In This Issue:

Some years ago I was fortunate to receive training from a VP of Finance. His task was to bring me up to speed on the financial aspects of my new position as a national accounts manager. The sales force had recently signed a lucrative contract, and I was scheduled to present to the new client in two weeks.

The VP, whom we'll call Paul, started by placing three Profit and Loss statements on the table.

"OK, what jumps out at you?" he said.

"The title," I responded. The look on his face indicated that he knew his job was cut out for him.

"Dee, there's a story in the data. The trick is to discover what the numbers are trying to tell you-the clues that are buried within the data. It's similar to how a medical examiner inspects a corpse. "

Paul sure knew how to create a powerful visual! The good news is that I learned how to explain the financial story to my clients, many of who were not comfortable with numbers.

Many people shy away from learning about the financial aspects of their business because they feel intimidated. In reality, a basic financial understanding is critical to advance your projects and career.

In the next five issues of Rt Times we'll offer you cost-savings ideas and negotiations tips you can use to manage your business. This month's issue begins by helping you become more familiar with two finance models used for capturing and tracking cost savings.

Cost savings are important because the best corporate entrepreneurs operate their business unit like a standalone business, which includes the ability to clearly define and produce auditable financial results for your programs, projects, and operations.

This becomes even more critical when quality initiatives such as Lean Enterprise or Six Sigma become part of the equation, given that these programs require you to track and report quantifiable results.

Partnering With Your Finance Department

Partnering with the finance department became part of my standard business operations. After accepting a senior manager's position for a Fortune 500 company based in Silicon Valley, my #1 priority within the first 30 days was to create a budding partnership with our department's financial analyst, John.

John and I spent two hours discussing the financial soundness of my business. Although "-John-" had limited knowledge of my operations, he offered suggestions on opportunities for financial savings. I took copious notes.

During the year that John was our financial analyst, he became extension of my core team. I ensured he was involved in operations reviews, quarterly supplier updates, and that he participated in new vendor negotiations.

It wasn't a flawless partnership, but when crunch time came for preparing our annual budget, he did excellent job of representing my business within his team. This was particularly important because budget discussions and informal decisions were typically made long before the formal budget presentations occurred.

This win-win relationship helped John's career as well. It didn't hurt being a member of a team that captured millions of dollars in direct (hard), indirect (soft), and operational efficiency savings for the company.

Cost-Savings Model#1: Return on Investment

If you're looking to capture direct (hard) cost savings, you'll want to use the classic Return on Investment (ROI) model. These types of savings will directly impact a company's bottom line (Investment/Costs = ROI).

To qualify as ROI cost savings, processes must be documented as a measurable part of your business plan. Examples of ROI savings would include:

• Reducing purchases or cost of ownership. For example, if you're planning to cut computer purchases as a means of cost reduction, you could capture this as a hard- cost savings. Don't forget to include any associated costs (cost of ownership), such as technical support, training, software, or connectivity.
  
  
• Avoiding higher costs that otherwise would have occurred. If you can renegotiate pricing of existing goods or services, you can certainly capture this as direct cost savings.
  
  
• Improving the total value of a purchased good or service. For example, if you signed a supplier agreement last year that included X, Y, and Z services in the contract, this year you can renegotiate with the supplier by extending the reach of existing services to your internal customers. This allows you to avoid bringing on a new supplier.

Keep in mind that price reductions such as those driven by outside factors (for example, market conditions) do not qualify as hard cost savings.

Cost-Savings Model#2: Cost-Benefit Analysis

The Cost-Benefit Analysis (CBA) finance model allows more flexibility than straight ROI tracking. It allows you to also track the following:

• Indirect (soft) cost savings. You can reduce the cost of doing business for another department because of the streamlined process you recently implemented. The other department reduces their administrative overhead to one person from three, and uses the other two individuals to manage new projects. This not only reduces their administrative overhead (indirect), but in this instance also allows you to capture cost avoidance savings for the money saved by not having to hire two contractors.
  
  
• Cost avoidance savings. Cost avoidance occurs when you reduce or eliminate a new cost that would have otherwise occurred. For example, a cost avoidance would occur if you eliminate or reduce a published supplier price increase by aggressive bidding or savvy negotiations. Also, you can consider negotiating volume discounts and consolidating business from multiple vendors to a few as cost avoidance savings.
  
  
• Operational efficiencies. Operational efficiencies are actions that result when less work effort is required to achieve the same, or better, result. If you implement a new tool that reduces the number of steps to complete a process, and if it reduces the administrative burden on your department, it qualifies as operational efficiency cost savings (only if it reduces expenses that come from regular staff salaries, temporary employment fees, overtime, or per diem payments).

The Big Picture

Cost savings opportunities exist not only in what we do, but also in how we do it. It's never a good strategy to allow the pursuit of cost savings to be the sole determinant when selecting a product, supplier, or work method. Remember that cost savings must be consistent with the quality of goods and services required to keep your business competitive for the long haul.

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