indirect spend

How small business can challenge their indirect costs

Profit-risk

No risk no reward it is often said. Small business ownership is definitely not for the faint at heart.  Owning your own business has incredible rewards and can represent everything about yourself professionally.  The old saying of “you’ll never work a day in your life if you love what you do” certainly applies to many small business owners.

However, the same passion small business owners have for their core business does not necessarily translate well to other areas outside their core competency. Welcome to the world of indirect costs.  It does not matter if you are restaurant, medical office, manufacturer or a retail store, indirect costs can eat right through your profits in no time.  Indirect costs include many areas that are not a deliverable to your customer such as transportation, merchant services, electricity, gas, fuel, insurance and office equipment or supplies.

Small business owners struggle in these areas because of a lack of expertise, leverage and most importantly the lack of time. The indirect cost providers have no such lack of expertise or time compared to the small business owner.  This usually leaves the small business owner with the least amount of leverage.  Kind of like a nail to hammer relationship!  Not much leverage for the old nail.

However, small business owners do have options to increase their leverage if they choose.  Here are three ways they can increase their leverage with indirect costs:

  1. Open up negotiations – there a lot of indirect expenses in which there are no restrictions to competition so rebidding the service is a very viable option. This even includes using your current provider. There is nothing wrong with checking the marketplace for updated pricing and service plans. Service levels, service providers, technology and your own needs change over time. You just might be surprised to find key savings right in front of you.
  2. Buying groups – buying groups add value to their members through essentially group discounting. These groups are often associated by industry and can be a very effective way to increase leverage with providers to the industry.  There can be costs associated with joining these groups, but the cost of membership can easily payoff in the savings associated.
  3. Strategic partnerships – there are strategic partners that specialize in indirect costing solutions that give small business access to negotiation leverage they just can’t get on their own. These partners add leverage to the small business owner through their expertise and their relationships with these types of providers. They can provide preferential pricing to the small business owner because of their track record and relationship with these providers and pass these savings onto the small business owner. These partnerships not only pass along savings to their clients, but they also allow small business owners to leverage time because they act on the behalf of the small business owner allowing them to focus on their core business. Some of these partners specialize in one are while others can provide a one stop shop for all indirect costs.

Small business ownership requires maintaining cost to keep you competitive in the marketplace. While you can’t save your way to higher sales, you can price yourself out of the market.  Indirect costs are just part of doing business so make sure to review those costs for opportunities that just might give you an edge. If it has been a while since you reviewed those contracts the investment of time could payoff exponentially.

If you know of anyone that would like more information on how to reduce their indirect costing solutions in transportation, utilities, insurance, merchant services or many other areas please email info@atssoutherncal.com.

Question:  what’s the longest you have gone without reviewing a service contract with your indirect provider such as small package delivery, insurance or merchant services?

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Following the money is just the beginning…

money trail

“Follow the money” is a timeless quote made famous in the movie All the President’s Men.  But the point remains just as relevant in today’s business climate.  Accounting departments today can tell us where the money is being spent, just not necessarily why.  This is especially true when it comes to indirect spending which can range from 20-50% of all costs for companies.  But how does that much spending go without proper oversight?

Indirect spend is mostly made up of spend categories that fall outside of core competencies for most organizations. Whether you are a restaurant, law firm, manufacturer or dentist the fact of the matter is you likely are very in tune with every detail from your supplier base through delivery to the customer that involves your core competency.  You have organized the structure of the company to deal with all facets from sourcing, contract development, marketing, sales and customer service.  Indirect spending by contrast has little accountability to any one person or organization in most cases.  Costs such as insurance, fuel, utilities, office support equipment and supplies or maintenance.  These have a way of flying under the radar.

If your goal is just to match last year’s indirect spend budget then you are not asking the right questions.  Business services change, technology changes and your demands are constantly moving.  Take the time to investigate existing contracts. The effort will more than pay for itself.  Here are three ways to help you manage those costs:

  1. Start by following the money – Identify, track and create awareness as to how much and where those costs are being spent. Most people in the organization do not have an understanding of how many total dollars are being spent outside of the areas they directly touch. Awareness is the key to making change possible.
  2. Review contracts – Most companies get into contracts and do not update the level of service timely to account for the shifting demands of their business. Increasing or decreasing staff or new technologies often change your demands on the level of service required. Service `providers also are constantly updating their level of services, rates and not to mention competitors.
  3. Engage partners if you are short on resources– There are many options when attempting to negotiate with indirect services. No one has to go it alone.  Just like you have a core business, there are companies whose core business is to simply negotiate these services for you and they will often times more than pay for their services through their work.  They have the experience, capacity and strategic partnerships already in place to quickly deliver turn-key solutions that fit your needs.

Indirect spend is a very significant factor in cash flow that is seldom properly addressed.  Therefore I think the challenge to procurement should not be to just follow the money.  It is time for procurement to take this challenge to the next level.  Cuba Gooding said it best in Jerry Maguire, “Show me the money” procurement!   That is the question procurement should be answering when it comes to indirect spend strategy.

If you know of any companies that may need help in “showing me the money” please email info@atssoutherncal.com.  We would be glad to assist you in finding solutions that will “show you the money” in your indirect budgets.

Question: what other famous movie lines apply to your business challenges today?

3 reasons why procurement outsourcing allows companies to focus on their core business goals

Basketball

Keeping your eye on your business goals is critical to success. Remaining focused on your core business requires engagement in every area from the supplier network to customer delivery.  But what is it costing to keep this focus in your supplier network.  Probably more than you think. Procurement outsourcing is a solution that allows companies to stay focused while addressing non-strategic areas without adding additional costs.

Outsourcing has survived so long in the business world because it simply adds value. Outsourcing has been used by IT for decades and payroll demands have helped create giants such as ADP. Procurement outsourcing is capable of adding similar value to any organization and is now beginning to find wider acceptance.

Here are 3 key reasons why companies should consider procurement outsourcing as a strategic solution to their operations:

1. Cost reduction

It is very expensive to hire talented people and keep them in house.  Procurement is a very demanding business function and talent is getting to be in short supply driving up the costs.  Salaries, benefits, training, insurance, office space and equipment are all requirements that add costs to your overhead and must be factored into your cost structure.  It is important to hire strategic help that fits your core business model. Procurement outsourcing allows companies to address non- strategic elements of the business much more cost effectively.

2. Risk mitigation

The business environment today can be very choppy, up one day and down the next.  Most companies have learned to adapt since the Great Recession by keeping staff very lean and adding new employees only as a last resort. When business is a little soft, the exposure to higher cost is very risky.  Layoffs have become a normal part of business operations, but scaling the organization up and down comes at a cost.  Payouts for terminations, recruiting new talent and training are significant costs to businesses having to deal with natural peaks and valleys of business cycles.  Procurement outsourcing mitigates this risk but allowing companies to tap into talent on demand and yet keeping the agility to remain scalable to any project.

3. Expertise

Choosing procurement outsourcing allows you tap into expertise that was never possible when relying on in house talent alone. We all have to pick and choose our battles and your core business is certainly worth protecting. But that leaves a lot of areas outside of your core business.  Now that the baby boomer generation is retiring, they are taking with them decades of experience.  Companies will be forced to deal with this change in talent level one way or another. They will have to choose wisely where to engage their limited resources. Procurement teams will be asked to handle many demands outside of their core business with less experienced people? It can be like bringing a knife to a gunfight when trying to negotiate contracts out of your expertise.  It sure is nice to have an expert on your side of the table.

Outsourcing is a proven business model that is finding a new application in the procurement world that can add value across many areas of your business.  Is it time for your business to be ahead of the wave or behind it?

If you or anyone you know would like to learn more about how procurement outsourcing solutions can help your business be more competitive please email me for a free no cost assessment.

Question:  Does your company’s lack of procurement support either now or in the future concern you?  Please feel free to comment. 

5 reasons why using an expert to manage your indirect spend will pay for itself

Animal help

We all need a little help sometime

Are indirect expenses directly costing you cash flow you don’t need to spend? While you may have a difficult time defining your indirect spend, these expenses seem to have no such problem adding up.  Expenses such as marketing, office equipment, maintenance or industrial supplies are just a few typical indirect expenses.  Organizations rarely have the right resources available to manage these costs, but that does not mean they can’t effectively manage the expenses.

Here are 5 reasons why companies should look to experts to help them manage indirect costs:

1. Ability to tap into expert knowledge

No matter what business you are in, everyone has a core business they perform and unless you specialize in indirect cost management, your organization is likely to be leaving money on the table. Most organizations do not have the expertise in house to match those skillsets on the other side of the table when it comes to buying indirect goods and services.  This is why using experts makes sense.  We all use experts throughout our lives.  Would anyone really consider doing their own dentistry? How about legal advice, tax advice or just car maintenance? We all use experts in our life to get the best value and provide a level of protection.  Indirect spending is no different.

2. Lack of internal resources

Everyone is faced with doing more with less. Procurement is no different.  This is why every procurement department is focused on their core suppliers that keep the daily operations functioning at a high level.  But who is actively managing non-core suppliers? In most organizations, no one!  Indirect providers know this and use this to their advantage. This is exactly why companies are paying too much and not getting the highest value for their money.

3. Turn-key solutions

Just like you would never expect your doctor to ask you to run a blood test, experts do not ask you to handle the research, analysis and communications needed to provide a solution.  Sure some interaction is needed to gather and understand the issues, but the actual work is performed by industry experts that are very experienced and trained to provide cost effective solutions ready to implement into your organization.

4. Increasing cash flow

Indirect spend can range between 20-50% of all expenses.   Finding a way reduce indirect spend therefore has a very positive effect on increasing the bottom line.  Many indirect cost reduction projects find ways to reduce costs by double digits.  What impact would reducing your spend by double digits mean to your organization?

5. No risk

Still not sure if using an expert is right for you?  Try one for free.  The right experts will provide a no cost assessment up front to determine if the fit is right.  No investment is required.  The expert will identify the opportunities and provide a roadmap on how to achieve the results.  Compensation is paid out of from the savings achieved.

Every organization has indirect expenses. The question is how effective can you manage those expenses. Effectively managing those costs can make a huge difference in your cash flow.  Using the right team to help you manage these costs can pay for itself in a very short amount of time. If your goal is to reduce indirect spend in your organization but lack the proper resources, contact me for a no cost assessment and I can put you in touch with our team of industry experts.

Question: What is your experience in managing these indirect costs? Please share your experiences with me.