Why Overspending Happens in Companies like Yours
Most companies today still focus on increased sales vs. cost cutting to increase profits. Let’s face it, new sales are sexy. They create headlines. Business owners as well as shareholders prefer to see these numbers when evaluating growth. Cost cutting is often associated with poor financial health and all too often is reactionary. It’s almost like airing your dirty laundry and sometimes involves layoffs-so many companies avoid it. Other companies think they have active cost reduction practices in place but are only scratching the surface with an outdated or weak vendor management program. Today we look at your fixed spend with current vendors, and some common scenarios that lead to overspending.
The Problem
The vendors who repair your equipment, supply your wireless service, ship your products, haul your waste etc. are all interested in making the most profit(just like you!). Once you are in contract, they have no incentive to share information about how to save money with them without sacrificing service. So you are on your own, and you may not have the resources to fully evaluate, negotiate, and insure you are paying the best price for the goods or services you need to operate your business. So you end up overspending, and in turn hurt your profitability.
If you are like most companies you have at least some controls in place in your finance and purchasing teams, but are you doing enough? Here are some common scenarios that lead to overspending. Do any of these sound familiar?
Not Reviewing Invoices Regularly
The world is changing at an ever faster pace, and this is even more true in business. Markets and prices move more frequently, and new processes and technologies can affect the price of goods and services you buy. The 2 –year contract you signed 9 months ago could even be outdated. How often does your staff really do a deep dive on your vendor invoices and contracts? Quarterly? Annually ? or “When they get around to it.” Every business is different but if you are not REGULARLY reviewing invoices for optimized service, billing errors, and outdated charges, you likely ARE overpaying. A simple phone call to the vendor outside of your normal sales rep many times can uncover new promotions or unpublished rates.
Apathy with Longstanding Vendors
Many times the vendors who you have the longest relationships and most trust with are the biggest offenders in overbilling. They may not intend to, but, again they have no incentive to show you how to spend less. With the increased use of auto renewal clauses in contracts that go on for years you may be paying for outdated or unnecessary services. Beware too the cozy relationship some of your department heads or purchasing managers may have with certain vendors. People are people and sometimes the easy path for an employee is to just keep things the same; particularly if they don’t have P & L oversight. We see it all too often that if the invoice is within budget for an approved vendor many accounts payable departments just pay the bill without question.
Overworked Staff
Let’s say you do in fact want to get a better handle on your invoices. Do you even have the resources to add this level of scrutiny to the mix? With the economy running at full tilt it’s harder than ever to find and retain good employees. Your staff is probably overworked as it is, and the last thing you want to do is have their core job performance suffer because they are spending new time evaluating invoices and contracts. Another point to consider is the skill set of the reviewer. Are they trained in cost containment and negotiating?
Boring Work Gets Done Last
Combing through a stack of vendor invoices every month is tedious and boring. Looking for errors and problems is negative energy compared to finding new markets to sell into. As a result we often see invoice review is the last thing that gets done, and in an overworked environment it can easily get pushed to the back burner until next month’s invoice comes again. Before you know it 6 months has gone by and nobody has looked at them with a fine tooth comb. The flip side is that when you do find an error in this month’s bill, you have to double check it next month to insure that it’s corrected, so this adds to the workload. One of our customers reported it took them six months to chase down a $900 credit. The cost of that manager’s time to call their vendor every month, go on hold for 15 minutes, email customer service, and document the credit likely cost them more than gaining the credit back.
“We don’t need any help”
Most of our clients tell us this when we first meet them. It’s a universal truth that in life, health, and in business a second opinion never hurts. In general the farther removed that a reviewer of your invoices is from the relationship to the vendor the better the scrutiny. Consider having managers of other departments do checks for each other, or have a separate party outside of your finance or purchasing to do a regular review. Many times we see corporate governance and the status quo as the biggest impediments to looking at new ways to save money, and the companies with the best fiscal health have made vendor management part of their strategic planning.
If you don’t have a mirror in your office, go to the rest room and look into it. Can you honestly say none of the above has ever happened to you?
Mobilia Consulting LLC is a Cost Reduction Company, founded in 2013. They serve mid to large size business all over the U.S, and offer a no cost no obligation review of your corporate spend in a variety of business categories. Click here to learn more.