Optimizing Spending on Services

Introduction
There is a famous phrase attributed to John Wanamaker, a pioneer in retail
and advertising, "Half the money I spend on advertising is wasted; the
trouble is I don't know which half." While Wanamaker was referring to only
one category of vendor services, the problem of hidden wasteful spending is
common in categories as diverse as telecom, banking services, health care,
private jet maintenance and management, and waste, scrap, and recycling.
The root cause of wasteful spending is the lack of relevant information in the
hands of decision makers. When given the relevant information decision
makers can see painless savings as high as 50% in some categories of
services, with no drop in the level of service. For substantial six and seven
figure spends, even annually recurring savings of 10% to 30% can be a
victory.
This article will help finance professionals:
Find the red flags that indicate categories with probable high levels of
waste.
Understand and communicate processes to eliminate the waste.
Delegate the work and minimize decision makers time.
Find high ROI solutions that reduce investment of time and money.
Goal
The goal is to painlessly decrease costs of services while maintaining or
possibly increasing service levels. There are three possible ways to do this.
1. Eliminate billing errors.
2. Eliminate services you dont need, or replace underutilized services
with cheaper ones.
3. Negotiate better rates on the remaining services where possible.
Barriers
This should beg the question why havent all the painless cost savings been
captured already? Why is there an opportunity to save money?
The answer is that decision makers have been given only some of the
relevant information. Vendors almost never tell their clients about all the
billing errors, the services their clients dont need and shouldnt be buying,
and by how much the vendor can lower their prices and still be profitable.

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To gain more of the relevant information this means someone in your

organization must have the time and expertise to find these cost savings,
and make sure they are implemented. With many spends this does happen,
but in many cases the time and expertise is simply not there to discover and
implement everything and money must be left on the table. This is a
quintessential example of rational ignorance: Rational ignorance occurs
when the [opportunity] cost of educating oneself on an issue exceeds the
potential benefit that the knowledge would provide. [
http://en.wikipedia.org/wiki/Rational_ignorance ]
Our suggestion is that decision makers should make decisions. With the
proper delegation, other people, including outside experts, can do the
research and implementation. This lowers the opportunity costs and
eliminates the last barrier.
Red Flags
Here are some key red flag questions decision makers should look out for:
1. Do we know what we are spending in each category of services? Is that
total amount significant to us?
2. Do we have an inventory of all our services? Do we have granular
visibility?
3. How do we know that each item is billed correctly?
4. Is each service paid for a service were actually using? How do we
know that?
5. How do you know if each service is fairly priced? Do we have an
outside advisor or expert who knows the industry and can tell us if
each of our services are fairly priced?
The Process
The process is very simple.
1. Gain granular visibility in to spending by creating a database that
inventories every single service.
2. Then check each service billed to see if there is:
a. A billing error.
b. An unused service, or one that can be replaced with a cheaper
one.
c. A cheaper rate to negotiate
3. Each time the answer is yes, implement a fix, tracking it to completion.
Visibility

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Without visibility into costs one cant manage them optimally. Visibility is the
key to managing any cost. Without it optimal management of a cost
category is nearly impossible and excess spending is inevitable. Services
unlike materials are intangible. Services are often recurring, so they can be
bought month after month without piling up in a warehouse attracting
attention.
Many firms work as follows.

Business Needs
This is a great way to overpay. A vague pool of services is paid for by a bill,
and the pool of services collectively helps keep the business running.
Few firms if any have something in place similar to the following diagram:

Service C

Many companies will pay every month for services such as telecom. The IT
department for example keeps a list (if only mental) of all their important
services. The finance department keeps track of the monthly bills. If there is
no visibility, never the twain shall meet.
Department
Service
Cos

Finan
ce
Cost

Bill

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Bill

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t
Service A

Bill A

Service B

Bill A

$1,00
0

Total Bill A

Service C

Bill B

$1,00
0

Total Bill B

With Visibility
Bills are consolidated and broken down.
We can see connections, without always having to flip through paper bills.
Service
Service
A
Service
B
Service
C
Service
Z

Cost

Bill

$500

Bill A

$500
$1,0
00

Bill A

$500

Bill B

$500
$1,0
00

Bill B

Total Bill A

Total Bill B

With Visibility we can manage each cost

Eliminating or consolidating unused and underutilized services, fixing errors,
and renegotiating rates.
Service
Service
A
Service
B
Service
C
Service
Z

New
Cost

Bill

$500

Bill A

$350

$150

$500
$1,0
00

Bill A

$350

$150

Total Bill A

$700

$300

$500

Bill B

$350

$150

$500
$1,0
00

Bill B

$0

$500

$350

$650

$1050

$950

2000

Total Bill B
GRAND
TOTAL

New
Cost

Savin
gs

Notes
Re-negotiated to market
rate
Re-negotiated to market
rate
Re-negotiated to market
rate
Unused service is
removed

almost 50% savings

The above example is very simplified. In reality you will need multiple data
points for every service. The question is what are the relevant data points
for that service and have they been tracked? Whoever is in charge should be

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able to answer this question. Then steps can be made to obtain any missing
data.
A complete inventory of services will have enough relevant data points so
that you can answer at least the following questions about each service:
What does the service cost?
What is the service? What does it do?
What business need does it serve?
Who are we buying it from?
How much is it really being used?
Is it serving something we dont even have any more?
Where is it being delivered to?
An incomplete inventory is a sign of hidden waste.
Without the inventory you dont have visibility. Without visibility in to what
youre buying, (including the business need, and what it costs,) you cant
manage it.
The nature of the inventory reflects the nature of the goods and services
being purchased. Inventories help determine if there is a disconnect between
the contractual and current market price of the key services the business
needs and the actual charges on the bill. They can assist with the RFP
process and the accounts payable process.
Without visibility, companies will have a disconnect between the optimal
price of the services that the business wants and the total dollar amount
accounts payable is actually paying.
Year after year we find most companies pay 100% more than they need to
for telecom due to visibility issues, including lack of market data.
Gaining visibility is time intensive. To track complex services purchased you
can have dozens of data points for every service, and weve seen that even
60 person offices can have 100 to 200 services in a complex category such
as telecom.
Once you have visibility, fixing issues can also be time intensive. Vendors in
some categories are notorious for not fixing billing issues and not applying
new contracts. In other categories prices are subject to creep increases in
price that the vendor in practice obscures from the client. All issues must
also be tracked over several months until resolution. Not fixing billing issues

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in just one vendor category can cost even the small companies weve worked
with tens of thousands of dollars.
Sign of Low Visibility
Signs of low visibility include
Does your company have processes and the time to actively manage
ALL vendor costs?
Is there an inventory, some kind of database giving a granular view in
to all services purchased in each category?
Billing Errors - are your people frustrated with confusing bills,
overcharges, and time wasted dealing with vendors?
Confusing Bills do your people really understand everything the bills
are for? How do they know and verify the services being purchased,
including the true nature of every service?
Unused Goods and Services - are they unable to know EXACTLY what
youre paying for and if you need all of it? Is detail vague?
Above Market Pricing - do you know if youre getting the best rates
available? Is it hard to find out?
Is further time spent just not worth the hassle? Does it seem like a
black hole?
Can the contradiction between waste of time and waste of money
not be solved?
Areas with these red flags may be good candidates for intensive review
every few years (if not every month where automation is possible.) This is
especially true if saving 10% or more would be a win for you. However a
consistent process and follow through is needed.
If your decision makers in charge of spending decisions can honestly answer
that these are not relevant to a spend category, then you have little to worry
about. This is almost certainly the case in some categories. Given the quality
of vendor data, and how busy decision makers are today, it is unlikely the
firm has full visibility in all expensive categories.
After Visibility
Once you have visibility, each of the services is{are} analyzed and three
questions are asked of each service.
What is the business need, is it unused or underused?
Is the charge the one contractually agreed to?
Is the service over priced in todays market?
Unused services are discovered and terminated and underutilized services
are consolidated or replaced as needed. Vendors billing errors are
discovered and fixed. Better rates can be negotiated and implemented.

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Documentation and Tracking

The inventory is used to document what each months bill should look like.
Alternatively, a document is created explaining what each bill should look
like.
Whenever a change request is made to the bill, each change is tracked. A
change is primarily defined as:
Fixing a billing error.
MAC Moving, Adding, or Changing a service.
Removing a service.
Signing a new contract with new pricing.
To track changes, a spreadsheet can be used, or a ticketing or other workflow
system.
Each time a change is requested from the vendor a new tracking issue is
created, and there should be a corresponding ticket or document. It should
list the change, when the change was requested, from whom, at what time,
the tracking # from the vendor, whether there are any e-mails documenting
the request.
The next bill is then checked to verify that the change happened. The
tracking system or spreadsheet is checked every month for any changes that
have not been verified.
None of these steps are particularly complex, but they must be performed
accurately.
As should be clear by now, there is a lot of detailed work to be performed.
How can the organization most efficiently remove the money off the table
and back in to the organization?
Creating Visibility and Lowering Costs Efficiently
There are two solutions Delegation and Outsourcing
Basically these are two sides of the same coin.
The primary constraint is decision makers time. Decision makers should
prioritize decision making.
If cutting a cost no longer takes up a lot of a decision makers time, it can
move rapidly up the priority list. There is a low opportunity cost. However if
making a cost cutting decision takes too much time, it wont be done. The

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opportunity cost is too high. Most decision makers have to spend too much
time on research in order to make a decision and too much time on
implementation of the decision. If decision makers educate vendors and
subordinates to properly present information and to implement decisions,
they can accomplish much more.
Delegation
Depending on your organization the role of the people to delegate to can
vary - Internal Auditors, Business Analysts, Network Admin, HR, Accounts
Payable, Project Manager, etc. Youll probably need two people working
together. One person will understand the business needs for purchasing the
service, the other will understand the process of correctly paying for the
service.
What you dont want is an accountant recommending removing services you
need because they dont understand what theyre for. Nor do you want
someone in the business approving a bill because they assume it is error free
and charging only for services they want.
When delegating this process, a key point is making sure the people doing
the work understand the services, the needs they serve, and the bills for the
services. The reason there is an opportunity is because the people buying
the services dont have all the information they need to understand
everything. This doesnt mean everyone needs to understand everything
but it does mean at least one person helping the organization does, and can
easily communicate the information as needed to others.
Lets use Telecom as an example, but it could be Waste and Recycling costs
or IT support and maintenance charges.
1. For example find an IT person (who understands why telecom is
purchased) and someone in accounts payable (who understands
paying the vendors) to create an inventory in their spare time. Insist
that they make the time.
2. Make sure they understand and account for every service being
purchased and what is really being purchased, why it is needed and if
it is being billed correctly. Suggest they push back on the telecom
vendors for help.
3. They have to make sure the costs listed on the inventory equal the
costs listed on the bills. Insist they figure this out, and help if needed.
4. Have them fix any billing errors.
5. Have them withhold payment from firms who refuse to fix billing errors
or explain bills.
6. Have them submit to the decision maker any unused or underutilized
services. The decision maker approves, the lower level staff executes.

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7. The staff should figure out how to easily determine if a quote is worth
pursuing, then be open to new quotes or give targets / demands to
potential vendors. If a deal is found the decision maker will be given a
clear presentation as to why it is a deal.
8. The staff will determine what the cost of the needed services should be
based on the existing contract or any new ones. This will be used to
document for accounts payable if a bill should be flagged for review.
Everyone will know what each months bill should look like when Old billing errors are fixed.
There are no unused services
New pricing is implemented.
9. Each months bill will be easily checked to make sure it is the expected
amount. Some firms create purchase orders.
10.
Whenever services are added or subtracted the documentation
will be updated.
11.
Issue tracking must be implemented. Every time a change is
made, the change should be tracked. Spreadsheets can be used, as
well as others tracking systems (trouble tickets, CRM, etc. that
facilitate tracking issues for a year.)
While this can be time consuming, if your employees save $1,000 a month
for the next four years, or $48,000, wasnt it worth them spending many
hours every week last quarter? Maybe, maybe not. Sometimes ignorance is
rational.
If your staffed is too busy on higher priority projects, youll have to look at
outsourcing make your existing vendors or new ones do the work for you.
The Role of Expertise:
One of the key conditions for reducing waste is not just a process but
expertise. There are three key types:
1. Someone must be able to understand the services enough to know
what is billed for, why people buy them and what they do, and to
evaluate them in context. This implies someone with years of
experience and domain knowledge. Such a category expert can be at
your company or outside of it.
2. Someone must also be able to figure out why your organization needs
the specific services being purchased. While a category expert from
outside can often figure this out quickly, at the end of the day this
knowledge is known by the decision makers and stake holders in that
category of services.

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3. Someone must know what prices vendors can and will sell services in
the category for, and how to get you contracts at such low rates. This
usually means the person has somehow worked inside the vendors
industry, not in your industry. For example we have colleagues who are
ex-bankers, formerly in charge of profitability models, so they know
where banks are willing and able to cut prices and where they arent
and how to get those prices reduced without damaging the
relationship.
Notice how expertise is very likely divided between people internal and
external to your organization. Even if you delegate within the organization,
outside sources of expertise will probably be needed.
Outsourcing
Making someone outside the company do the work can be even better, they
can do all the delegation steps listed above. Or you can have someone else
create visibility, have a motivated outside expert in the field suggest actions
for cost cutting, and pay someone else to execute and document the new
standard.
For outsourcing the key problem is that you don't have an inventory. You
need to get usable documentation so you can gain visibility. This is the first
step to outsource.
Vendor Assistance with Visibility
One possible expertise source is account managers and sales reps. Their
firms have the data to give you visibility in to what you are buying. The down
side is that their management is motivated to keep you spending money. The
other down side is that in areas like telecom the account reps often dont
understand in detail what youre really buying either. User friendly data or
information is often not available. In some cases if you make it about trust
and make it clear youre willing to walk if your visibility issues arent
resolved, they may be willing to play ball. Of course if theyre like some
phone companies we know theyll let you walk management may not give
the reps the time and resources to help. In that case youll have to ask a new
vendor to resolve your visibility issues for you. In some cases though no
vendors will give you visibility in to your costs, which means their systems
will become your problem.
Also remember that your vendor may not be able to tell you how their
services serve your business needs this is something that will require
research.

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Getting an expert who isnt a vendor can give them incentives to have your
best interests at heart.
Regardless of whether your expert is a consultant, a firm, or a vendor, here
are some suggestions for making sure you get results without spending a lot
of your valuable time. Hold them to this.
Make sure they can give you full visibility in to what you are purchasing
and should be purchasing. You need an inventory both of you can
understand. Without this they wont be very effective.
Ask them to make suggestions based on the inventory. Ask them to
clearly explain what each suggestion will save and how it wont affect
service levels.
Similarly, if you have visibility already, but you want to make sure
youre not overspending, you can give the expert the inventory to
make good suggestions, saving their expensive time and decreasing
time to savings.
Approve the suggestions you like.
Have them implement the suggestions you approve.
Make sure they provide documentation showing real results and
explaining what the savings are, where they are in the bills, etc.
Make sure you have some guarantee of results before you agree to pay
them unless the amount seems trivial.
Case Study: Telecom
An accounting firm we worked with, the 5th largest in the USA, had 800
people in one of its main offices. They had bought intelligently from their
vendors. With so many people they had economies of scale, and could use
techniques like Least Cost Routing. The result was that they had a very low
spend per employee.
What they did not have was visibility in to their costs. There was no
inventory document listing all their vendor services, what they were for,
what they cost, etc. We created one for them. With visibility we found the
following cost savings.
1. They had sufficient capacity to remove an expensive Voice T1 line, and
use a less expensive unutilized Voice T1 line they were contractually
obligated to purchase.
2. They were paying for 720 phone numbers / DIDs that they werent
aware of.
3. They were paying substantially over the market rate for international
calls.

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4. We verified the physical location of all services, and discovered they

were paying for large numbers of phone lines that were still at an office
theyd moved out of.
5. Theyd recently signed a three year contract obligating them to spend
a certain amount each month on outbound calls. If they didnt, theyd
be charged a substantial monthly minimum. However they were
making no outbound calls on those lines. We discovered that by
rerouting all outbound calls to NY State theyd be charged less per
minute and recover the money they were wasting.
6. We discovered large numbers of unused phone lines at their office.
7. They had not noticed a large discount on one bill for making outbound
calls. If they re-routed more outbound calls down the line they could
see a substantial reduction in their long distance bill.
With visibility they were able to find nearly 50% savings in their already low
telecom spend.
[To touch on health care. Health care costs go up in part because
organizations dont have ways to control:
1. Are we getting our employees the right health care? Are our
providers charging us for services that werent actually helpful? Do
employees have to go back to receive the right care?
2. How do we know were paying a fair price for the care received?
Would other providers have been better for expensive services?
Since most companies basically get charged by their insurance company
based on how much they spent last year keeping down unnecessary
health care spending would decrease one of the biggest expenses. ]
There are many areas where vendor services are hard to manage and
additional processes and expertise, supplied internally or externally, could
result in large savings without reducing service levels.
Insurance (including health)
Freight
IT Contracts
Print
Banking (Treasury, Credit Card / Payment Processing)
Private Jet Maintenance and Management
Travel and Expenses
Waste and Recycling
Office Supplies
With this guide we hope more finance and other professionals will see the
hidden opportunities to reduce waste in vendor spending.

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After noticing red flags in large vendor spends, finance can help decision
makers understand: What is the key process? What additional metrics and
information do I need? How can this be efficiently delegated? What kind of
outside help do I need?
With the right process and people in place, costs can be dramatically and
painlessly reduced in a wide variety of services spends without using up
management's valuable time.

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