Effective cost reduction: Is it a contradiction in terms to pay someone to help with cost reduction? Why not just do it in-house?

I’m sure that many Finance Directors have asked themselves this question, and it is certainly something that a few FDs have asked me over the years. There are a number of things I would recommend that you consider if you find yourself with this quandary.

Which areas of cost do you have the expertise to review in-house? Do your staff understand what’s happening in the market, do they have the skills and knowledge to conduct a full market review and analyse and compare offers?

Where there is no or little in-house expertise, it clearly makes sense to involve an experienced third party to help with these areas of cost reduction.

Where there is in-house expertise, the next consideration is whether those staff have time to manage a review process and how long it might take them. If they are busy looking at other areas of cost or have other priorities in their work, it might make sense to bring in a third party who can complete the review and find cost reductions for you quickly and without interrupting those other valuable activities.

Other things a third party might bring to the organisation are market leverage and objectivity. They might have a good number of other clients with similar requirements, with suppliers therefore willing to work to finer margins for their clients than would be the case if organisations approached them individually. The fact that a third party is involved imbibes the situation with a degree of seriousness that the supplier might not realise if a review is being done in-house with staff they have a strong relationship with.

If you do decide to move ahead and work with a third party, the next concern is who to work with. Consider each potential third party’s method of operation. Some only review a narrow range of costs, others have a wide range of expertise; some only check invoices for accuracy, others offer a wide range of services; some offer a group deal from a predetermined supplier, others offer a bespoke service; some tend to focus on unit cost reduction while others tend to look at wholesale process change. Which of these suits your organisation’s requirements at this time?

As with any business decision, you will want to work with someone you can trust. Can any of your peers recommend a suitable cost management supplier? If not, check out testimonials and/or references from those short-listed. Make sure you understand their revenue streams – are they solely incentivised to find best value for you, or are there other factors involved, eg commissions from suppliers?

And one final but essential consideration. Are you sure you will be achieving value for money – will the cost reductions achieved outweigh the cost of the consultancy?

Ultimately, the decision about whether or not to review costs in-house will depend on your unique circumstances. One final recommendation if you do decide to do an in-house review – remember to review your position after a pre-determined period of time. Has the review been successful? Has it actually happened? Now you’ve taken out the low-hanging fruit, is it worth asking a third party to see whether they can do even more?