance of effective purchasing and
cutting right now? its direct impact on cost management.
As always, cost cutting starts at the top While this has always existed for raw
and works its way down the list. For material costs, what we have seen in
most organisations, this means the first recent times are finance teams realising
area for cost reduction is headcount that, by working much closer with
closely followed by other major cost experts in procurement, they can
overheads, such as salary and ensure every cost within the business
pensions for the remaining staff. Next delivers best value.
to be targeted is often the direct or raw More importantly, by establishing
material costs of the business. Very the right relationships and good
rarely will most finance teams get much reporting processes between the
beyond this before other priorities people who buy the goods or in cost control they have taken
appear on the radar. services and the finance team, the on in the recession when the
cost savings found become economic sun comes out again?
What do you think will change sustainable for the long term. That If the focus of FDs turns too quickly
there in 2010 and beyond? should make the entire business unit away from the lessons of recent
There is a real trend now forming in healthier overall and something times and the correct ongoing cost
finance teams nationwide to recognise any business will need to achieve if and purchase management
that effective cost management is not it wants to run efficient operations processes and cultures are not
just about taking a “slash ‘n’ burn” in the UK and compete locally maintained on all areas of spending,
approach to cost cutting. Having or internationally. complacency will quickly enter the
addressed the main line costs in 2009, supply chain and businesses will
it’s now time to go behind the scenes Do you think FDs are at risk of struggle even more to compete with
and establish effective cost and forgetting the valuable lessons leaner businesses elsewhere.
14 THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST

17. INSTIL LONG-TERM PRACTICES
Of our list of ten ways to
control cost, which would you
say was the most important in
2010 and why?
While all are valuable points in
becoming an industry leader in cost
management, many are not overnight
solutions and will take some time. The
single point which could provide
immediate benefit in 2010 would be to
focus on the behind-the-scenes costs,
or the bottom two-thirds of your
purchase ledger. Longer term, the
creation of a cost-aware culture
throughout the entire organisation is
what will change UK industry for the
long-term and something I believe
more and more FDs will be recognised
for in the future.
How would you advise FDs to
instil this specific point as a
permanent discipline?
Establish the right reporting and
measurement systems which can
recognise when someone is achieving
best value from suppliers. We all spend
a fortune on sophisticated performance
measurement systems for our sales and
marketing teams then reward and
acknowledge their success publicly.
Having the right monitoring systems
in place to judge when best value is
gained – and maintained – from
suppliers will enable the same
recognition to be given to staff, and very
quickly make the necessities of 2009 a
permanent discipline in the future.
What would your warning be to
FDs who do not take a leading
role in instilling longer-term
cost control disciplines from
How can FDs lead the process control of cost in other departments? the lessons we have had out of
of instilling these lessons Like any form of change, process the recession?
as lasting disciplines? aimed at creating a lasting culture With slow growth and an increasingly
Lead from the front. Show the team that which recognises the importance of global market for UK businesses to
you are serious about ensuring best always getting best value from compete within, any company not
value and making savings. If others see suppliers is about leading from the top. operating a best-value culture across
you take it seriously, they will quickly So to start, ensure all members of the all areas of the businesses purchasing
echo the same habits. board place equal importance on will not be able to match those who do.
It’s one thing to do that within the creating this culture. Beyond this, I also believe that the achievement of
finance function where the FD holds create the monitoring and reporting FDs in the area of leading a cost-aware
sway – but how do they do this if they processes needed to continuously culture will become an attribute
want to raise the profile and influence of monitor whether best value is being investors will place increasing value on
finance across the business and keep gained from suppliers. long after the recession is over. I
THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST 15

18. BENCHMARK AND COMMUNICATE SAVINGS
What’s
your story?
ONCE YOU’VE IDENTIFIED WHAT SAVINGS CAN BE MADE, YOU
NEED TO DEMONSTRATE YOUR SUCCESSES TO THE BOARD,
THE BUSINESS AND YOUR STAKEHOLDERS, SAYS LIZ LOXTON
s we come out of what has needed to show the investment
A been described as the
starkest recession in memory
and move into what is being
characterised as merely a period of
deeply difficult trading conditions, cost
community that the business has
the ability to manage costs in such
situations more than usual.
“We manage our business to
KPIs. Revenue per head shows
control remains imperative. the level of activity. Profit per head
What counts now for businesses and shows efficiency.
their investors is evidence that “Salary cost to revenue is very
companies have addressed cost- important, as is operating margin,
cutting and cost awareness head on. since we are a people business.
Stronger balance sheets and business Internally and to the City that’s
survival speak for themselves, but how we get judged from a cost
where companies have publicly management perspective.”
committed to eradicating duplication Creston consolidated its call
and unnecessary cost, the board and centres and online market research
the investment community will want to panels in order to eradicate waste.
hear the specifics. “Any investment we make, we try
Benchmarking cost reduction efforts and look at it from a group
is a must, but it is an exercise that has perspective,” says Brien.
to be sensibly executed, says Clive While the current conditions are
Lewis, head of SME issues at the exceptional, sudden falls in income in
Institute of Chartered Accountants in his sector are nothing new. “Even in
England and Wales. Software can help good times, you can lose a big client
with the detail, he says, but what really and take a large hit on income,” he says.
matters is having an agreed process
that fits the organisation. Run the numbers
“The board must agree KPIs that are Regularly running the numbers to look teams to assess how the business was
relevant to the business. The problem at the impact of losing key business is a doing month-by-month against agreed
with cost reduction is that some costs familiar discipline. “In this industry that reduction targets.
are relatively fixed and some vary with is a very well-trodden path,” he says. The result was a £150m year-on-
the level of activity, so keeping an eye At the Co-operative Group, CFO year improvement on the working
on costs in absolute numbers is Martyn Wates says benchmarking the capital position, largely thanks to
difficult,” he adds. business against competitors has rallying everyone in the business to
For Barrie Brien, CFO and chief proved an invaluable starting point to the cause of cost-reduction and of
operating officer at marketing group the group’s cost cutting initiative. recording what happened so that it
Creston, being able to demonstrate Profit margins, working capital, could be communicated internally and
cost management disciplines is debtors, credit terms – all were to the wider world.
important when income is falling assessed and measured against “Finance is just a record of what
steeply. His sector endured a difficult the market. happened in the business. If you
summer in 2009 with sharp declines The finance department then took don’t make a difference at ground level,
in advertising revenues and Brien has the lead, working with operational nothing changes,” says Wates. I
16 THE FINANCIAL DIRECTOR GUIDE COST CONTROL CHECKLIST