Financial discipline has been in focus for a lot of businesses this past year. Markets pushed for profitable growth and businesses responded. COVID-19 will push this into hyper-drive and every business will need to trim fat and spend wisely. To help we put together a list of spend categories with actionable tips for finding savings.
Not all savings can be realized immediately, but you have to start now and you have to put in the work. An effective analysis needs to be a deep dive into every line item and transaction. As Chamath Palihapitiya recently said on Anthony Pompliano’s podcast:
“There are [COVID-19] implications for every single business so why that’s important is because for a company to reset, I think you’re going to start hearing the term zero-based budgeting ... It means let me build my business back up bottoms-up, line-by-line, excruciating line-by-line, and when you do that you’ll understand what you’re willing to bear in your expense basis … Every single company will be under an enormous amount of pressure to re-baseline their expenses. In these next 6 to 9 months, they’re going to figure out what they’re willing to spend. Then, they’ll start to spend cautiously.”
Now, here are some areas to start exploring for savings:
- Diversify Legal services providers & negotiate fees by matter.
- Cut or pull back on underutilized Software.
- Consolidate vendors.
- Shed excess real estate or downgrade offices.
- Cut back on Marketing.
- Optimize your Cash Conversion Cycle.
- Reduce travel and tighten policies
- Renegotiate debt.
- Implement controls.
- Ask your employees.
Prioritize legal matters and optimize fees.
Legal fees present a savings opportunity for most scaling businesses. This happens as matters increase and most of the work goes to existing service providers. As you scale and costs are less of a focus, you’re prioritizing speed and execution. When it comes time to dial it in, you’ll want to inventory of your matters and to assess the following:
- Matter Scope and Budget
- Resources & Rates
For existing matters, figure out what’s most important and what can be cut. Take smart risks. Bring more work in-house or add internal capacity if the savings justify it. Good matter management can also cut admin work on both sides.
For new matters, you should have 2-3 service providers for quotes. Often, boutique service providers who specialize can drastically reduce rates. It’s a bit counterintuitive, but the best projects to take to market are small or low impact. You want to shop around, but not every time. Ideally, you have a small set of preferred vendors who understand your business.
For negotiations, push for the most favorable fee arrangement given the matter at hand. This typically takes form in 3 ways: hourly, flat-fee, or contingent fee. Talk about the fees and don’t be shy. Make sure you understand the scope of work and their perspective on what it takes to get it done. Push them on staffing and make sure tasks are with people who can get the job done, but have moderate bill rates. Use discretion depending on the importance of the matter and be explicit about rate ranges you're comfortable with. Use market data to back up your claims. Regardless of fee structure, make sure you set a firm budget for every scope of work. Fixed fees are ideal, but you can also set caps on hours to control costs and eliminate surprises.
Cut or pull back on underutilized Software.
Keep a log of all software vendors. Track these key items:
- Termination Date
- Billing Terms
Prepare for negotiations well in advance of your termination notice. Identify how the service is being used, if there are any redundancies, and quantify the value of continued use. Kick-off negotiations with plenty of time to hash things out before the termination deadline hits.
Arm yourself with your data, but also reach out to peers to help with price discovery. You’d be amazed at how different price points might be for similar software packages at different companies. Know the competition and their proposal. Be clear with your objectives and creative with finding win-win solutions. In times of need, lean hardest on your large vendors with big balance sheets. Here are tips for re-negotiating:
- Be transparent with your situation and objectives.
- Bring market data and/or benchmarks to back up your ask.
- Be prepared to discuss deal levers outside of price (i.e. contract length, service-levels)
- Offer other ways to be helpful: beta new features, product workshops, provide testimonials, etc.
- Commit to the long-term and discuss longevity, especially with Finance. Retention typically impacts Long-Term Value (LTV) more than short-term price optimization.
- Ask them for ideas on how to reach a solution.
- Treat them like a partner and reaffirm the value they bring to your business.
Conduct a vendor analysis by looking at purchases by vendors across key spend categories, accounts, and/or items. Here are some examples of where overlap might exist:
- Hardware purchases like computers, monitors, etc.
- Software subscriptions such as project and task management tools.
- Consulting projects with Big 4 or similar firms across multiple scopes of work.
- Facility services for cleaning, catering, security, etc.
- Marketing service providers.
Consolidating vendors can impact a few key areas of spend management:
- Aggregate purchasing power for better pricing and contract terms.
- Lower administrative overhead costs for vendor management and accounts payable.
- Improved quality of service.
- Lower shipping costs.
- Stronger vendor relationships.
Shed excess real estate or downgrade offices.
Companies who secured real estate in anticipation of growth might not be growing into space as fast as they expected. Similarly, companies restructuring will have extra capacity in their office. Once your revised hiring plan is set, you can reset the space your business will need. You can reduce your sq/ft per employee to further tighten things up.
Now you can figure out a plan for disposition which typically includes sales, subleases, buyouts, or renegotiation. Come up with a plan given the market conditions, but in any type of transaction don’t be too stingy on price. Time is your enemy and excess space is burning our cash. Here are actionable next steps:
- Research your termination rights and analyze the financial impact. You’ll want to understand the implications to use in a renegotiation or net savings with moving to a lower cost option.
- Negotiate a lease extension with your landlord which would length to the term in exchange for free or reduced rent now.
- Renegotiate by clearly showing your landlord the current state of your business. Give them visibility into your financial scenarios and how your proposal will impact its trajectory. Given the market, they’ll want to keep you as a tenant.
- Sublease your space. They are probably many people looking to downsize or move into a situation with flexibility.
Cut back on Marketing.
Pulling back on marketing is business specific. For businesses where marketing is a large part of lead generation, then your investment needs to match your ARR target and/or sales spend. You can try to cut costs by simplifying your channel strategy and investing more in higher ROI lead generation activities. Only pursue this strategy if you have a strong grasp on your cost curves. Pushing too far into diminishing returns can put your economics at risk: requiring more budget or leaving sales capacity unmet.
For all businesses, brand or awareness marketing is typically best reduced by cutting consulting spend. Bringing more PR, content, and design work in-house will force prioritization.
Optimize your Cash Conversion Cycle.
Improve liquidity by bringing in cash faster and slowing it down going out. It will help you get to profitability faster and it’s especially helpful when your cash balance is getting low. You can change your Accounts Receivable policies to collect cash faster, but given COVID-19’s broad impact, you can more than likely expect this number to move against you.
For cash outflows, extend your payables by renegotiating billing terms and delaying payments. Lean on your large vendors with big balance sheets. Be transparent with your objectives and the impact it will have on your business. If your cash position is comfortable, then push for early-payment discounts.
For Sales and Marketing driven organizations, you can adjust commission payouts for leads or deals to better align with when sales generate cash. More on this below.
Adjust variable compensation plans.
Increasing the ratio of commission to base salary shifts your expense profile from fixed to variable. When cash is tight this allows the business to capitalize on demand, without risking burn. This strategy needs to be carefully weighed against the impact to morale. Sales teams are notoriously mercenaries rather than missionaries and an erosion of trust when it comes to money might mean they’ll quickly hit the exits.
Reduce travel and tighten policies.
Cutting back on travel is a quick and easy way to drive savings. This one is particularly interesting because we have no idea how COVID-19 will impact our lives when we get back to business. Regardless, the entire world is adapting to remote and you can use this trend to move in-person meetings to a Zoom.
For business travel going forward, tighten your policies around how far in advance to schedule, trip durations, and allowances for meals & entertainment. Make sure your policy allows people to schedule at good times and to live comfortably. Policies that force extreme behavior (redeyes, cross-town lodging, inconvenient logistics, etc.) should be avoided. The pain this causes to employees and the negative impact on their work will far outweigh the savings.
Fiscal discipline starts with good spend operations. Employees have good intentions, but they often don’t know what to do. Purchase workflows should be simple and automatically comply with policies. Coordination across key stakeholders should also be automated so the buyer has a single experience from initial request to an approved transaction.
A great purchase experience will guide employees towards best practices like soliciting multiple bids, leveraging purchase power, and avoiding redundant software and services. They should also have confidence to set contract and bill terms inline with company expectations. Once a purchase has been made, the lifecycle of that transaction (ownership, renewals, audits, etc.) should be put on autopilot.
Create a proposal to share with your creditor. Here are some areas to explore:
- Reducing interest rates.
- A longer payment plan.
- Loan consolidation.
- Securitizing unsecured loans with collateral.
- Issuing equity to
It’s best to approach your creditor with a game plan including other cost-cutting and restructuring initiatives, as well as updated financial scenarios. At the end of the day, they want you to be able to pay them back and should be supportive to helping you get there. Your proposal should include the following:
- A revised Operating Plan and milestones.
- Customer base and pipeline analysis.
- Loss mitigation scenarios and strategies.
- Internal controls and execution plans.
- Capital structure plan.
Be honest and creative. Your objectives should be clear and at the end of the day, you both want the business to be sustainable.
Ask your employees.
You’d be surprised by the good ideas people suggest. With increasing autonomy and decentralization in purchasing, it’s often the front-line managers and employees who know about the excess you’re not able to pick up in spend analysis. Regardless of the program’s explicit financial impact, you’re bringing more awareness to the problem. Sustainable fiscal responsibility starts with the decisions your employees make every day.