Reducing costs without focusing on price

Founding partner Andy Palfrey shares his thoughts on how costs can be reduced without reverting to table thumping and renegotiating price

It always makes me shudder when I hear of negotiations or relationships that are becoming fractious as a result of the dreaded “cost reduction” conversation. I’ve heard countless such recollections over the years, but during the current challenging times, I thought I’d share a few ideas on potential approaches to reduce expenditure without having to resort to renegotiating price.

A lack of internal alignment?

The challenge that affects many organisations is that there is typically insufficient intimacy, engagement and alignment between those that can be loosely described as the “internal customer” and those who are tasked with procuring and negotiating the desired goods or services. Engagements are event driven, project like in nature and have defined start / stop gates that provide a degree of control, allegedly. Yet sadly, the engagement is all too often viewed as a task and those that are responsible for the procurement activity have a fundamentally different definition of success from those who are “consuming” the services (e.g. the CIO). Once the task is “complete”, the various stakeholders part company and regroup often years later when there is a renewal imminent, or the deal is little more than a “box of broken parts” that needs to be fixed urgently.

Similarly, the measures of success are vastly different. Procurement often views the achievement of saving targets and the contractual elements as critically important, whilst the CIO is likely to be losing sleep over service quality, innovation, the working relationship and so forth.

The reality is that all of these areas are critical and like any great recipe, the order, ratio and treatment of the ingredients has a massive bearing on the final outcome. And we mustn’t forget that ultimately the outcome must meet the consumer’s requirements with commercially acceptable terms.

Reducing costs whilst maintaining your supplier relationships

Regardless of the position within the contract lifecycle, there are always cost reduction options available. With many organisations looking to reduce costs having complicated operational and financial constraints, the following might provide a little food for thought:

  • Understand your contract: all too often, contracts are signed, then left alone, which is great when things are working perfectly and there’s an abundance of cash. But sadly contracts are often complex and many who are responsible for them don’t fully understand the detail. Often, key activities that are included in the contract are either insufficiently delivered, or not delivered at all and subsequently bought as an add-on. The conclusion is simple: make sure the supplier does all that it is contractually obliged to do and don’t inadvertently do their job for them.
  • Optimise delivery & performance: paying lip service to performance optimisation is easy, but it is surprisingly common to find that areas of underperformance vs. what’s been agreed can inadvertently become regarded as acceptable, by both supplier and client. Make sure that delivery is as expected and as agreed. This means ensuring that both supplier and internal teams deliver against plans, budgets and risk profiles. It can become all too easy to develop complex and plausible excuses that lead to cost overrun, which is exacerbated by an increasingly tolerant business culture. Whilst we don’t for one minute suggest that table thumping is needed, a firm but fair approach, underpinned by good communication and the right skills on both sides, can be invaluable.
  • Review risk vs. reward: we regularly hear from service providers that despite the best of intentions to create a high performing, symbiotic, partnering arrangement, their clients often revert to “me customer, you supplier” behaviours. This, in particular, has a big impact on the approach and appetite for risk. Our experience is that partners who are given latitude to try new, innovative ideas in a culture that rewards success, rather than punishes failures, often leads to valuable ideas that drive significant cost benefits.
  • Revisit what’s needed vs. what’s delivered: business requirements inevitably change over time, but often these changes don’t make their way back to the services being delivered. Sometimes a short exercise to confirm the services, service levels and alignment of business priorities can identify major opportunities. Recent examples have included telecoms circuits being paid for which connect offices that have been decommissioned years prior and 100’s of “VIP users” receiving services that were never used. Put simply, check well and don’t forget to turn the lights off.
  • Understand the market: it might sound obvious, but having a good understanding of what the market is doing can be invaluable. This is arguably more useful during the run up to a market engagement exercise when clients have more leverage and opportunity to change. However, the value of a clear, independent and up to date view of the marketplace to inform decisions should never be underestimated. The marketplace is dynamic and innovations and disruptive change, which in turn lead to value generation, can often be overlooked and result in a lost opportunity.
  • Nurture your relationship: suddenly becoming the supplier’s “best friend” when you urgently want something rarely works. But what does work is empathy and good communication, supported by the relevant facts and a joint investment in maintaining a high quality relationship. Sometimes, when you feel that you have a big ask, being clear and direct is often much more likely to generate a positive response, if it’s within a well-managed relationship. Reciprocation is invaluable in all relationships.

Whilst these areas are just a few of the potential options clients have, they’ll hopefully create opportunities for meaningful dialogue on reducing costs and go a long way towards acting as a catalyst for positive change.