In Brainyard’s Summer 2020 Finance Priorities Survey, a whopping 71% of respondents cited “identifying areas for savings” as a top priority for the finance team, up from 61% and 53% in spring 2020 and winter 2019, respectively.
Managing costs is clearly top-of-mind for businesses, with its importance increasing as of late. However, cutting is often easier said than done. How do you lower expenses without risking a decrease in product or service quality or sacrificing employee morale or growth potential?
Michael Hammelburger thinks a lot about just those thorny issues. As CEO of the Expense Reduction Group, Hammelburger helps companies reduce their costs by focusing on areas not typically considered by leadership teams.
Need to conserve some cash? Read on for five areas where Hammelburger often sees unnecessary spending — and some ways to stop the waste.
A poll of employers by the Kaiser Family Foundation found that premiums rose 5% for family plans in 2019, bringing the average cost of employer-provided health coverage to over $20,000 for a family plan. On average, employers bore 71% of that cost, while employees paid the rest.
The really bad news? A recent analysis by Covered California projects that, nationally, premiums will increase between 4% and 40% — and possibly more — in 2021, largely as a result of the COVID-19 pandemic.
“We all know healthcare is expensive,” said Hammelburger. “It’s the largest administrative cost outside of payroll. So being able to reduce that cost by 20% could make a large difference.”
This isn’t a recommendation to provide substandard plans to employees in the name of cutting costs. That’s counterproductive to keeping top finance and other talent. But there are methods The Bottom Line Group recommends to contain health costs without lowering the quality of care. These include:
|5 Strategies to Reduce Healthcare Costs|
|Review healthcare data and statistics||Analyze past referrals, healthcare claims and records to determine best outcomes. By mining your own data, you can steer employees to the top providers.|
|Offer telemedical care||In addition to convenience for the employee, telemedicine services can save employers up to $500 per episode of care for the most common health conditions. In a year, these savings may shave up to 11% off total healthcare expenses. And, COVID-19 has made people more comfortable with video.|
|Embrace medical case management||Medical case management programs can reduce the cost of healthcare by directing your employees to the right care at the right time, place and price.|
|Request reference-based pricing||When you opt for reference-based pricing, the health insurer will specify set costs for specific healthcare services. Without this strategy, such services may come with wide cost variations.|
|Incentivize comparison shopping||Offer incentives for employees to do price comparisons for healthcare services. For example, an employee may not need a surgical practice for a simple sprain. Some insurers offer comparison tools to help employees match the provider to the issue. If yours doesn’t, ask why not.|
Shipping might not be the first cost-cutting area that comes to mind, yet it’s a major expense for many small businesses. And there is almost always room for improvement. Hammelburger estimates that 80% of companies overpay for their shipping — and there are easy ways to lessen the burden.
Compare: There are many shipping options available; is your company taking advantage of the least expensive one for each given item and destination? Between major carriers like USPS, UPS and FedEx, as well as several smaller carriers, there will be price and convenience differentials. Note that if you handle product returns, there are specific savings opportunities there.
Negotiate: Negotiation, like comparison, is a beneficial byproduct of a competitive shipping landscape. All shipping companies have pricing schedules based on volume: The more you ship, the lower your rate. If your business ships a lot of packages, carriers may be willing to lower the rate further to avoid losing your business to another shipping company. But you have to ask.
Go online: Paying for shipping online can provide significant savings. In addition to the internet-based postage offered by the USPS, Endicia and Stamps.com are both authorized by the USPS to sell postage online — at a highly discounted cost versus what you would get at the Post Office counter. Or, for those using USPS Priority Mail Express or Priority Mail, USPS partner Express 1 offers discounted shipping.
Third-party insurance: While the supplier’s insurance may have convenience allure, third-party insurance is less costly. While carriers charge about 85 cents for every $100 of insurance, with a $2.55 minimum, third-party companies charge about 55 cents for every $100.
Packaging: Yes, the thing that the item goes in can add up. Be sure that your company is “right sizing” packaging. Because carriers charge based on a package’s size, weight and destination, small tweaks to make a shipment smaller and lighter make a big difference. Additionally, using packaging provided by the carrier as opposed to your own can help avoid “dimensional fees,” which occur if a package exceeds size regulations. Bonus: USPS, FedEx and UPS all offer some free shipping supplies online.
Prepay in bulk: Buying in bulk isn’t just for Costco. Ordering supplies in bulk online can provide valuable savings. Additionally, buying prepaid shipping labels from FedEx and UPS can offer a discount rate of up to 20%.
Like health insurance, workers’ comp insurance is a needed expense that has potential for reduction. Hammelburger says 75% of companies overpay for their workers’ compensation insurance.
First, work to keep injuries from happening. Proactive measures like hazard prevention, employee education and safety programs can help prevent accidents and injuries. Post-injury, a well-formulated “Return-to-Work” program can lower costs by safely transitioning employees back to the workplace.
It’s also useful to examine your company’s current workers’ compensation policy to ensure accuracy. Errors around payroll happen often — and they aren’t pretty. Under-report and you’re in for a painful (and costly) audit. Over-report and you’ll drag down your cash flow throughout the year.
Workers’ compensation class codes, the three- to four-digit numerical codes assigned to employees to identify specific categories of work, are prone to error as well. Whether intentional or accidental, misclassification can result in overpayments or penalties, even lawsuits.
And don’t think mistakes are just on the employer’s side. According to EHS Today, an occupational safety and health magazine, the "mistake ratio" in the insurance industry is higher than 27%. An area of particular concern? The Experience Modification Rating—essentially a company’s safety rating — can be inaccurate, and that directly affects a business’ premium. That’s right: You could be overpaying for someone else’s mistake.
Combatting unnecessary workers’ compensation insurance expenses is complicated and time-intensive. The potential inaccuracies listed above are just a few of the errors that could be directly impacting your costs. If you feel your costs are high, Hammelburger recommends hiring an independent third-party source to audit the policy.
For some small-to-midsize companies, partnering with a Professional Employer Organization (PEO) can be an option to get control of workers’ compensation costs. Through economies of scale, a PEO can improve an employer’s cash flow by reducing or eliminating the down payments frequently associated with insurance purchases and offloading some of the diligence required around workers’ comp.
The costs for leased items and mundane services — like printers, copiers, telecommunications and other month-to-month contracts — may seem intractable. After all, the term “contract” tends to be synonymous with “inflexible.”
However, there are often significant cost-saving opportunities buried within contracts. For example, when reviewing your telecom expenses, you may find unused lines or cell phones assigned to ex-employees. Could you get by with fewer printers or copiers now that more people are working from home?
It’s worth taking a hard look at use of leased office equipment and contracts that have been on autopilot for a few years.
While examining contracts, mark the contract end date and a reminder several months ahead of time. Instead of simply letting the contract renew with the original terms, renegotiate. This will give you a chance to get better terms and eliminate the services and products you do not need. You’ll be surprised to find that many companies are charging significantly better rates than when you first signed the agreement.
“Most companies never give this a second thought and are shocked by how much money is being wasted every month [on the leases] and how painless it is to change that,” said Hammelburger. “Ninety-eight percent of companies who get a review [by our group] are eligible to reduce costs.”
In fact, there are firms that do nothing but scrutinize telecom, generally looking at a handful of areas. Companies usually pay a percentage, and only if the contractor finds savings, so it’s no risk.
If you are not at a point where contract renegotiation is possible, it’s still worth opening a discussion with suppliers. You may be able to find an agreement that helps for now, like lower monthly payments or flexible interest.
In the same vein as office services or equipment leasing, vendors can provide wiggle room when cash is tight, and those cost reductions could stick long term.
Getting better payment terms can be as simple as asking. Hold up on that phone call though: Renegotiating payment terms requires a plan, lest you burn valuable bridges or come out with a less-than-ideal agreement.
Know your rights: Understand the specifics of the contract, like cancellation clauses, fees and penalties, prior to starting a discussion so you know what your options are.
Know what you need. Vendors are likely willing to work with you to keep your business. But for them to help, they have to understand your situation. What can you afford to pay now? How long do you expect any liquidity issues to last? That provides a starting point from which to negotiate. And don’t focus solely on lower rates. More manageable payment terms could help your cash flow now.
What’s in it for them? This is a partnership — and you paying less or later could be of detriment to the supplier, which has its own expenses. After all, vendors set their terms for a reason. Are there ways that your company can bring new value to the relationship? For instance, more cash flexibility may allow your company to order more. Or, could you help them gain a foothold with peers in the industry or in new markets? The Harvard Business Review cited a case where a beverage manufacturer received a 10% price reduction in exchange for using the supplier’s cans in two new markets.
Employ a win-win strategy. Remember Matt Harrington? The star pitcher was selected in five MLB drafts. Acrimonious negotiations and a failure to compromise made Harrington the only baseball player to have been drafted so many times without signing a contract. He now works at Costco. Aim to be a little more like the Boston Bruins’ Zdeno Chara, whose 2010 negotiations were praised by former GM Peter Chiarelli as a win-win for both sides. Aim high to start, but be willing to compromise as talks proceed.
For CFOs, launching an expense reduction exercise can come with a warranted dose of trepidation. Employees may worry about the products and services they depend on, and even at the best times, cutting costs is a difficult balancing act.
The fear of inhibiting growth is omnipresent, and valid.
“Unfortunately, it is a double-edged sword with cutting expenses to stay afloat,” says Hammelburger. “Obviously, cutting out unnecessary expenses is always smart, but when times are tough — as they are now — and companies are hurting for cash, more often than not the cuts the company makes are the type that will inhibit growth.”
We’ve discussed lessons from past recessions, best practices for cost cutting and methods for evaluating capital spending plans while still investing in growth. Companies that are proactive and cut expenses consciously and with a plan — not as a knee-jerk reaction to a problem — tend to have better success.
Megan O’Brien is Brainyard’s business & finance editor, covering the latest trends in strategy for CFOs. She has written extensively on executive topics as a former content creator for Deloitte’s C-suite programs. Reach Megan here.