Getting a Handle on Unmanaged Spend – SIB Whitepaper
GETTING A HANDLE ON UNMANAGED SPEND
How to Ensure You’re Maximizing Savings on Fixed and Recurring Costs
There is hardly a company in the world that isn’t under continuous pressure to reduce or minimize costs while simultaneously striving for growth. Executives feel it. Purchasing departments feel it. Managers and even entry-level staff can feel it.
The continual drive to do more with less has resulted in various techniques that look like good solutions, but they can be very difficult to accomplish, and at best only deliver a fraction of what a company’s total savings could be.
In this white paper, we’ll explore some of the common hurdles all companies face when trying to reduce unmanaged spend, as well as provide some unique solutions on how to get the job done more effectively.
WHY YOU MIGHT BE SPENDING TOO MUCH
Recurring service costs like telecom, waste removal, treasury fees, utilities, and maintenance contracts are some of the biggest culprits when it comes to excessive unmanaged spend.
A large part of the problem is that for many of these services, contracts are scattered across multiple locations and/or GL codes don’t match from division to division. For these and various other reasons, it can make it very hard to even notice that a problem exists.
Customers are continually either over served (paying for services they aren’t using) or overcharged (paying more than they should for the service) by vendors and it can be hard to tell whether you’re a victim or not. It isn’t a matter of how skilled your accounting department is; it’s simply that many groups don’t have the bandwidth to effectively audit these expenses, creating a lack of true visibility into your spend.
If you don’t believe that your company could possibly fall into one of these categories, you may want to pause and consider this: a 2015 audit of waste disposal services across more than 5,000 locations nationwide revealed that 94% had savings opportunities. Of these, 28% were due to billing errors or fraudulent charges, 34% were being overcharged, and 39% were paying for services they weren’t utilizing.
Mistakes like these add up quickly, costing companies millions of dollars every year without them even being aware it’s happening.
BAND-AID SOLUTIONS
There are a handful of ways companies have attempted to get on top of costs like these, but they’re often too cumbersome to implement, don’t actually maximize your savings, or just flat don’t work.
“ONE SIZE FITS ALL” CONTRACT CONSOLIDATION
In theory, consolidating contracts makes sense. Combine all similar services under one master contract and use your new purchasing power to negotiate for lower rates across all locations. In practice, this is not only difficult to implement but can actually be more expensive as well.
The problem arises when companies try to shoehorn different branches with multiple service levels into the same contract with a single national vendor, regardless of whether it makes sense operationally or financially.
It is extremely rare for contracts scattered across an organization to end at the same time. A company therefore has to choose to wait until the contracts lapse (paying a higher rate the whole time), or back out of the contracts early (often resulting in high cancellation fees).
This method of cost control almost always has a negative effect on operations. Local divisions who are happy with their current vendors tend to resist and resent change. Often a new vendor just means a new set of problems to cope with. The honeymoon period of a new relationship fades quickly, and before you know it, you’re right back to where you were before.
INEFFECTIVE NEGOTIATIONS
Contract and price negotiations are one of the more common methods of cost control. This approach can make you feel like you have a lot of control, but the problem with negotiating on your own is that you only really know what you used to pay. This amount becomes a false benchmark for all future decisions.
This can make a 15% reduction look like a great deal even if you’re still being charged too much.
For example, services like off-site document storage are the same whether you’re a hospital, law firm, or a bank branch. Vendors, however, will arbitrarily scale prices based on the type of customer. In other words, the hospital may be using the same landscaping company as the restaurant down the street, but could be paying twice as much for the same level of service.
You may also be unknowingly paying excess for “fluff” fees like environmental, fuel, and administrative costs. This can conceal true pricing as the base rate may be low, but these hidden costs are where the vendor really makes their margin. Combined with annual price increases, these hidden costs can easily undo any savings you’ve won through negotiations.
Without data on real costs and expected margin from your vendors, your negotiations will never be as effective as they could be.
STANDARD INTERNAL AUDITS
Capturing spend via GL review is a smart, but often very inaccurate exercise. Services get categorized differently, miscategorized, or placed under a “general” category that won’t show up on a GL review especially among larger companies that have locations scattered across the country. Issues like these can keep you from ever really knowing what you’re spending on something like waste removal, for instance.
Full-blown reviews that capture every last level of detail from every division also take time, energy, and expertise that many accounting departments just don’t have. Maintaining day-to-day operations keeps them too busy to make the effort to capture spend at this level of detail.
AP recovery reviews also tend to focus on objectives that can give the illusion of saving money while in actuality only recover a small portion of expenses. For instance, an AP review will help you uncover whether a certain invoice was overpaid, or perhaps paid twice, but it will never help you determine whether you were overcharged in the first place.
In other words, an AP recovery review helps you uncover errors that you made, not necessarily mistakes that your vendor may have made.
BROKERS & BILLING MANAGEMENT
Brokerage services may seem like a dream come true. Allow someone else to manage your vendors and contracts, and pay one single, consistent bill for services. The broker manages their own costs and you’re free to conduct business as usual.
While these types of vendors can add a lot of value to your organization, especially in terms of time, this method can also expose you to certain risks that you ought to be aware of.
With brokers and billing managers, vendor relationships and contracts are with the broker, not you, and so the price presented includes the vendor’s margin plus a usually undisclosed broker’s fee. As a result, only the broker can determine how much you will actually save, and you have no true understanding of what the best market rate may be.
Additionally, because more services equals more money for the broker, brokers can be unmotivated to help you optimize service to ensure cost efficiency and may fail to keep you advised of areas in which you may be over-serviced.
Lastly, brokers leverage their own relationships, usually steering clients toward preferred vendors, which not only represents a conflict of interest – it can also necessitate a disruptive change in vendor or service.
Rebilling errors with brokers like these are another very common cause of excess spend. The process of copying a charge from one bill and adding it to yours is a simple exercise, but it doesn’t always happen accurately. Taxes, tariffs, and other charges are frequently copied incorrectly or sometimes even duplicated, resulting in excessive charges to you. Without continual monitoring, these charges often pass by completely unnoticed.
IDEAL SOLUTIONS FOR THE COST-CONTROL ISSUE
The solutions for every company wishing to reduce its recurring cost burden are relatively simple in theory, but can take a lot of effort to achieve.
In the case of contract consolidation, it is much more effective to renegotiate with current vendors based on the best market rates. This saves you the time of waiting for contracts to expire, as well as the added expense of early termination fees. It also prevents pushback from local managers who may not be pleased with changing vendors. Collecting these contracts can cost accounting teams enormous amounts of time, but it is well worth the effort.
Audits and reviews need to find duplicate charges and overcharges rather than just duplicate payments and overpayments. This approach focuses on vendor error rather than payer error. Additionally, these reviews need to be leveraged to optimize service levels, renegotiate rates, and achieve ongoing future savings rather than just cleaning up past mistakes.
Negotiations are the most effective route to direct savings, but you must first collect enough benchmark data to know the best rates vendors are charging for similar services in your area.
In other words, you have to be certain you aren’t being overcharged before you start negotiating. You wouldn’t install a new floor without first removing all the old material and getting down to a solid base, and the same is true in negotiations. Starting the process without a real understanding of the best market rates gives you very little real leverage.
Without this knowledge, you will still be at the mercy of the best price the vendor will give you. You won’t necessarily be getting the best market rate. This requires collecting as much data as possible to benchmark pricing in your area.
Working with your current brokers and billing management vendors also presents a great opportunity for savings. Because billing errors are so common with these services, a simple audit of charges can be enough to clear big money without damaging your current relationships.
The solutions mentioned above have been proven to help companies reduce their exposure to unmanaged spend, although it isn’t always easy to know where to begin.
Lacking significant experience in these methods, or the number of trained staff to implement them, many companies try, but still fail to realize maximized savings across their organizations.
Fortunately there’s a solution that takes care of all these methods that is simple, quick to implement, and has zero up-front costs.
TAKE ACTION TODAY TO START SAVING MORE MONEY
Many companies find the previously mentioned techniques too time consuming or burdensome to perform on their own. Other times they don’t know exactly what data they’ll need or how to collect it. With that in mind, our solution can help you identify and realize savings for your company quickly and without many of the headaches that come from doing it yourself.
SIB will take the lead in working with your current vendors to identify service levels and contract terms, check for contract compliance, correct billing errors, and obtain credits or refunds as appropriate.
We’ll also identify service optimization opportunities, and negotiate better contract rates and terms based on our extensive database of benchmark rates for services. Finally, we’ll handle implementation of savings that do not change current vendors or service levels. On an ongoing basis, we’ll continue to monitor invoices for contract compliance and look for additional future savings opportunities.
The best part for our clients is that there are no up front costs for our service. We’ll assume the entire risk of performing your review, something that would cost you significant time and money in hiring new staff or training and reassigning current resources. Also, we only get paid if we’re able to save you money, and even then only after you’ve realized the savings.
It’s a low -risk, high -return proposition for any company.