Best Practices

Operational excellence: what it takes to quickly and responsibly reduce costs

Striving for operational excellence improves a company’s overall performance and efficiency. At its core, it means that every activity within a company should be clearly tied to the profitability of the company. Every hour worked and dollar spent should have a clearly justified return on investment. As the de-facto finance lead at Vareto, I'm laser-focused on optimizing operations, reducing waste, increasing productivity, and continually improving processes, systems, and culture in order to achieve sustainable success.

With the collapse of Silicon Valley Bank and continued uncertainty in the tech industry, companies are finding that they need to significantly extend their runway. Companies are scrambling to streamline operations and reduce costs, and organizations need a strong handle on their capital allocation to be successful. Reducing vendor spend is often one of the largest levers companies can pull. Here’s how to get started.

1. Aggregate the data 

When striving for operational excellence, getting the information is often the hardest problem to solve. In order to be successful, teams need to be able to examine vendor financial data in one place in a structured and accessible way. Here at Vareto, we use the Vareto platform to structure our financial data by vendor. Financial data is automatically pulled into the Vareto platform through integrations with business-critical platforms such as our ERP, eliminating the need to manually aggregate vendor spend month over month.  This allows our team to quickly and easily understand where money is spent, how much is spent over a given period, and identify trends and inconsistencies. 

For example, using Vareto’s reporting tool, our team can build a single report displaying vendor data from the last 12 months. With this report, we can easily see which tools cost the most money, how much we spend on each tool per month, where spend has stayed the same month over month, and where spend has increased in a particular month or months all in one place. From there, we can go down the vendor list to see what spend is critical for success and what can be cut.

2. Make a plan and prioritize

After you have the appropriate information, break everything down into manageable pieces. From an operational perspective, it’s likely that there are many vendor opportunities, but it’s not possible to address them all at once. The impact-effort matrix can help. 

In this case, sizing the potential impact is fairly straightforward. Calculate, in $-terms, the size of the potential savings. Larger vendors and vendors that can be eliminated entirely will have a higher impact. Smaller vendors, or those with the opportunity for only a partial reduction in spend, will have a lower impact.

Effort will likely be harder to gauge, as you may face both internal and external resistance to change and may not fully understand the usage and value of every vendor on the list. Start by considering the term length of the contract (month to month, annual, multi-year), the cost driver (usage, seats, fixed), and whether that vendor is a “must have” or a “nice to have.” For large vendors where you’re unsure of the value, develop a hypothesis, which you can refine as you engage with business partners.

A chart showing how how impact and high effort tasks should be considered as major initiatives when low impact and low effort tasks can be delegated.

High-impact, low-effort opportunities are your quick wins. Reduce costs swiftly and move on. High-impact, high-effort opportunities will become your major initiatives. They will take time and thought to capture savings, but the effort is worth it because of the size of the prize. Low-impact, low-effort opportunities should be delegated. Ask others to quickly make changes and capture savings that are too small to invest too much of your time in. Low-impact, high-effort opportunities should be deprioritized.

3. Ask probing questions

Now that you have your prioritized list of vendors, you’ll need to take action. Consider that you’re likely operating on unvalidated hypotheses for what vendors can be cut, and how much can be saved. By engaging with business partners, you can zero in on the true opportunity.

Keep in mind your business partners might not be bought into the objective of reducing costs. Expect to be told there’s no opportunity for cost reduction where there is. Get creative and ask hard questions. Are the assumptions that led to the original purchase of this tool still true? Or have things changed? Can you point to the realized value (not hypothetical value!) you’re getting from the vendor? Can you accomplish the same thing with fewer seats or less usage? 

If you’re still encountering resistance, dive underneath the iceberg to better understand what’s behind it. One thing I typically see is that, during the original purchasing discussion for a new tool, a lot of work is put into the purchase rationale and negotiation. At purchase time, everyone buys into the value of the vendor. Then in the future, it’s natural to look back and assume that you’re capturing enough value, even if some critical assumption or fact that led to the up-front purchase is no longer true. Asking probing questions can get people to re-visit and reflect.

Often, when I’m told there’s no opportunity, I simply ask, “are you sure?” This question forces your team member to pause. At that moment, they’re much more likely to reflect seriously. This one small question turns a rushed dialogue into a deliberate discussion, often only taking a few more minutes of everyone’s time. As David Wieseneck, the VP of Finance at Demostack, shared, you don’t need to say no. Instead, highlight the risks and impact, which creates mutual trust. Many times, if given the opportunity to reflect on the request, they may find a different way of accomplishing the same goal that's a better use of company resources.

4. Ensure it doesn’t happen again

Finding areas where costs can be reduced doesn’t mean the organization is fiscally irresponsible. It’s often not feasible for fast-growing companies to keep total control of everyone’s spending at all times. Finance and operations teams are contending with continuous changes —  new people join the company at a rapid pace and start doing new things all at once. Since moving fast is often the most important thing, operations and finance teams intentionally equip leaders and team members with easy-to-use corporate cards that enable them to make purchases under reasonable thresholds without much oversight. It's the right thing to do if you want to enable your team to move fast and innovate. However, the cost of this intentional choice is that you'll likely have cost creep, especially with tool vendors.

That’s why it’s essential to put controls in place so that spend can’t be run up again. With each cut, determine why the team spent more money than intended. Consider if there’s something you can do now to prevent the organization from getting into this situation again six months from now. Does this mean implementing hard automatic limits on credit card spend? Imposing restrictions within tool platforms? How can finance leadership illuminate easy-to-understand guidelines? Either way, ensure these are communicated clearly with buy-in across the company.

The answer is going to be different for each tool. In some cases, the overspend may be with a larger vendor with a signed contract. You may realize that teams aren’t getting the intended value out of the tool. At that point, it’s prudent to start negotiations with the vendor for the release of the contract. For those cases, once negotiations are finished and the contract is done, there’s little chance of the cost returning without going through a more rigorous review process. Alternatively, the extra spend may be a case of license creep on a tool. In those cases, it’s crucial to figure out why the team ended up with more licenses than intended and then figure out a way to put automatic control on the spend so that the finance or operations team has to approve extra licenses or upgrades.

Continuous improvement with effective tools

While the hope is that spend will be better managed, it will inevitably expand over time, especially in a growing business. When it does, having the appropriate tools that allow teams to organize data in a structured way, all in one place — in our case, Vareto — enables teams to trim the fat efficiently again. By making continuous improvement a core business value, organizations can position themselves for long-term growth and success and ensure they move toward profitable growth in uncertain times.

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