Monday, December 15, 2008

Cutting expenses but not your own throat

The best way to preserve cash is to stop spending. But, obviously, you have to be strategic and cut in such a way that it also builds the company for the future.

Based on my experiences at various clients over the years, by taking a reasonable and strategic approach, you should be able to cut 9% - 22% off your Expense lines while most likely making your company a better competitor. It might also help a company beat the odds and emerge from Bankruptcy. By the way – this is high stakes poker – if you go too aggressive and cut muscle, the returns will be a short term ‘false positive’.

Who should do the cutting? Generally, we recommend an outsider, mainly because as I often say “we’re the people everyone can agree to hate” or as a client once put it “you’re a first class SOB but you’re our SOB”. Insiders often do not have the broader cross-industry exposure, are used to doing things "our way-it just is" or are afraid of the ramifications to themselves. Your employees and executives/senior leaders should be represented on the Approval /Steering Committee.

Assuming you are using an outsider, how do you contract? There’s a bunch of people out there right now who will go for a straight percent of the save identified, but this often leads less to savings and more to amputation without regard for life- after. The better way is to put a bit of skin in the game as a 1-month billable project to bake this initiative into the staff, structure the Governance model, etc, followed by 20% of the amount mutually agreed to as identified potential saves (this means a business model, identified vendors, terms, etc.). If you wish the outsiders to perform the saves, then expect to pay an additional 15-20% (for a total of 35-40% to the outsiders, 60-65% of the saves stay with you) once the saves are completed. Make sure they teach your employees how to re-run a cost savings initiative on their own.

Where are the savings? As an example, the items listed below are a sub-set of what we, and presumably others, would examine in the IT arena which is usually a large % of spend:

Applications Development, Maintenance, Licenses
• Review all quotation software to ensure the edits/rules are current and tight enough to prevent overly aggressive quotes, i.e. ‘revenue leaks’
• Ensure licenses are used and return all shelf licenses which will not be used for 24-36 months. Why pay now? They’ll be glad to give discounts anytime.
• Are we getting value for maintenance dollars and can we lower the cost based on value received? Can we use 3rd party certified providers for routine maintenance?
• Are we overusing any online applications and can we cut back to a controlled level? Many people see online as ‘free’
• Can we not renew non-strategic licenses coming due in 2009?
• Are there avenues where implementing technology will provide MEASURABLE saving in 2009? Examples would be implementing workflow to replace field FTEs
• By implementing Shared Services, can we reduce the number of licenses, hardware footprints, business unit staffs, etc?

Projects, new and In-flight

• Review all projects to see if they are properly scoped, structured and have a measurable payback within 12-24 months. If not, is the project sufficiently strategic to remain active?
• If implementing any Enterprise software such as ERP, most vendors will supply significant resources gratis to ensure the project is successful. If early on and the vendor is uncooperative, introduce competition if possible and revisit.

Network Infrastructure
• Review contracts to ensure best deal.
• Review bills – often leads to 10-30% savings
• Deploy VoIP to save 50-90 %
• Review which sites need 99.99% uptime vs. 99.9%. This often saves in excess of 20% of WAN expenses

Hardware Infrastructure

• Defer Windows upgrades unless cost free
• Defer PC replacements; do not go to Vista or Windows 7 in 2009
• Virtualize and consolidate servers, use Linux for servers
• Review and standardize business intelligence and reporting software vendors
• Postpone all architecture pilots, evaluations and upgrades
• Review data management requirements to avoid adding online capacity, also reduce duplicate data storage by various systems in favor of Master Files callable by all. For example, save Customer info once, use many.

Purchasing
• Set and enforce strict rules on purchasing new services, equipment, etc.
• Immediately consolidate ALL procurement to the Procurement Dept. No credit cards purchases by units or people
• Start Vendor Management process, including tracking and adherence to SLAs and Master agreements
• Buy used first, new only if absolutely required
• Review if remote offices need full infrastructures or it they can use online versions of a central application – reduce hardware, infrastructure and licenses accordingly


People

• Review required staffing levels, reduce as required
• Review which non-essential services can be moved to a 3rd party vendor
• Stop all conferences and courses

Wednesday, December 10, 2008

In a recession, cash is king

“Follow the Money”
“Because that’s where the money is”


In a recession, cash is king


A South American country was continually and publically threatening its neighbors with immediate invasion as a means of diverting its population from the little fact of 1200% hyperinflation. They reset the currency every day at Noon by some factor, usually small, but sometimes by double digit percents. They also instituted personal, manufacturing, export and repatriation exchange rates. I was running the local subsidiary of a US company and early on naively accepted payment from a government agency at 11:45AM in local currency. 15 minutes later and on the way to the bank, the currency was devalued by double digits and I had to eat over $250,000. That’s hyperinflation


The only way to survive was to use Accrual Accounting for my HQ reporting (and local statutory filings) but operate on a daily basis as if this was a corner deli, that is, on a cash basis. We developed a ‘30-Day Sources and Uses of Cash’ report and at the close of business each day, did the “we took in X, spent Y, still have money in the bank so we’ll open again tomorrow” discussion. In doing so, we had an accurate understanding of our immediate business health and the amount and timing of our cash needs/sources and sufficient time to address any expected cash shortages. Before we developed our 30-Day cash report we would occasionally get our cash timing wrong and scrambled to survive. From this I learned the only way to survive a difficult economy is to live by your timed cash flow. Not to say that accruals were or are a bad thing, quite the opposite, but on a daily basis we needed to know if we were distressed or healthy. Accrual Accounting just did not fit our daily lives.


We have to treat today’s severe recession as if it is as dangerous as hyperinflation and manage by cash over a rolling 30 day window. No, they are not the same thing, but both represent extreme economic dysfunction and living for the present is the best way to survive. I know of several businesses that are, on a cash basis, highly distressed while on an accruals basis, healthy. Just recently I dealt with a company that was healthy per Accrual Accounting, but the owners had to arrange an emergency cash line and inject some of their own monies as well because on an available cash basis, the company was technically borderline distressed and the bankers didn’t care about their accruals.


When managing on a rolling 30-Day Cash basis, you have to monitor only a few key things:
• Cash on hand
• Cash to be collected within 14 days
• 30-Day Burn rate, especially if any belt tightening remains to be done
• Revenue Leakage


The first 3 are self explanatory, but the 4th isn’t. Revenue Leakage occurs when sales reps sell your product or services for less than your approved pricing guidelines and discounting policies. This often occurs because your reps are trying to keep their jobs and your order entry systems permit out of bounds pricing. The problem with Revenue Leakage is the immediate impact it has on that king of all recession needs, cash, because it overcomes any smart negotiating you did to lower your Cost of Goods Sold and upsets any in/out cash flows. In other words, you worked hard to get the best deal from your suppliers and your reps are giving it away and this pretty much guarantees a cash shortage in the very near future.


The takeaway: During severe economic recessions, manage by the real-world metric called 30-Day Cash. Thinking in terms of cash buys you the time you need to survive long enough to build for the post-recession future. The ‘30-Day Sources and Uses of Cash’ report is your single most useful daily operations management tool.


Richard Eichen is a senior turnaround and crisis manager and is a Managing Principal at Return on Efficiency, LLC (www.growroe.com) and can be reached at richard.eichen@growroe.com.