Sustainability Through Cost Control
By Stephanie Scarola, CPA, Expense Reduction Analysts
Let’s face it, working for the Government is tough business! The operating environment is challenging to say the least – a ‘best value’ buying climate at best, an evolving competitive landscape, the war for talent, emerging compliance requirements, and unyielding financial performance expectations to name a few.
The need for government contractors to be cost competitive has never been greater. More than ever before, the ability to creatively manage costs will be a deciding factor of future success. Effective cost management can create a competitive edge, but you need to go beyond traditional cost cutting and improving the optics of cost pools or indirect rates to address fixed costs and create cost structure flexibility. Improving cost structure flexibility not only lowers indirect rates – it can fund investments in diversification, and just might help you exploit new opportunities or weather setbacks.
Assessing your needs and sourcing practices will help you target cost areas for potential reductions or conversion from fixed to variable. Knowing where to start can be daunting, but some areas that can yield the greatest benefit include:
- Occupancy Costs – Paying for an option for future expansion versus committing to additional space now can result in future cost avoidance should that expansion not be necessary. Does your lease allow for sub-leasing unused space? Alternatively, if you’ve got temporary needs, utilizing swing space could be a good alternative.
- Supplier based costs – What products and services are you using? What are you buying and how is it priced? Places to look for significant savings include Insurance, Group Health, Telecom and Financial Services (including Banking, P-Cards, and Asset Management). There is often opportunity to save without changing providers or services. The bottom line is that being an informed buyer drives value.
- Technology - While IT costs can be significant, it’s often least understood. Beyond addressing network costs, and though never easy, perhaps it is time to look at whether reducing IT infrastructure through data center consolidation, virtualization, outsourcing or offshoring will reduce expenses and/or increase cost structure flexibility.
- Support Services – Would outsourcing certain support services shed fixed costs in favor of a more flexible cost structure – one that that scales with need? Areas to look at include payroll processing, accounting, technical support, and any processes that are standard and repeatable. Be mindful of sacrificing future cost flexibility in exchange for a lower expense today – make sure it makes sense in the long run.
- Infrastructure Integration – Like many contractors, if you’ve grown somewhat through acquisitions, chances are there could be an opportunity to better leverage skills and costs relative to how support services are delivered across your business units. How are Finance, HR, Legal, and IT support services delivered? If it’s distributed, is this a strategic decision or is it time to re-consider integration and consolidation?
Improving cost flexibility and trimming costs is often not easy, but preserving your optionality is critical and against the headwinds of an increasingly complex and challenging environment, it may be due time to consider.
Stephanie Scarola, CPA
Profit Specialist | Optimizing procurement to increase EBITDA for mid-market clients