Over the last couple of years many businesses have reviewed their cost base and where it is appropriate and feasible have undertaken a cost reduction programme. But a new report last month identifies a surprising and often growing gap between the lowest cost performers and their contemporaries amongst leading US companies. Despite the significant effort companies have made to contain and reduce costs the research shows that there is still plenty of ‘fat’ in the system and outsourcing in particular does not necessarily lead to lower finance and administration costs. Gary Simon, FSN’s managing editor looks at the latest survey “2010 Finance book of metrics for technology” from accounting firm, Deloitte.
The survey, conducted by Deloitte’s Global Benchmarking Centre looked at finance costs in US high-tec public companies and identified a cost gap of $8.8 million per billion of total revenue between the median and lowest cost performers with much of the savings opportunity nested in process costs.
As Deloitte says, “Such gaps point to significant potential for cost reductions, not only for short-term relief during this economic downturn, but also for the long-term process efficiencies needed to jump start growth upon recovery.
But the survey is keen to point out that cost-cutting for its own sake is not the answer and benchmarking is not about achieving the lowest cost possible. The answer isn’t always to be best in class; rather, the goal should be to find the position that makes the most sense for the organisation’s overall business strategy. In other words it is a balancing act between cost and performance.
Of course there are dangers in taking a survey for one particular industry sector and applying the findings across the board but nevertheless there are undoubtedly significant and valuable lessons to be learned by businesses of all hues. Unsurprisingly the survey found that many of the process inefficiencies are self induced. For example, average performers operated with three times more general ledger systems and nearly ten times more active suppliers.
The inflexibility of traditional ERP systems could be another factor weighing companies down with cost. David Turner, Group Marketing Director of UNIT 4, the supplier of Agresso and CODA ERP systems told FSN, “Companies need to change processes to make efficiency gains and cost savings but many are saddled with large scale ERP systems that are extremely difficult or costly to change. In the end companies conclude that it is simply too hard to make the necessary changes and end up living with poor processes. This is probably why some companies in the survey simply could not reduce their cost base further.”
Multi-national operations also add to a picture of complexity – and of course cost. For example, finance costs as a percent of revenue for companies that operate in 50 countries or more are, on average, between 2.5% and 3.5% higher than those for a company operating in only one country.
But most surprisingly, outsourcing is not the great salvation that many are led to believe. Deloitte says, “an effective use of shared services reduces costs, while outsourcing seems to have the opposite effect.”
Although the survey found that low-cost performers process more of their invoices in a shared services centre; it came up with the seemingly counter-intuitive conclusion that total finance cost increases with higher proportions of outsourcing. Since outsourcing is most often thought of as synonymous with cost reduction, how can that be? Answering their own findings Deloitte says that it is possible that companies are outsourcing poorly designed, inefficient processes, which only compounds the cost problem. Ideally says the firm, businesses should redesign their processes before attempting to outsource them. Another possible explanation is that finance process outsourcing is not as mature as other types such as technology outsourcing. That can result in both company and service provider climbing the experience curve together — at the company’s expense. Furthermore, while a reliance on outsourcing results in fewer staff, it also requires more experienced — and more expensive — staff to manage outsourcing relationships.
So what strategies are available for taking out further costs? According to the survey automation is fundamental to cost reduction – doing away with swathes of staff and replacing them with much fewer, more highly skilled and remunerated staff seems to point to the way forward. Low-cost performers earn have consistently higher levels of automation and a higher proportion of technology investments than their median counterparts, says Deloitte. Low-cost performers also handle more invoices automatically and have fewer manual journal entries. In addition, they use proportionally more standard reports than the more manually intensive ad-hoc reports.
Integration and accessibility are key themes for Infor one of the largest global providers of mid-market ERP systems. Infor Director,Tim Truesdale, told FSN, “Mid-market companies can be surprisingly complex and there is still plenty of room for process improvement. We tend to assume that everyone can make the leap to efficient best practices but this isn’t always the case and it has to be at a cost that is affordable. The challenge for vendors is to make the solutions more accessible so that mid-sized businesses can more readily take advantage of automation, workflow and integration between applications. The tools are available – in fact they have been available for some time – but we have to be better at making it easier for companies to achieve the benefits.”
However, the ‘hot’ area of enterprise performance management is where the difference between low and high cost performers is most evident. Low cost performers have 46 percent fewer staff at a slightly higher wage rate than the median.
Overall the survey implies that there is little room for complacency with both transaction processing and performance management providing fertile territory for further process automation. And as FSN has reported many times there are numerous areas of automation still not routinely covered by large businesses. Cloud computing offers significant opportunities for cost savings as companies take out the heavy burden of IT infrastructure and maintenance. Innovative on-demand ‘source to pay’ applications such as Web 3.0 from Sapphire Systems and Wax Digital which include functionality for supplier catalogues, reverse auctions and automatic tenders can dramatically and directly reduce the cost of purchasing as well as increasing processing efficiency across the purchase to pay cycle. Document management and tight integration with the finance systems adds further possibilities for efficiency gains.
In the enterprise performance management space, dedicated budgeting, planning, forecasting and consolidation systems are capable of displacing inefficient spreadsheet-bound processes that are also highly error prone. Specialised reconciliation software from Trintech and Blackline can greatly enhance close processes and task management systems from the likes of Oracle, SAP and Runbook can accelerate the close process whilst enhancing control. To add icing to the cake most of these systems provide a basis for continuing productivity improvements so that no organisation need think that it has eliminated all wasteful and unproductive tasks.
After two years of cost cutting the Deloitte report is a timely reminder that there is still everything to play for. Costs containment need not be limited to recessionary times. Continuing appraisal can be just as fruitful.
