Managing expenses effectively is one of the most important steps for the long-term success of your business.
Here are some tips to help you right-size your expenses.
1. Harness your headcount.
People cost money. To start, outsource where you can. As an example, my company recently outsourced technology support and development, which saved us 60 percent in costs and significantly accelerated our ability to implement new software. Meanwhile, get rid of the under-performers, the overvalued, and the sacred cows who are taking away more value than they’re worth. You may also be overpaying people, so consider a compensation study to determine fair salaries.
Larger companies will want to dive into their spans and layers. For example, if the CEO manages five directs and each of them manages five directs, then you need only five layers for a company of 700 people. In a firm of this size, identify all the people who manage fewer than five people (span of control) and parts of the organization that have more than five layers of management. Then look for specific opportunities to remove layers, combine responsibilities into fewer roles, and reduce people. A final way to harness your headcount is to set targeted front-office to back-office ratios. This can allow managers to see when they may be back-office heavy. Having a ratio upon which senior management agrees will force everyone to look for opportunities to rein in expenses even further.
2. Use interns.
If you get the right ones, this can be the best bang for your compensation buck, as they can take on simple but time-consuming tasks. Interns can take on lower-value tasks and allow other employees to focus on higher-value work that is commensurate with their experience and compensation.
3. Move middle- or back-office workers to lower-cost locations.
I’ve seen companies save some $50 million or more by moving Manhattan jobs to Jacksonville and Salt Lake City. It’s a longer-term strategy, but it works.
4. Promote telecommunicating.
Some of our best employees have worked out of home offices in India, Switzerland, and the West Coast. Thanks in large part to teleconferencing and instant messaging, sometimes I never know that they’re not in the main office. By having people work outside the office, you can rent smaller spaces or sublet the space you no longer need. In addition, you may be able to negotiate lower compensation for people who work at lower-cost locations.
5. Negotiate and find buying power with vendors.
Everything is still negotiable — even expensive black-car services. We were recently able to talk our car service into matching Uber’s prices. For small businesses, consortium groups can help pull together purchasing power to negotiate lower rates for everything from office supplies to healthcare costs. A professional employer organization, or PEO, that takes on your HR functions can also reduce healthcare costs. Finally, use corporate credit cards to pay vendors rather than checks. This will save time and let you earn miles or points, which can then be used to pay some expenses. Negotiating with vendors is also a good way to reduce professional fees. Freelance lawyers might be looking for part-time work and might charge a fraction of what you’re paying people on retainer. If you want to keep a firm on retainer, find out what other firms charge and use that information to renegotiate your rates.
6. Focus on the overtime.
How much are you paying? Shifting work hours can minimize this expense line. If you are in an industry where the overtime hours are racking up, consider shifting hours around, or bringing in a temp or even another intern to keep the line item in check.
7. Reengineer the process.
A tighter and leaner organization comes from improving automation and simplifying processes to free up resources. Lose unnecessary reports and useless weekly emails, and make a long-term investment in a well-run system with no extra clutter.
8. Stay focused on business, not hobbies.
You might be overpaying for potential product lines and projects that are just pipe dreams. Remain more fully committed to profitable ventures instead. Allow your company to finish less crucial projects only if you make it to certain revenue or profitability targets half way through the year.
9. Let the experts develop the software.
Expensive IT projects can be a costly trap; cut the cord on those you already know are failures or need some serious maintenance every year. Instead of spending $20,000 a year upgrading your customized software program and paying dearly for an offsite disaster-recovery location, consider using an out-of-the-box software solution, which will allow you to benefit from their software upgrades every year.
10. Split the cost of events.
Other vendors or partners might be willing to share branding and speaking opportunities at costly conferences. Or, for internal events, consider combining events into one, such as a joint 50th anniversary and holiday party.
11. Lose the paper addiction.
Ink, paper, waste. What can you move to the digital realm to share the same exact information in a better format? Show your work on a screen and maintain commonly asked-for material on your iPad or computer so that you can send information with ease, instead of constantly printing out the material for every meeting.
12. Become creative with space.
Perhaps you can sublet your space to help offset the office costs. If you’re downsizing, leave a lease early, and find cheaper and smaller space. If you are getting a new space, consider doing an office share so you can split the overhead costs. Analyze your space use and other large expense items separately and on a regular basis to more clearly identify opportunities to save.
13. Cut the travel and entertainment budget.
You can still schedule trips, but pack them with more meetings, and implement limits on hotel costs. When possible, organize teleconferences or webinars. Avoid sending the entire sales team to one conference. Consider selling those pricey, unused season tickets and instead, when you need to, use Stub Hub to get those front-row tickets. Maintain a strict standard on expenses; for example, require senior management approval for any expense more than $500.
Reeling in expenses can be one of the hardest parts of running a business. There are probably cost savings you haven’t even thought of yet. Consider offering $1,000 to employees for the best idea that achieves an expense cut, or reward such an idea in a non-monetary way, like giving the winning employee the chance to join an important project. Tie individual and department goals and incentive rewards to the expense line, and let everyone — from department heads to employees — know that everyone has a stake in managing the bottom line.
By Alexander Tuff ’03 – Alexander Tuff is the president and partner at Winged Keel Group in New York City.
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