Finding the Buried Treasure in Your Organization
There is a hidden resource hiding within every organization. And it’s one that can help any leader—CPO, CFO, COO—overcome the primary challenge with which they are tasked: increase earnings. For most of the clients we’ve worked with at LogicSource, the focus in rising to this challenge is often revenue-centric. If you want to impact earnings, you increase sales. Seems simple enough. It might even be called lazy if it didn’t take so much effort to make a significant difference that way. Of course, it’s sacrilege to suggest trying to increase sales is a bad thing (it’s not). But it isn’t the only way leaders can boost earnings.
When is the last time you took a close look at your organization’s indirect (goods not for resale) spend? Typically, these goods represent around 20% of an organization’s cost base, and many companies treat this like a sunk cost. That’s a big slice of the pie to take for granted. It’s within these costs that we find the major resource most companies are hiding. Across all of our clients at LogicSource, we’ve found savings between 10-15% on not-for-resale goods. That’s a 2-3% reduction in your total cost base. You can imagine what that means for earnings. What’s more, think about how much sales would have to increase to make the same kind of impact. So, why are so many leaders ignoring this untapped resource? If your company could shave 3% off of its total costs, aren’t you obligated to figure how to do it and then make it happen?
Why does this resource go untapped?
It’s tough. We get it because we’ve seen it over and over. Even when more attention is paid to cutting costs than increasing sales, the focus shifts to Cost of Sales. And that makes perfect sense. Those costs most directly impact customers, pricing and sales cycle length. It’s also easier to manage. There are fewer supplies, and usually, all of those costs are well-contained within a single system. Overall, Cost of Sales is a straightforward and visible universe of spend that makes it easier to diagnose issues and then implement change.
In contrast, indirect costs aren’t so tidy. We were working with a client and needed to take a look at merchandising expenditures. We got a report back the same day, at the SKU-level, with daily volumes. It took weeks to decipher all the expenditures, coming from multiple systems, with sloppy categorization, missing information, and so many other complex problems.
It’s this mix of complexity and disorganization that keeps leaders away from doing all they can to leverage the resource into deep savings. There are a ton of suppliers—often multiples of those for Cost of Sales. It requires a highly diverse set of categories. Every function utilizes a different set of suppliers, and every function insists on managing indirect spend themselves, being the best equipped and most knowledgeable about their needs. There’s even a political element to contend with. Most functions hate it when others play around in their sandbox. Finally, and most critically, it’s likely you don’t even really know what you spend. With data spread across disparate systems, all categorized differently or—more often than not—miscategorized, there is not great visibility into what you’re spending. Consequently, few companies have the resources to find this kind of savings.
None of those above challenges are an excuse. It’s your job. As a leader, it’s your responsibility to look under every rock for savings that can lead to opportunities for competitiveness, growth, better returns, or all of the above. So, what can you do about it?
Find the money!
Once you decide that this is imperative for your organization, start with where you’re looking. The money is there, you’ve just got to find it. In our experience at LogicSource, a ton of savings is usually hiding in indirect categories like Marketing, Packaging and Store Development. But, that might not be true for your organization. Leaders need to analyze the spend at 30,000 feet and under a microscope to find the largest categories with the biggest opportunities to consolidate and save. It’s a cliché, but there’s a lot of truth to getting the “most bang for your buck,” and it shouldn’t be dismissed as a legitimate starting point.
Get full buy-in
Bring leadership together to make a commitment to do something about it. It’s likely you’ll find that the biggest savings comes from spending categories across the organization, all with different leaders at the helm—the CIO for IT, supply chain for Packaging and Logistics, CMO for marketing expenditures. As a leader, it’s your responsibility to get a commitment across the organization to address the opportunity, agree to work together to achieve the savings you’re after, and positively impact the bottom line.
Once you’ve got full buy-in from leadership, new options become available. Is this a project that your company has the internal resources to tackle? Most don’t. It’s hard to dedicate the time and attention necessary to do this work the right way because it’s not a part of your core business. That’s why outsourcing makes sense. Just as your business is focused on delivering goods and services to your customers at a high level, to realize the full potential of the buried treasure within your organization you need to find a partner that can help you find, attain, and keep (more on “keep” at another time) the savings. What’s most important about this choice is that you’re honest with yourself. If you really believe you have the resources, commit to the project and get it done. If this savings truly matters to you, get a partner to run the project for you. There’s no middle ground to getting this done the right way.
What can you expect?
Invariably, clients see 10-15% savings on their indirect costs. That’s enough to move your organization’s total cost base 2-3% in your favor. If you choose to do the work internally, you can expect to need a heavy dose of patience. Doing it yourself can take up to a year before you start to see savings come in, but if you stay persistent the returns will be significant. With the right partner taking on the project, you could begin to see savings almost immediately in some categories. In general, with the help of a third party, significant savings will start coming in after six months, and less in some cases. As long as you’ve thought things through, there’s no wrong choice, but if you’re determined to do it yourself, be doubly sure that it’s right for your company. Going it alone, even just a year’s delay in completing the project could end up costing you more than if you’d brought on a partner from the start.
Does this all seem worth it?
By now, it should be obvious the advantage that tackling this kind of spend can give your organization. And if you’re a well-intentioned leader, a project like this should inspire and motivate you. If you aren’t seeing the advantage or you’re feeling like addressing these costs isn’t imperative for your company, really ask yourself why, and hold yourself to the answer. Because it doesn’t take too much reflection to understand how powerful a change like this can be, and you should be eager to make it.
Maybe none of this is your style. You’ve relied on increased sales or cutting Cost of Sales spend for years and it’s gotten you this far. But that’s a limiting belief. A dollar is a dollar. What difference does it make to your earnings statement if the money came from a relentless sales push or deep savings on Not for Resale goods? If you’re struggling to find breathing room as a leader, taking on a project like this should be non-negotiable. You just need to be absolutely certain that you execute properly. Doing it yourself just adds more pressure to an already tense situation. If you’re not completely sure that your company can handle this itself, consider a partner to run it for you. If it’s not handled properly, you could be leaving millions in savings on the table. And don’t let the internal complexities deter you either. Navigating those choppy waters is your job. Finding your way through the morass to add millions to your company’s bottom line is your job. You were hired to solve complex problems and add value wherever you can. There are few more powerful ways to impact your earnings than maximizing this untapped resource and you can’t afford to neglect it any longer.
It’s time for you to lead, step up, and get it done.
LogicSource is an execution-based Sourcing and Procurement firm with a proven track record of increasing speed-to-market and delivering meaningful savings on indirect procurement spend for our clients. Reach out to [email protected] for more information.