Transcript
Speaker: Amid the coronavirus crisis, companies are desperate to conserve cash. One way to do that, find and plug your cash leaks. We'll find out how to do that on the next episode of The Market That Moves America. Welcome to The Market That Moves America, a podcast from the National Center for the Middle Market, which will educate you about the challenges facing mid -sized companies and help you take advantage of new opportunities.
Speaker: The country, the economy, and customers have all hit the pause button. For businesses, cash isn't coming in. For many, it's a grim time. And if cash isn't coming in, that means that they have to stop it from going out.
Speaker: There are some unexpected and surprisingly effective ways to do that, which we're going to explore now. I'm Tom Stewart. I'm the executive director of the National Center for the Middle Market at the Ohio State University's Fisher College of Business. We're the nation's leading research group studying the mid -sized companies that account for a third of private sector employment and GDP
Speaker: and the lion's share of economic growth. It is indeed the market that moves America. The National Center for the Middle Market is a partnership between Ohio State and Chubb. I have a special guest with me today. He's Paul Zaleski. Paul is a principal consultant at Expense Reduction Analysts. It's a consulting firm that specializes in helping companies find, manage, and cut costs. Paul, welcome. Thank you, Tom. Good morning.
Speaker: Tell me, tell us a little bit about Expense Reduction Analyst. What do you guys do? We're a global firm that's been around for about 27 years and we operate in nearly 40 countries. With over 700 consultants, our primary clients are in the middle market.
Speaker: And obviously, your focus is on helping them find ways to trim costs and cut costs. And you're looking at the bottom line more than the top line in your overall work. Is that right? That's correct. Yeah, we have benchmark data and subject matter expertise in over 30 broad expense categories.
Speaker: Very cool, very cool. In late March, we at the National Center for the Middle Market went out and surveyed more than 250 middle market companies about the impact of the pandemic on their business. And it won't surprise you to hear that the impact is overwhelmingly negative. In fact, 25 % of the people we talked to said the impact could be catastrophic.
Speaker: When we talk to them about the challenges that they found the hardest to manage, the two biggest ones were their supply chain, upstream and downstream, and the number one challenge was cash. Are you guys hearing similar things?
Speaker: Yes, we are, Tom. I'm working with a contract manufacturer that's in metal stamping with a couple of hundred employees. And currently they're running minimal production, which really is their non -automotive customers. They have a skeleton crew on site to handle the production and team members that are able to are working from home. So, you know, their consumption of materials and supplies is greatly reduced. And of course, you know, the demand for their products is reduced on the customer side.
Speaker: If I may continue, I read this morning that Continental, the world's largest auto supplier, will have nearly zero profits on first quarter sales of about 6 billion euros, and the article further suggested that many smaller suppliers will close.
Speaker: Yeah, so I mean, as I said earlier, it's pretty grim out there for a lot of them. And for many, I mean, there's an immediate question, which is like, I need cash. It's like, I need oxygen to breathe. Cash is the oxygen that companies need. And if they haven't got it,
Speaker: What can they do about it? I guess in one thing, of course, you can do is see if the bank or somebody else can loan you cash if you can get something over. But at the same time, what are the ways that a company can go about conserving what cash it has? Well, there is typically cash to be found by reducing expenses. And other ways to increase cash are, of course, increasing sales or acquiring another company. Those two are really out of the question. So it leaves you with an expense reduction opportunity.
Speaker: So where do you look? Well, when we look at a client spend, we'll take a look at their 12 months, essentially their check register, and we will portion it into
Speaker: What we consider the managed spend, which is really about 80 % of the spend with about 20 % of the suppliers. The remaining 20 % of the spend is with 80 % of the suppliers. And that's where we can look. And this smaller portion, dollar -wise, has many, many suppliers. And it can include packaging, supplies, telecom, freight by mode, and lane, and those kind of things.
Speaker: So go back to, take me back a second. When you talk about, you know, this is your basic Pareto, 80 % of the money goes through 20 % of the suppliers and 20 % goes, 20 % of the money comes from 80%. Talk a little bit about what you call the managed spend, that 80 % from a relatively small number of people. What do you mean by managed spend? Well, that would be their raw materials, anything that goes into their cost of goods. And these are items that are driving their margin, right? So
Speaker: they typically have a pretty good understanding of their pricing structure with their suppliers. Obviously, we're down at a monthly meeting with my top team and I say, okay, let's look at our contract with company A or our deal with company B, however we do it. We're watching that all the time. Right, because again, it's the margin that is supported.
Speaker: expenses. Also in that managed spend area would be capital expenditures, occupancy, utilities, and to a degree health insurance. So those are, you know, the, the fewer, the fewer group of suppliers with the greater portion of spend. And that's the stuff my eagle eye is usually on. But what you're telling me is 20 % of my spend is stuff that people are kind of not paying a whole lot of attention to. Right. And this would include areas such as
Speaker: Packaging, other supplies, MRO we refer to as maintenance, repair, and operating expenses. Telecom circuits freight by various modes, whether it's a truckload, a less than truckload, small package freight, and by lane. That's where the 20 % of the overall spend is with 80 % of the suppliers. If I could give an example.
Speaker: One of my clients has about a $56 million overall spend and that tail portion is roughly nine and a half million. That tail includes 630 suppliers. And that is just too many relationships to manage. It's a very fragmented spend and there are thousands of skews of supplies, packaging, telecom freight modes and lanes again. And it sounds to me like you're describing grandma's attic. That's a very good way of looking at it.
Speaker: It's the items that they know they have.
Speaker: But they're not really aware of what the opportunity is in terms of reducing those costs. So when you go into grandma's attic looking for stuff to cut, what do you find and how much is I guess part of what you part of what we were talking about earlier when we were talking before this this this podcast, there's actually a surprising amount of opportunity to save money and and stanch leaking cash up in the stuff in grandma's attic.
Speaker: Right. In general, at the aggregate level, Tom, we could consider 2 % to maybe 4 % or 5 % of revenue can be uncovered to add to the bottom line. Within that tail spend area, that 20 % less managed or unmanaged portion
Speaker: we can see savings of 10 to 40 % or more. I have a consumer products good company with revenues of about 35 million. The first round of savings across their packaging, chemicals, telecom and commercial insurance was about 900 ,000. And that's roughly two and a half percent of their revenue. The telecom savings alone was 200 ,000 on a $300 ,000 spend. So
Speaker: we implemented savings of 67 % on the telecom spend. So let me change metaphors a little bit. It sounds to me like there are leaky pipes all over the place. Yes, we do refer to cash leakage. In fact, when we audit a client spend for a month or a quarter, we will report to them because we have the data. We will report to them where the cash leakage occurred for that audit period.
Speaker: And then that, that then becomes an actionable item for their team. So, so if we're looking at all this, I'm running a company in the ordinary times, right? This is good. Business is good. My eye is, my eye is on the most important thing, which is growth.
Speaker: Finding new customers, opening new markets. I'm managing my costs because I want to keep an eagle eye on my costs, but I'm managing the big buckets because that's the most important. This stuff really in these good times, in Palmi times, who cares? Yeah, everybody cares. You guys do business in good times as well as bad, but in a sense, it's not a crucial issue. But right now, it's become a crucial issue. It also seems to me,
Speaker: If I were running a company right now and I had a bunch of people who were not employed counting the cash that's coming in, this might be a seriously good opportunity to take a look and find where all those leaks are and see if I can turn them off, plug them, or in other ways reduce them. That's correct, Tom. There are some areas that, you know,
Speaker: could be reviewed with not a great deal of effort and some of them might be reviewing your contracts. If you have a contract in place for your telecom service, are you being invoiced in accordance with that contract? We had a client that had vacated a factory a year before we got engaged and
Speaker: they were still paying about $8 ,000 a month for telecom services there. Even fax lines, we see fax lines that are no longer in use, but they're being paid for. Some other areas that could be reviewed, just contracts in general, and it's a nice opportunity now to take a look at what contracts are in place. We see contracts for waste services, for uniform services, for industrial gases, and these all are typically four or five years in duration. They usually have a
Speaker: 6 % to 8 % increase every year with the right reserve by the supplier to increase at will the pricing. And often these contracts are signed in the back of the shop by the shipping and receiving guy with zero oversight and 100 yards away on the other side of the building. The CFO has no idea that they just got into a new contract. So these are opportunities. Insurance is another area where your workers comp is
Speaker: As you pay progress payments for your premium during the policy year, your workers' comp is based on expected payroll levels, and your liability insurance is based on expected revenue.
Speaker: If a company has new estimates of where these numbers are going to be, you can contact the carrier or the agent and have them reduced in the policy and then that will free up some cash in the current period because both of these types of insurance will true up at the end of the year when they audit the policy and you actually pay for the insurance that you used in a sense when they have the actual payroll and revenue figures. So these are some of the areas that can be looked at.
Speaker: How would you organize it? I mean, obviously you guys are with the expense reduction team come in and have a process, but let's say I'm growing my own here and want to get organized and figure out where I would look. Where would you start? What kind of team would you put together to start looking for this hidden unnecessary spending? Sure. I think you need a cross -functional team. You need somebody from finance.
Speaker: who can come up with the figures and has access to the invoice data, you need someone from operations. And I would suggest generating a list of what you paid all your suppliers for the previous 12 months. And if you can categorize them by the expense category, whether it's freight and logistics, packaging, and then you can build a profile of what that overall spend looks like.
Speaker: There might be 20 suppliers in the operating supplies group that could be rationalized and consolidated because we often see fragmentation in these areas. So I'm dealing with five guys when I might just roll it up and deal with one. Correct.
Speaker: travel, it could be, well, and then you obviously got other, I was just thinking of travel agents, that's not an expense that people are paying right now, but this could be in all kinds of things, materials and stuff like that. I'm also struck by what you said about these expenses that may be based on a sort of a metered charge like Workman's Comp and some insurance premiums that are based on assumptions that are no longer true and that you probably have to
Speaker: call the carrier, call the provider, and say, hey, this is supposed to go up or down depending on what's going on with employment or sales. And let's start that meter running, or let's trigger that down event. And then, of course, we'll trigger the up event back as we hope things will get better.
Speaker: So overall, I mean, you mentioned that you guys have got a whole lot of benchmark data. I mean, could you, can you characterize from that maybe two things? Number one, if you look at that tailspin, that 20 % of spending that you're not paying a whole lot of attention to,
Speaker: How much, I mean, is there sort of an average percentage of that that I can get out? That's sort of one question. And the second question, and you've been talking around both of these, I guess, is within that 20%, what are the two or three things that you think are the easiest to grab right away sort of as proof of the opportunity that's there? I would say probably telecom is a good area.
Speaker: Insurance we're seeing pretty strong savings, you know in normal working conditions, you know prior to the coronavirus I don't think telecom insurance and operating supplies there are When at the shop floor there might be you know An employee who likes a particular item. He doesn't care what what they're paying for it There could be alternative products that will match the fit form and function for that item
Speaker: And you can just test the market on those in a sense, right? Does that make sense? Yeah, it does make a lot of sense. One of the other things I want to sort of look to the future. And I mentioned this survey that we took of 260 middle market financial decision makers. And one question we asked them was,
Speaker: you know when this is over uh when the all clear whistle blows and of course it's not going to be like a sudden event but but when this happens how long will it take you to get back up to full capacity and and on average i guess i guess 50 percent or maybe 51 said that they felt that they would be able to get back to capacity whatever that will be within six months so that's pretty good news a sense of resilience um uh but it seems to me that that
Speaker: that one of the advantages of cleaning out grandma's attic or turning off the leaky faucets, pick whichever image you prefer, one of the advantages of doing this during this dark time would be that you'll be able to accelerate faster and move more efficiently when the lights come back on. Is that a sense that you get as well? Yes, I think so too because
Speaker: you're at a certain consumption level, let's take factory supplies. You're at a consumption level now that as business activity increases, if you've been able to get more effective pricing in place, as your volume grows, that will be magnified with the growth, the savings. And also too, if a company is able to pare down or consolidate that supply base, right? They've got maybe six or eight suppliers, they're all getting a good share of that
Speaker: that consumables bucket, if they get them down to two or three suppliers, then that's fewer relationships to manage and it's easier on the team in house to manage. And so that's kind of a soft savings that's really overlooked when you consider in relation to the measurable dollar savings on the items themselves, right?
Speaker: You know, that's interesting because when we did a study a couple of years ago of supply chain management, middle market companies, because they're mostly links in other people's supply chains, and most of the stuff about supply chain is how to manage yours, but this was how to be a great link. And one of the findings in that study, which was sort of surprised me,
Speaker: was that the most successful companies had fewer but deeper relationships with both upstream and downstream. They doubled down on their most important relationships. They didn't hedge their bets with a lot of others. And the data showed that having fewer but deeper relationships
Speaker: gave you a stronger ability to grow. And I guess what I'm hearing from you is that that happens, that holds true even when you're talking about the little cost items as well as the strategic purchases and sales in your supply chain. Right. We find that our clients are viewed by the suppliers with a heightened level of sophistication.
Speaker: Once we get involved with our clients, we're transferring knowledge to them to make it a sustainable initiative. And although the suppliers will get an RP from us and if they're the incumbent, they will feel a threat. But on the other hand, it's an opportunity for them to grow market share with a net client because they're only seeing their portion. So it's a chance for them to grow their business and strengthen that relationship and really crowd out the
Speaker: the suppliers that maybe aren't the best fit and from either a pricing standpoint or a quality and service standpoint. And what we really try to do is match that client with the best overall value proposition that meets their needs and requirements. So let me try to put a summary around this because I think this has really been a really interesting and productive discussion. I mean, one thing is that
Speaker: there's a whole lot of spending that companies do that they're not paying a whole lot of attention to. It's just sort of like, I need a little of this, I need a little of this, go buy this. Oh yeah, fine, sure. And it sort of builds up. And that spending is more than you think. And not only that, within that spending, more than you imagine is actually,
Speaker: overpaid, unnecessary. I love your example of somebody paying for a telephone line to a factory that they closed a few months ago. I mean, those sort of things are there. So that's the first thing. There's a lot of sort of stuff there. And the second thing is that this time of reduced activity can be a great time to look at that, first of all, because you need the cash.
Speaker: and it's a way of conserving it. But second, because you've got some time. You may have some time to look at this stuff. And the third element of those, I guess, is that what we're talking about just now is that one of the things that
Speaker: shows up in looking at your spending and looking at your selling as well, is that relationships matter and that deeper and better relationships are stronger for you.
Speaker: And I guess that's something we're learning about this whole pandemic too, that relationships are really important and that the more we can deepen relationships, the stronger we're likely to be both during this time and coming out of it. Paul, did I capture that correctly? Yes, I think so. I think that was a well -articulated series of statements, Tom.
Speaker: Well, thank you. And I want to thank you very much for joining us. Paul Zaleski, as I said, is a principal at Expense Reduction Analysts. You can learn more about their work at us .expensereduction .com. And I'd like to thank Paul for joining us, and thank you for listening to The Market That Moves America.
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