• image
  • image
  • image
  • image
  • image
  • image
Tag Archives for " cost reduction tip "

Why Good Management Consultants Are So Expensive?

although I am writing this blog post to note down my precise thoughts just for a handful of people, it might be useful for  a whole lot of other people too. That is why I am making it public.

This post is written in response to a frequently asked question that I face – and having no FAQ section in our website, this will have to act as a substitute.

Once again, this week, I was asked to justify the ‘very high’ hourly rate that I charge for my work.

Somehow people have no qualms paying nearly double of my rate (including support staff) for a large branded consultancy service – but resent a much lower rate when it comes from a much more competent consultant without a famous multi-century brand.

However, the conversation always starts as a justification for the hourly rate without any comparison points.

I recall several l years ago a similar conversation where I was challenged to justify the rates by a highly (extremely) competent senior executive. He, rightly, pointed out that he could do almost everything that I could do, so why would he need me.

I replied there is only one of you in the company, and not many more in the world.

But then, I pointed out that today’s executives are working at a pace which is akin to driving at 150 km/h (90 mph) on an extremely busy and rowdy highway. There are vehicles large and small rushing at breakneck speed from all possible directions. people are barely keeping to their lanes and easily cutting each other off. Risks of accident are extremely high. Those who meet with an accident are left on wayside. Those who make it to the destination, barely have time to recuperate before they start on another project.

No one has time to look in the blind spots. If you slow down you are overtaken and left behind – never to catch up again. Others are ready to jump into your seat at a moment’s notice. And, if they are not as competent as you – it does not matter.

If you don’t look in the blind spot, you risk accidents.

What you need is an early warning radar system that assists you to plot your way through the maze around you – taking all the relevant data points into consideration.

You pay the price for collision avoidance, for arriving safely at your destination with your sanity intact, and for enjoying the journey to a large extent.

After some thought, my friend on the other side added his keen wisdom to the conversation.

He said (and I paraphrase) “for a moment I was disturbed by the thought that if they are not as competent as me, it does not matter. But then I realised it is true, because branded mega-consultancies act a airbags, or other bags, of some sort. So my main decision now is whether I want preventive care, or palliative care!”

I pointed out the obvious – that prevention was far more valuable than palliation.

And, that size or brand image had only a small impact on the style of consulting practiced by a person.

In the end, it all came down to personal ethos. And, that should be the most important consideration when you hire a management consultant.

How to Prepare Simple, Effective Cost Management Reports (part 1)

hudgeon12By Doug Hudgeon

The Cost Reduction Tip

Effective management accounts are critical to a cost reduction initiative. Without it, your stakeholders can’t see that their pain is justified. It’s like the difference between running on a treadmill (without a watch or odometer) and running through the countryside. If you have a destination and can track your progress, your motivation will be higher.

Good management accounts are different from good financial accounting in that management accounts in a cost reduction initiative are concerned with real money out the door right now whereas financial accounts are often reporting on expenditure decisions made years ago (depreciation). I’ve prepared a sample data set that I’ll use for the upcoming series of posts.

The management accounts are from the fictional company ABC Services who provide software and consulting in the facilities management sector. They have one office in Sydney and another in Melbourne and the bulk of their revenue comes from the sale of asset management software but have an active consulting arm. They kicked off a cost management initiative in November 2010.

The management accounts tracks their expenses and revenue over the 12 months from July 2010 to June 2011. 1-296x300You can see from the orange line above that revenue has consistently increased throughout the year and from January 2011 their cost reduction program has made some headway.

Now let’s take a look at the impact of this on their profit: 2-300x255As you can see from the above chart, moderate to strong revenue growth combined with a high impact cost reduction initiative can create some stellar results.

In the next post, we’ll look at the data elements underlying the above charts and slice and dice the monthly data by location, division, expense type and headcount to see what areas of the company contributed most to this turnaround and which areas require further work.

Note that I’ll be changing the underlying data throughout the series of posts to highlight the importance of certain elements of the data set so don’t look for consistency across these posts. I’ll do a wrap up post at the end.

Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

Teach Your Old Vendors New Tricks

hudgeon12By Doug Hudgeon The Cost Reduction Tip In the 1970s and 80′s, skateboarding went through a renaissance. Difficult tricks became commonplace and impossible tricks became possible. The invention of polyurethane wheels in 1972 and the US drought in 1976 (which led to the draining of concrete pools) kicked off these advances but it was not until groups of skaters such as the Z-Boys began challenging each other to innovate that we saw an explosion of new tricks. A good example is the Ollie. Within days of Alan Gelfand’s arrival in California in 1976, the Ollie became a standard part of every skateboarders repertoire. The Ollie is a trick performed off a vertical wall (such as a swimming pool wall) where the skateboard sticks to the rider’s feet as he or she flys above the lip of the wall. Every half-decent skater can do the Ollie but it’s not until you’ve seen it that you even realize it can be done. We’re at this same stage with enterprise software. New entrants into the enterprise software space are performing impossible feats. Some of these new tricks such as SAAS delivery require new technology but many tricks simply require you and your existing vendors to re-conceive your service requirements and their service offering. This can both improve your vendor’s capabilities and significantly reduce your costs. Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

How to Identify Cost Reduction Opportunities

hudgeon12By Doug Hudgeon The Cost Reduction Tip Certain problems when you first look at them seem intractable. But once you understand their natural fracture lines, breaking them up and solving them is actually quite easy. Most business process problems fall into this category and cost reduction problems are no exception. The natural fracture line for cost reduction opportunities are people and COGS. It’s easy to get lost in arguments about what is and what is not included in COGS so it’s best to simply think of COGS as costs that do not vary with the number of staff you have. In fact, I’ll call these non-People costs in this and subsequent posts. For example, desktop support costs are driven by People costs whilst marketing expenses are driven by non-People costs. Certain expenses can fall into both or either category such as data centre costs where your data centres support both your intranet and internet sites. For these, you can split them by percentage or just lump the entire expense into the biggest driver – People or non-People Identifying your cost reduction opportunities then is just a matter of categorising each expense line in your management accounts as being driven by People or non-People. Tackle the former by considering how you can deliver the same value with fewer people and the latter by identifying the drivers of that cost and looking at ways of minimising it. Sound simple. It is. Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

Cost Reduction – Start by Looking for Game-Changing Opportunities

hudgeon12By Doug Hudgeon The Cost Reduction Tip When looking at cost reduction opportunities in an area, you should start by assuming that you can remove 100% of the cost. If that’s not possible, then look at ways to remove 90% of the cost. If you don’t start ambitiously, you’ll miss some real plum cost reduction opportunities. Internal IT hardware logistics are a good example. You may have staff engaged in building and deploying hardware on site. Instead of looking at how you can improve the process, first ask yourself: Why are we doing this at all? Why can’t we get our vendor to build the hardware and ship it straight to our user’s desks. If the user can’t plug it into the network themselves then give them a help desk number to call for assistance. Speaking of help desks, the internet provides countless opportunities to reduce your cost of service by an order of magnitude. Multi-million dollar help desk ticketing systems from BMC Software and others can be largely replaced with SAAS (or ‘cloud’ in the newest lingo) providers such as Assistly. Now, before you start defending the functionality of Remedy (BMC’s product) sit back and imagine a world where Assistly was the only option: What changes would you need to make to your processes and people? How much would you save and what would your end users have to give up? My bet is that you could deliver an equivalent service to your end users (perhaps better?) and cut your costs by 90%. Unless you dream big, and act on those dreams, you’ll never realise dramatic cost reductions. Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

How to Build Your Own Cost Analysis Monte Carlo Simulation in Excel or Google Spreadsheets

hudgeon12By Doug Hudgeon The Cost Reduction Tip After posting yesterday’s tip, I’ve received a few requests to explain how the Cost Analysis Monte Carlo spreadsheet works. I hope you find this post useful. Note: For those who are fire walled from Google Docs, please click this link for an Excel version of the Cost Analysis Monte Carlo Spreadsheet Background The Cost Analysis Monte Carlo spreadsheet calculates the range of monthly resource costs for a seven-step activity – in this case the monthly cost of processing purchase orders – with 90% probability. This means that 9 out of 10 times, your monthly PO costs will fall within the range. Image 1 In the above screenshot, the total monthly costs for processing POs will be between $172K and $255K in 9 out of 10 months. Setting the inputs The spreadsheet calculates this by taking the inputs below for the seven activities: Image 2   Three types of inputs are required for each activity:

  1. Activity time in minutes
  2. Annual resource cost
  3. Number of units per month

1. Activity time in minutes In activity 1 in the above example, creating a requisition, users take between 1 and 3 minutes to create a requisition in 9 out of 10 requisitions. The outlier will take less than 1 minute or greater than 3 minutes to create. 2. Annual resource cost In activity 1, the fully loaded annual resource cost for staff creating requisitions is between $90K and $110K. More accurately, the salary of 9 out 10 staff who create requisitions will fall between $90K and $110K. 3. Number of units per month In activity 1, the number of POs created each month ranges from 10K to 20K in 9 out of 10 months. Running the Monte Carlo Simulation on the inputs The Monte Carlo simulation spreadsheet takes these inputs and generates hundreds or thousands of random values for each activity. The key to getting this right is that the random values are normally distributed between the low and high range i.e. the random numbers create a bell curve. The more values generated in the spreadsheet, the closer the fit of the data to the bell curve.* To generate random values, I inserted a worksheet corresponding to each activity. I unimaginatively named the worksheets Activity1 through to Activity7. Each worksheet links to the inputs for that Activity: Image 3   You can see that column A has turned 1-3 minutes into 60-180 seconds. Otherwise, the values are identical to those in Image 2 shown above. Now, here’s the tricky bit: you need to take each of those values and generate a normally distributed random value between 60 and 180 seconds. I use the following formula to do this: =min(A$2:A$3)+(max(A$2:A$3)-min(A$2:A$3))*NORMSDIST(SQRT(-2*LN(RAND()))*SIN(2*PI()*RAND())) I realise this looks daunting but it’s not that bad. The first section, highlighted in red, simply takes the minimum of the input values, in this case, “60″. The second section, highlighted in green, subtracts the minimum input value from the maximum input value, in this case, totalling “120″. The blue is a piece of magic I have taken from the excellent Excel User website. The piece of magic is known as the Box-Muller Transformation and you can easily test it by pasting this code into thousands of rows of an excel spreadsheet and sorting and charting the result to show a clear normal distribution of values. Adding the above formula into cell A4 and spreading it down 500 rows and then dragging the formula right into columns B and C gives you a worksheet like the one below. Here you have 500 rows of data with a normally distributed random value in each cell. Each of these rows takes the inputs and gives you a normally distributed random sample for Activity 1. This sample can easily be turned into a cost figure using the following formula: =A4/(60*60*HrsPerMth*12)*B4*C4 This formula takes seconds in column A and calculates it as a percentage of an entire year’s output from one of your staff who is performing this work. In the example below, it calculates 172.74 seconds as a percentage of the annual time worked by a staff member with a fully loaded cost of $108,864.84. This dollar figure is then multiplied by the monthly volume of 11,662.99 to get a monthly cost of $39,053.25. Image 4   Only one step now remains. Calculating the Percentile Distributions Each worksheet contains a calculation of the 5th and 95th percentile values in the Monthly cost column (Column D). The formula for calculating the Percentile is provide in both Excel and Google Spreadsheets: =PERCENTILE($D$4:$D$103,.05) =PERCENTILE($D$4:$D$103,.95) Image 5   These values then appear in the 5th and 95th percentile shown for Activity 1 on the front worksheet in the workbook. Image 6   You’ll note that the Totals in bold in Image 5 do not equal the sum of the 5th percentile or the 95th percentile. This is because simply taking the sum of all of the 5th percentile activities does not give you the 5th percentile overall – it gives you lowest cost for activity 1 plus the lowest cost for activity 2 etc. The value displayed in the spreadsheet is the 5th percentile of all 7 activities combined into a single transaction. This calculation is performed on the AmalgamatedResults worksheet which contains the totals of all activities, combines each row of activities into a single total cost for the transaction. Image 7   You use the same Percentile formulas to calculate the percentile figure for each transaction. In the example above, the 5th percentile is $172,921.53 and the 95th percentile is $255,358.43. Tips on building your own If you download the Cost Analysis Monte Carlo spreadsheet, the areas you’ll likely need to modify are changing the number of activities and increasing the number of rows in the Actiity1 through Activity7 sheets. If you do so and improve on my version, I’d greatly appreciate receiving a copy. My email address can be found in the icons on the top left of this site: * In the Cost Analysis Monte Carlo spreadsheet, I have only put 100 rows of random data. If you find that your cost analysis varies greatly every time you recalculate your spreadsheet then add some more rows. Some commentators recommend no less than 5,000 rows but for my purposes I’ve never needed to go above 500 rows to get consistent results with each recalculation. Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

Use Monte Carlo Simulations to Quickly Model Costs and Influence Stakeholders

hudgeon12By Doug Hudgeon

The Cost Reduction Tip

Taking your business down to its lowest possible operating cost typically involves changing (usually simplifying) processes. When preparing a business case for changing your current processes, it is usually easy to nail down system costs but people costs are almost always problematic. Even if you believe you can calculate them accurately, your stakeholders will each have their own views on the assumptions underlying your cost model and this can result in an impasse.

I like to use a Monte Carlo simulation to model people costs. It enables you to quickly calculate a range of costs for activities that can encompass the conflicting views of your stakeholders.

Here’s how I do it:

I’ve prepared a sample Monte Carlo simulation in Google Spreadsheets that you can review online and download as an Excel file.* Because the values in this file may change as I run different scenarios, I have taken a screenshot of the current settings and labelled the components of the spreadsheet. Please click on the thumbnail image to follow the discussion below but refer to the Monte Carlo Simulation Google spreadsheet to explore how it works in detail.

Note that I have prepared a subsequent post that takes you through the spreadsheet in some detail and, for those who are fire walled from Google Docs, please click this link for an Excel version of the Cost Analysis Monte Carlo Spreadsheet

Monte Carlo Simulations The first column (1.) shows each of the activities that will be modelled. In this case, I have set out seven steps involved in manually processing a PO and paying the resulting invoice. The next three columns (labelled 2, 3, and 4 in the thumbnail image) allow you to enter assumptions against the time taken to perform each activity

(2.), the fully loaded cost of the resource performing the work

(3.), and the number of transactions per month

(4.).In the above screenshot, you can see that Activity “1. Create requisition” takes between 1 and 3 minutes to complete and the fully loaded cost of the resource creating the requisition is $90K to $110K (assuming some pretty significant overheads for this resource!). Each month, the organisation prepares 10K to 20K purchase orders.Running a Monte Carlo simulation over these variables (FTE utilisation: 130 hours per month) results in this activity costing somewhere between $12,382.44 and $35,681.69 with a 90% confidence level

(5.).The last 5 words of that sentence are pretty important. When you are setting your variables for activity time, resource cost and number of transactions per month, you want to set the minimum number so that 95% of the values will be above that number and the maximum so that 95% of the values will be below that number. For example, in activity 1 when I said that the activity takes between 1 and 3 minutes what I mean is that 90% of the transactions I observed take between 1 and 3 minutes i.e. 95% of the transactions took 1 minute or more and 95% of the transactions took 3 minutes or less. If I am confident that this is correct for each of the values in the yellow highlighted area of the spreadsheet then I can expect that 90% of the time, my conclusions will be correct.**

Now, back to our stakeholder question: When you are speaking with your stakeholders with your Monte Carlo simulation in hand, you can explicitly discuss each assumption and, where the stakeholder has better information than you, immediately incorporate their information into the model and see the impact on the business case. If your business case still stacks up after this process then you can proceed confidently knowing that your stakeholders understand the numbers and have had their input incorporated.

* A Monte Carlo Simulation is an approach whereby you nominate an upper and lower limit for each activity and generate random results (in this case normally distributed)

** You’ll note that the Totals (6.) do not equal the sum of the 5th percentile or the 95th percentile. This is because simply taking the sum of all of the 5th percentile activities does not give you the 5th percentile overall – it gives you lowest cost for activity 1 plus the lowest cost for activity 2 etc. The value displayed in the spreadsheet is the 5th percentile of all 7 activities combined into a single transaction.

Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

Doug Hudgeon – The Cost Reduction Tip: Fix Core Problems

By Doug Hudgeon

The Cost Reduction Tip

Some problems just need to be fixed, regardless of cost. Last year, near our apartment in South Delhi, maintenance workers spent more than two months resurfacing our road. Every fortnight thereafter (and possible continuing to this day), a sinkhole would appear in the road and a roadwork crew would come and resurface the road.

Shortly before we left Delhi, the wheels of a water truck broke through the road surface into a cavity that everyone aside from the road works department suspected was there.

What did the department of roads do?

They sent another road crew to resurface the road. The problem, of course, is not with the surface of the road but with what’s underneath (or what’s not underneath in this case); and even if they permanently stationed a road crew next to this intersection, they would not fix the problem.

Tackling the core problem – the sinkhole created by leaking water pipes – is simply too frightening to contemplate and so the endless road repair work continues.

One of Delhi’s core problems is the poor quality of its water infrastructure. Many thousands of Delhi residents go without enough water not because of inadequate supply but because of inadequate distribution (more info).

Fixing this problem will be costly and difficult but Delhi must do it before it will be considered a world-class city.

Delaying the repairs will not make the work less expensive or easier to do. In fact, each day’s delay costs the city dearly in more road works, water distribution by trucks, and lost productivity from households spending part of their day securing an adequate water supply. Not spending the money to fix it now is false economy.

Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

Keep Your Passengers Informed

hudgeon12By Doug Hudgeon

The Cost Reduction Tip

Tom Bender from SpendCorp contributed today’s tip: It’s not enough to do good work, your stakeholders must see that you are doing good work: control, track and report.

Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

Assign Clear Personal Responsibility for Each Cost Line to a Single Individual

By Doug Hudgeon The Cost Management Tiphudgeon12 As I’ve planned my upcoming tips, I’ve been pondering which tip will be the most important. I now think this is it. You cannot reduce cost in your organisation unless you assign a single person the task of, and regularly hold them to account for, improving each cost line – and if you have to change your chart of accounts to do so then do it. Who you select as the responsible person for each cost line will depend on what you want to accomplish. If your cost reduction programme is urgent and necessary for your corporate survival, you should assign responsibility to a small group within Finance who are solely focussed on taking cost out of your organisation. However, if you are looking to improve operating efficiency as an ongoing practice within your organisation, you should assign responsibility to front line managers. Building a cost conscious culture requires empowering your managers to impact cost and valuing their success at doing so. Your managers must see themselves as personally responsible for cost reduction. Related web sources The bystander effect is well researched social psychology phenomenon. It was first studied following the killing Kitty Genovese in 1964 where her neighbours failed to intervene in her murder because they thought that someone else would. Whist this interpretation of that incident is probably flawed, you don’t want your company to die because your managers were all bystanders. Doug Hudgeon who is lawyer and vendor management professional who has branched into finance and accounting shared services management.

>