Protect Your Profitability: Cost Reduction Firms Can Save on Monthly Contracts
THE KITCHEN SINK
DAN SCHNEIDER – JULY 2013
Don’t take your vendor contracts for granted. You can recoup on renegotiation.
Full-service restaurant owners know there are only two ways to increase profits: sell more product, or reduce costs without impacting service. Selling more product is great, but in this economy, it can be a very expensive proposition. If you wanted to net an extra $100,000 this year, you would need an extra $2 million in sales (assuming a profit margin of 5 percent). That’s tough to do, and that’s one reason more and more operations managers are turning to specialty cost reduction firms to help them save money. Generally, these firms offer to find errors in past monthly bills, and recommend changes to service plans and options with current vendors. They can find savings in a number of different spending categories, including telecommunications, Internet, trash, maintenance contracts, and even workers’ compensation insurance. Many firms charge their clients a percentage of the overall savings they are able to find, which means full-service restaurant groups don’t have to spend any additional money. Instead, they share in the savings with the company that helped them find it.
Here are a few “traps” in contracts that full-service restaurateurs commonly see.
Auto-renew clauses. Many service agreements have clauses stating that if the service isn’t cancelled within a certain window of time, it will automatically renew. These providers are betting that you’re going to forget. There are some one-year contracts that automatically renew for five years. There are also some 10-year contracts that renew for another 10 years. What do you think the chances are that, 10 years from now, someone will remember to cancel the service at the right time? You could be locking yourself in for 20 years.
Pricing that runs out before the contract does. Sometimes service providers lock you in with a teaser rate, but don’t tell you how much they’ll jack the price up in the future. Cable companies do this a lot. They’ll give you a great price that’s good for one year, then make you sign a two-year agreement. You’re locking yourself in to whatever price they want to charge after the first year. And after the first year, you can almost guarantee they’re going to charge you more.
Contracts that stay with you no matter what. Many contracts don’t offer any relief if you move locations, or even if you shut down. You may move to a part of the city or country not serviced by your current trash or cable provider. But if the contract moves with you, you’ll still have to pay.
Sneaky terms hidden online. A new trick involves contracts that don’t list all of the terms in the actual document itself. Instead, they refer you to a website where all of the terms are laid out. Hardly anyone will take the time to go look at some website before signing the contract right in front of them.
Electronic signatures. A number of service providers now let you sign your contracts electronically, online, without having to print anything out. That may save a few trees, but it’s much harder to find unexpected terms and make changes to them. Print out any contract and go over it, line by line, with a pen or highlighter. It’s a lot easier to spot—and hopefully negotiate through—any surprises.
The big problem with these contracts is that once they’re signed, it’s tough to get out of them. Businesses may not have the time or energy to fix problems like this—or they just may not know they could get a better deal, and how to get it.
A number of cost reduction firms are out there, but not all of them are alike. Here are a few things to look for when choosing yours.
Size does matter. Most of the cost reduction firms popping up are relatively small, operating at 10 employees or fewer. You’ll want to make sure the company you hire has the man- and woman-power to handle all of the different spending categories in which they’re working to find savings.
Doing it by hand. Many cost reduction firms simply run your bills through a software program that looks for errors and other pricing options. While they usually do find some savings, it’s not nearly the savings they could find if they went through every bill, every invoice by hand…looking for every opportunity to find mistakes and cut costs.
Pay as you go. As we mentioned earlier, most cost-cutting firms work on a performance basis; they get a percentage of the money they save you. Some companies, however, ask you to pay for years’ worth of savings in the very first month, based on their projections of what you will save in the future. This means you’ll be out quite a bit of money early on, with only a promise of continued savings. Instead, go with a firm that gets paid on a monthly basis, at the same time you realize your savings. That way, you’re not required to make a big investment up front, and if for some reason your savings change throughout the year, the amount of money you are paying will change as well.
Go forward and backward. Many cost reduction firms will only find savings in one direction. They will only look for errors and overcharges in old bills, or they will only make recommendations and find savings with your monthly expenses going forward. Find someone willing to look backward and forward.
Do they have a track record with restaurants? Don’t assume that your cost reduction firm has worked with restaurants in the past, or that it understands the unique service levels a restaurant manager faces.