A wise boardroom must control its spending

Tough economic conditions and vanishing revenue streams mean that corporate organisations across Australia are searching for clever ways to maintain shareholder return.

It’s always interesting to me that organisations only seem to look for efficiencies during a downturn. While we are living in buoyant economic times, why wouldn’t you be looking to create the efficiencies anyway?

But tougher times mean that improving the bottom line becomes extremely important to deliver shareholder value in the private sector and deliver more service for less in the public sector.

If revenues are down, then typically organisations look at headcounts or perhaps even increasing margins on service or product – both a risky strategy. But there is a more sensible target to deliver savings – it’s called PROCUREMENT.

Someone I share social media space with, and a specialist in procurement, recently posted a blog titled “Procurement is as dull as dishwater”. Of course he was being sarcastic, but many boards are still not getting the message of effective procurement.

From my experience, business leaders in Australia are starting to look at discretionary indirect spending under the microscope – and not just direct spending. By this, I mean the running and service costs of keeping an organisation operating.

There are many medium-to-large organisations addressing these issues as a priority: ranging from financial services, energy, universities and even online betting organisations. Many are starting to look at eProcurement solutions to drive compliance and save money.

So ask some simple questions about your organisation:

  • Can your employees buy items or services randomly, at premium costs to the organisation?
  • Is there any control to what employees buy?
  • Do the budget holders have visibility of their budgets or is the first they know about a cost when an invoice arrives in the accounts payable department?
  • Does the organisation have a preferred supplier list and limited numbers of duplicate suppliers for the same products?
  • Are accounts payable drowning in a sea of supplier calls, chasing invoices that are sitting in someone’s desk drawer?
  • How many people get involved in just placing a simple order?

There are many more questions you could ask but these are a great starting point.

One organisation I have been recently working with has calculated a saving of just over $5m year on year from indirect expenses with a value of $28m. This is without any fine tuning!

The initial investment was $384,000 including software, services and first year maintenance with a recurring annual maintenance of $48,000. I shall let you consider if this is a worthwhile exercise and calculate the ROI yourselves.

Of course the more indirect expenses the bigger the return as there is not a direct correlation between the investment and the return – that is, investment costs are basically fixed.

If boards of medium-to-large Australian organisations fail to consider a culture of efficiency and reform on indirect expenses they do so at their own risk and bottom lines.

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