Integrated Revenue Capture Success

4 Reasons Why CFOs Receive Pushback From Their Purchasing Departments When Their Indirect Costs Are Out of Control
by Paul DiModica, Editor, BDM News

Managing corporate expenses is a strategic and tactical action that must be monitored on a daily basis. Managing indirect expenses is a sub-segment of corporate accounting and purchasing departments which often go unnoticed or unmanaged because of the lack of time, the lack of sufficient competitive pricing data to benchmark against, and the perception that these areas cannot be reduced.

We have identified 4 reasons why many purchasing and accounting departments often do not recommend outsourcing the management of this area because of the difficulty to evaluate expense. They include:

1) Fear Based Decision Making

Often purchasing departments fear that an independent third party auditor will create unfavorable reviews of their department and their team’s ability to manage an expense center. Due to this fear, they fail to recommend or embrace having outside help and minimize the third party’s ability to improve their cost controls.

2) Think They Can Do It Themselves Internally

One recent independent study of companies that decided to manage their own indirect expenses found that after 9 months most firms still had not started their efforts to reduce costs in these areas. This was often due to lack of time and focus by the accounting or purchasing department and their inability to compare their vendor pricing to industry best practices.

3) Believe Their Purchasing Staff Has Necessary Experience To Reduce Indirect Costs Effectively

When indirect expense management programs are implemented in-house, often purchasing departments accept an additional 5% discount from vendors as a sign of success because they lack sufficient data to negotiate from a position of strength and end up leaving as much as 15-25% or more in savings on the table.

4) They View Payment to a Third Party as a Cost

Without looking at the business return on investment to their company, some departments become ethnocentric in their thinking and business conclusion development. They believe that investing in a third party consulting firm to reduce indirect expenses is a wasted expenditure. Additionally, purchasers usually gauge the fee of a consulting firm against their personal salaries and make decisions from a personal rather than a corporate mindset. Like any other investment, management teams must review their potential R.O.I. and the firm’s ability to validate its expense. Using a third party management consulting company to help reduce operational business costs and increase cash flow is a justifiable expense if the firm can quantify their best practices methodology and successes.

Conclusion

With business costs rising, management teams should seek independent advice to identify and control cost centers which may be invisible or difficult to monitor and adjust. Ignoring these expense areas or assuming that your internal skill sets can proactively manage these areas without relevant industry standard measurements to compare to will result in reduced corporate performance.

Author

Paul DiModica is president of the Value Forward Group, a worldwide management consulting consortium company focused on best practices and corporate business performance improvement. Value Forward Group is also the publisher of the newsletter CEO Management (www.ceomanagement.com).

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