Controlling Expenses Through IT Spending

So you’re a small business owner. You’ve purchased some microcomputers – PC’s – and you’ve got them setup to use email and browse the web. Great: your employees are able to waste time faster and you’re probably wondering: okay, when do these things help me save money?

To answer that, there are two tech strategies that I’d like to tell you about: expense reduction and cost containment.

Reducing expenses is the quickest return you can earn from technology investments. Through deploying tech, you can automate a business process to improve its speed, accuracy, and reliability. That improves its efficiency, reduces the expense to conduct that process, and increases your operating margin. Profit is higher and you’re making a stronger return.

Cost containment appeals more to saving costs associated with your growth as a business. You may look at your business model and see that a business process is highly supported by labor. To sell more volume, you need more people; to build more houses, you need more people; to process more paper, you need more people. People (labor) represents a variable cost that accelerates quickly and erodes your profitability. If you invest a little in tech today, then you can spend less on labor tomorrow by hiring one, two, or three less people.

The first strategy, expense reduction, is the low-hanging fruit; this is the first strategy you would want to concentrate on. The second strategy, cost containment, is more complicated in that it weighs a capital expenditure today against the labor expenses you’ll have tomorrow. Let me run through some examples on expense reduction.

Expense Reduction:

• Within manufacturing processes, bar codes and work flow management software can help track product and reduce overheads, and usually manage your inventory at the same time. Think of all of the time needed to cycle-count bins, move inventory through puts and pulls, and manage paper tickets that need to be fed to a Purchasing function. Much of this can be automated very inexpensively. Reduce touch points and convert to electronic processing as much as possible.
• HR is a traditional administrative function with lots of paper and high overhead. The deployment of an HRIS (Human Resource Information System) would allow you to transition that paper into bits and manage every employee transaction faster and more accurately. Modern HR software even allows for electronic integration with insurance carriers, payroll companies, and accounting software.
• Administrative paper is another area of opportunity. Do you have stacks and stacks of paper in cabinets that requires shuffling, maintenance… you require labor to put paper in and take paper out? Move to an electronic document management strategy so those documents can be scanned at the photocopier and added to an electronic database from your desktop.
• Customer relationship – often, the small business has information about their customers scattered across electronic and paper resources. Consolidate them into one electronic resource so that 90-percent of the information you need to handle a customer issue is in one place. We call this a CRM (Customer Relationship Management) system. Think about how, with one phone call to one person, the customer can get all of their questions answered. No transfers, no waiting on hold while you look up information. Fast, easy, efficient, and excellent service.
• Spreadsheets are the bane of my existence as a technology consultant because they’re so heavily over-used. Why? Because people “get” spreadsheets and don’t “get” databases. Over time, companies create these huge, complex, linked spreadsheets that are cumbersome and labor-intensive to fill in new data to calc a result, and then people leave the company and nobody knows how they work, and usually that data is being manually accumulated from other pieces of the information system. Yadda yadda. Spreadsheets are a decision-support tool – not an information system. Reduce or eliminate as many spreadsheets as possible. Move to database solutions. Press a button, get a report. That’s a lot easier and faster and more accurate.

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Cost Containment:

Remember that multi-function photocopier (MFC) idea? Maybe you don’t have one that scans and integrates into an electronic document management system. So, you need to make a capital investment today or enter into a lease to acquire one. In order to estimate a return, you’ll need to calculate the time your people spend on touching and accessing paper records; you might come up with figures like 30-hours/week, or, 3 hours a person/week. And, over time, with every new customer or month that goes by, that metric is probably increasing; you need to know that growth rate. Now multiply the rate of growth over the duration of the lease for the MFC. If it’s 2 hours/month for a 60-month term, you now have a basis of comparison: 120-hours of labor will be needed in the future based on the current growth in business and manual paper processing requirements. You now have a basis of dollar comparison against the cost of the lease to the cost of that labor over 5 years, believing that a portion of that labor cost (perhaps up to 80-percent) will go away. See? I told you cost containment is a little more tricky!

Another idea is a website that employs self-service features.  Out of all of the calls you receive in a month from your customers, what portion of them are routine requests? How much time does it take to respond to a typical request? What’s your customer acquisition rate and what does that look like over three years? Multiply the acquision rate by the number of calls and the time – you now have an estimate of the cost of that growth in your business. Eek! That labor cost is a tax on your growth! Now, what if they could find out that routine stuff on the web and not have to call you? After a long chat with a web guy, you come to a dollar figure for that self-service capability. The cost of the website capability is compared to a potential 3-year return on the investment by reducing the labor expense. Self-service through your website isn’t just cool and what your customers want – it’s a money-saver! You spend a little money today and contain your future labor expense.

Application:

It’s advisable that the business first reduce expenses until they reach a point of diminishing return. That is, for every dollar they spend on tech – over time – the return gets smaller, because they’ve already automated what they could; they’ve already eaten the low-hanging fruit. Then they’ve got to do something different with their strategy, and that’s where cost containment comes in.

Think about these ideas the next time your company is considering an investment in tech. Specifically: how will it help reduce expenses, or, contain expenses?  Right on – now you’re thinking strategically about tech!

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