How & Why Indirect Expense Management Adds Value to Your Business

1. Indirect Expense Management
The Challenge & Benefits
of
Improving “Indirect” Expense Management
July, 2012
Presented by:
Dave Page

2. Indirect Expense Management
Challenges in Recent Market Conditions
• Funding sources are becoming more difficult to obtain
• Government regulation & control is increasing
• Difficulty to “expand” business organically
• Growth in Sales requires larger amount of $ increase due to
impact of Margin (see next slide)

3. Indirect Expense Management
Increase in Sales vs. Indirect
Column1
Expense Reduction
20% Cost Equivalent
Current
Reduction In Sales
Column1
Revenue $ 100 $ 100 $ 114
Direct material costs $ 35 $ 35 $ 40
Direct labor costs $ 35 $ 35 $ 40
Non-core indirect costs $ 20 $ 16 $ 20
Net profit $ 10 $ 14 $ 14
After tax (40%) $ 6 $ 8 $ 8
Business Value = 6 P/E $ 36 $ 48 $ 48
$4k Non-Core Expense Reduction = 40% increase in Profit
• Column1
To Achieve SAME 40% increase in Profit, $14k in Sales Required
Even GREATER increase in BUSINESS VALUE

4. Indirect Expense Management
Definition of “Indirect” Expenses
• Those “Required” expenses that ARE NOT directly related to
providing the PRIMARY goods or services that the organization
delivers to its clients
• However, they ARE required to conduct business
• Typically are areas of expense with little management focus due
to other priorities in “Direct” expense areas
• Although “Indirect”, these expenses can have a direct impact on
quality of services provided

5. Indirect Expense Management
Examples of “Indirect” Expense Categories
(depending on Industry)
Services Telecommunications
• Food Services • Data
• Printing, Imaging and Reprographics • Mobile
• Payroll Processing • Voice
• Janitorial Services Merchant Card Services
• Uniforms and Linens Recruiting and Contract Employees
• Waste Management
Banking Services
• Utilities and Energy
Supplies
• Records Management
• Office and Stationery
• Information Technology
• Cleaning and Janitorial
• Facility and Equipment Maintenance
• Medical and Lab
Logistics
Insurance
• Small Package Freight
• General/Worker’s Comp
• Freight and LTL
• Health

6. Indirect Expense Management
Challenges of Managing Indirect Expenses
Effectively
• Primary focus on revenue, margins, staff costs & direct expenses
(i.e. fulfilling the Purpose & Mission of the business)
• Limited time for Senior management to address indirect costs
• Limited resources and/or knowledge to manage indirect costs
• Many companies “think” they are getting the best price for
services offered with inadequate or no validation
• Believe the suppliers are looking out for their best interest

7. Indirect Expense Management
Nothing is EASY !
So, How Do Company
Management Groups Respond?

8. Indirect Expense Management
Our Experience in Working
Methods Often Used
with Other Clients
• Multiple suppliers • Suppliers limit options
• Used in past • Those that benefit “them” the most
• Referred by others • Fail to properly analyze YOUR needs
• Establish multiple ordering points • Reduces savings potential and cash
within organization flow
• Delegates purchasing decision to • “Best Available” often lacks complete
“Best Available” knowledge or in depth experience
• Join Group Purchasing • GPO’s pricing is based on a profile
Organizations that may differ from yours. Result:
higher pricing
• Primary focus is on price • Other key business needs or ignored

9. Indirect Expense Management
Headcount Reduction – Lessons Learned
• Many organizations focus on headcount reduction as a means
to generate extra profits
• It may be emotionally difficult, but tactically easy to do
• There are times when headcount reduction is unavoidable,
however at SOME point maximum staff reduction is reached
• However, cutting too deep creates long term difficulty
• Good people are lost
• Service and quality suffer
• Profits from indirect expense reductions can help keep your
best people and maintain quality service

10. Indirect Expense Management
Do These Efforts Have REAL Impact?
• These Indirect, non-strategic costs typically
represent on average 15% of revenue
• Savings Opportunities can Average 20% of what
is being spent
The Opportunity IS REAL - 3% of Revenue!

11. Indirect Expense Management
Examples of Savings Opportunities by Category

12. Indirect Expense Management
Pitfalls of “Business as Usual”
• Loss of good people
• Service and quality suffer
• Inefficiencies in indirect purchasing management
• Lack of control or alignment with organization needs
• Higher expenditures and/or impact on overall mission &
purpose of meeting needs of YOUR Clients
• LOST OPPORTUNITIES in terms of Use of Funds – profit,
shareholder distribution & return, allocation of limited
sources of funds (contributions, financing, retained
earnings from prior periods, etc.)

13. Indirect Expense Management
Effective Cost Management Strategy
• Must be part of company DNA
• Needs to be a clear cut strategy
• Indirect Cost Management is on-going
• Prevent complacency or over-confidence
• Benchmark with others that have similar profile to yours
• Understand what you are buying
• Talk with your suppliers regularly
• Monitor and measure
HOW is this BEST Done?

14. Indirect Expense Management
Look at what you pay for the
goods and services you buy.

15. Indirect Expense Management
Review
processes

16. Indirect Expense Management
Ask your
suppliers
what you can
do to reduce
costs

17. Indirect Expense Management
Supplier Relationships - What They
Don’t Want You to Know
• The largest spending clients don’t always get the best
price
• Three companies with the same suppliers don’t always
get the same discount
• A level playing field between buyer and supplier is a
misnomer
• Supplier loyalty doesn’t always equate to best price

18. Indirect Expense Management
Improved Indirect Cost Management
leads to Increased Cash Flow
Summary
• Handled correctly indirect cost management can be a major
contributor to increased cash flow
• Does not mean slashing budgets or eliminating business
expenses – often more a matter of ALIGNMENT with your
business needs and Supplier offerings
• Indirect cost management is an on-going process involving
management, stakeholders, suppliers
• Equal emphasis on business mission, quality and reliability
standards is crucial to successful indirect cost management
improvement

19. Indirect Expense Management
Take a
fresh look. . .
Whether Your Management Team
does this Alone or they Seek Support

20. Indirect Expense Management
Why Utilize Outside Indirect Cost
Management Expertise?
• Have the time and resources to dedicate to indirect cost
reduction and management – will get off your “to do” list
• Provide proper “benchmarking” capabilities to ensure you are
getting the best price for service
• Help determine what categories should be reviewed
• Provide “best practices” to help maintain ongoing improved
pricing and services
• Enhance your supplier relationships
• Your advisor, analyst and advocate in partnership with key
stakeholders – suppliers may ATTEMPT to meet your specific
needs, but simply not have an ALIGNED offering available
• Improve profits and cash flow more quickly - $ for $

21. Indirect Expense Management
A Global Expense Reduction Analysts
Cost Reduction
Consultancy
Argentina Australia Austria Belgium Brazil
Canada Chile Colombia Cyprus Ecuador
Finland France Germany Greece Hungary
Ireland Italy Jordan Korea Luxembourg
Mexico Morocco Netherlands New Zealand
Panama Portugal Spain Switzerland United
Kingdom United States Uruguay

22. Indirect Expense Management
ERA – MORE than PRICE FOCUS

23. Indirect Expense Management
Wrap Up
• Our Executives have held Senior Management roles –
understand your limited time, respect issues related to
priority & are focused on relieving you and your staff from
the “heavy lifting”
• All attempts are made to use data sources you already
have in place – General Ledger, ERP systems, samples of
vendor invoices, contracts, etc.
• Proprietary software in place to allow focus on issues other
than simply price
• High respect for Confidential nature of your business
activities, but similar to other Professional Service firms,
we serve LARGE number of clients on a regular basis
• FINAL DECISIONS always are YOURS – it is YOUR business

24. Indirect Expense Management
Where and How Can we Best
Support Your Efforts to Improve
Management of Indirect Expense?
Thank You!