Synopsis
There are multiple methods for assessing the current position of one’s business entity. We have written separately on FAST Benchmarking, the external perspective on current position. In this case study, we review the internal perspective through the eyes of our work with a luxury goods manufacturer and retailer.
Despite the fact that our client was already quite streamlined, the systematic approach we took to understanding cost drivers and identifying solutions led to an 8.8% cost improvement on a £3.4m cost base over the 10-week duration of the project. The client’s conclusion was that “lean and mean” can become “leaner and meaner” but it took an outside pair of eyes to know where to go to get there.
Background
Competition today may be tougher than it has ever been – it may be the economy, deflationary expectations, desperate competitors, market leaders. Each can put extraordinary pressure on a company’s cost base. In today’s climate, they all are.
As business managers we know it should be a last resort to reduce growth-oriented investment – those things that generate revenues and pay the bills. Advertising and marketing, calling on our clients or customers, investing in our product are all the lifeblood of achieving top-line growth. For complex organizations (those spread over multiple sites and possibly multiple countries), tackling the cost base is the more immediate path to take. In this piece, we speak about “shared services costs” and whether we are really maximizing the sharing opportunity in these areas?
We worked with an international luxury goods company that had multiple locations in a single country – the focus of our shared-service cost review. Margins and growth were both healthy and the CEO and CFO always ran the company like a small business. By all definitions this company was already lean and mean. Thus, it is an interesting study to see how big the benefit can be by sharing services in the following areas we studied – temporary labour, delivery services, cleaning, utilities, telephones, stationery and maintenance.
Does “lean and mean” equate to absolute lowest cost? The answer was no in this example, as we found and implemented savings of almost 10% – a total of over £300,000 – over the 10-week duration of this work.
Chart 1 shows what the status quo looked like at the beginning of this project. This was a case of the extreme of “thinking global and acting local”. These six subsidiaries all do roughly the same thing – retail and wholesale luxury goods around the globe, but when it came to working together on a local level, they didn’t.
Chart 1
Shared Services suppliers and spend by subsidiary
Step 1 was to assess where they were at that moment in time. Our hypotheses were as follows:
- Some subsidiaries followed best practices that could be emulated by others
- Sometimes suppliers gave preferential treatment based on greater volume or activity and possibly 2+2 could equal 5
- There were probably some “nice to have” activities thrown in with “must haves” and management should revisit which ones they really need
Here we share three examples from the work and how they relate to these hypotheses. The three examples are electric usage (Chart 2), overnight delivery (Chart 3) and cleaning services (Chart 4). The electric example is a clear case of rate differentials that had little to do with volume. Also we were able to achieve further rate reductions based on combined volume. The savings achieved in this area was 19.8% of current spend.
Chart 2
Chart 3 on overnight delivery costs (e.g., FedEx, UPS, DHL, etc.) is another example of the insights from a relatively simple analysis. There were three suppliers with quite different cost structures. Volume played a factor in these relationships but wasn’t the only factor, and we were able to shed 5% from total annual invoices of almost £750,000.
Chart 3
Our final example, cleaning services, was slightly more nuanced. In this situation, “quality” was a cost driver. Corporate headquarters or a retail location had a higher cleaning standard than a regional sales office. Knowing this, we normalized for this required quality difference and calculated what a normal cost line might be. As with almost all other areas of shared services cost, there is quite a lot of unnecessary variation around the norm, and a common contract would help save 21.2% of this cost. Chart 4 shows how the situation looked and how it might improve.
Chart 4
All told as shown in Chart 5 savings added up to 8.8% of over £3.4m of expense. The satisfying part of the work was that our “lean and mean” client was amazed at the opportunities that surfaced that went behind what they were able to find on their own.
Chart 5
Summary of savings by shared-service cost area
Conclusion
As this client did, it pays to never assume you are optimized. A relatively small investment in seeing where you stand may realize savings that you hadn’t thought of or unearthed before. In this case it was worth over £300,000, not a bad return on 10 weeks work.
This shared services analytic approach is an internal methodology for addressing the issue of improving things now. It is a nice complement to our external approach – FAST Benchmarking, which takes an outward looking approach to finding out where you stand in the world.
>About the author
Ted Leavitt, Executive Director Faculty Partnership CIC Ltd, has an eclectic background that in general management, marketing, strategy, entrepreneurial, and M&A spanning large corporations and management consulting to his own start-up company. The common theme is taking these enterprises in new directions via top-line or bottom-line changes whether in the Private or Public Sectors. Ted can be found at Twitter at @inspeer.
