Cost Creation
Your Undiscovered Talent?
By Stephen Underhill

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Note : This article presumes your primary business purpose is to make profit.

Firstly, let's establish something of relevance. Intangibility is directly proportional to lack of interest, lack of ability and quite commonly ... sheer laziness. All too often 'Intangibles', or things put in the 'Too-Hard Basket', simply need a little more effort and some creative analytical skills to become part of business day-to-day reality. Intangible expenses normally relate to the cost of wasted time. Although not always, this formula is often quite accurate:

Intangibility + Careful Analysis = Tangibility

The article is about costs, something dear to your business heart. We're all in the game of maximising profit and reducing costs is key. 'Reduction' infers measurability. This is where we fail ourselves; we label many business-operating costs 'intangible' (of course we know they're real), have nightmares over the question of analysis, shut our eyes and hope the issue disappears. It's just all too hard.

Take cost-creation a step further in either direction. How much does your organisation cost your suppliers, or your customers? Or does this not concern you? Many business managers focus internally, but forget their external stakeholders and what it actually costs them to do business with you. Have you ever asked them? Remember, all business-related costs (internal & external) can be measured, controlled and reduced where necessary, although at times, a bit of lateral thinking might be necessary.

There are many reasons why repeat-business (either as a supplier or a customer) occurs. The obvious ones are the 'right product' at the 'right price' and no real cause for change. After all, by definition, to change anything creates some element of cost. But dig a little deeper, often business relationships change for no obvious reason, or for reasons unapparent to one party.

Business relationships must be win-win , for any chance of longevity. Forget the niceties, this means profit-profit in mutually acceptable proportions. It's the closer inspection of dealings with business associates/partners, something that can be somewhat time-consuming, that often reveals a very different picture from that first apparent.

Ask yourself:

Many intangibles simply consume time. A basic approximation method of establishing an average hourly cost per employee is as follows:

Calculate: Total Annual Expenses before Income Tax minus Total Annual Production-Purchases Expenses (the cost of direct-materials-except-labour/products for manufacturing, or the cost of goods purchased for resale). This gives you a total expenses figure for all expenses except those directly inputted into your saleable products.

Divide this figure by: a) Average staff numbers throughout the year

then by: b) Number of operational weeks per year

then by: c) Average number of operational hours per week

Example: Total Expenses pre Income Tax = $3,500,000

Total Production/(COGS) Expenses = $2,100,000

Average Staff Number = 18

You operate 51 weeks/year

A normal operational week is 45 hours

Eg. Average Staff Cost (including ALL OVERHEADS) is:

$33.89 per hour

Food for thought no doubt. If each one of your employees unnecessarily wasted an hour each day, use your own figures and the annual total will certainly surprise. Now, how is your organisation affecting your customers and suppliers? Their time and effort is also money, possibly yours! Perhaps you may be too expensive to do business with? And it's nothing to do with your product price.

Flow-on effects are difficult to determine, but they're as real as the initial problem. Any original intangible 'effect' will never remain insular; other areas of the organisation will be affected, with the associated cost on-flow. Awareness of this is essential.

The following points are in no order of importance. Priorities will vary between organisations depending on problem severity, and the resulting effects on your customers, suppliers and your own organisation. Many apply to both sides of a business relationship.

Contact Ability : (or should be contactability?)

Essential personnel (both parties) involved in any business relationship must be reasonably contactable. Avoid extended delays, difficulties in ascertaining the most appropriate person to deal with, the whimsical passing of responsibility, and dead ends. Many potential customers go elsewhere immediately on receiving this sort of treatment. First impressions count.

Process & Product Documentation :

Not only does inaccurate documentation lead to delays, ordering & product anomalies, and delayed payments ... we are now in the era of litigation. Legal loopholes abound when documentation is flawed.

Product Compliance :

Ensure your salespeople don't promise and claim benefits that may be difficult to deliver. Not only do 'unknowns' surprise, they upset customers, create unnecessary negative dialogue and 'cost' all parties a great deal of time.

Product Failure Rates :

Customers buy your product to use, often within their business. How financially dependent they are on your product, you may not fully understand. How much of an integral part of their process is it? What are the effects when it fails; per hour; per day?

Delivery Delays :

What was the stated delivery time? Your customer has taken your word (contracted in writing?) and begun their processes. For it to change unexpectedly will have financial ramifications and process-flow-on. Often, the problem is compounded by the seller's planned reluctance to impart bad news until it is absolutely necessary. As soon as a delay is likely, the customer must be informed.

Support Performance :

Look at your complaints department ... no, look at your entire organisation. Is the culture customer-focussed? You can do without the "not my problem" attitude. Problems need to be solved, not patched. Your organisation is judged by how it deals with issues, not whether it has them or not. Unfortunately, this is the area where many companies cause their stakeholder's grief, stress levels increase and a lot of time is wasted.

Service Time :

Taking a product out of service may cause a decrease or cessation in a manufacturing process. What does this cost your customer? Decrease the repair time by a day (or a week), and it will be appreciated as well as decrease your customer's losses. Do you offer temporary replacements?

Errors/Rework :

It's estimated that re-work to completion costs 5-10 times the original cost. Now (if applicable) add the expenses of your customer or supplier as a result. This applies to all areas of your organisation.

Payment Performance :

Delaying the payment of your creditors an extra month is good for your pocket. But it's bad for your supplier's profit line; your reputation, possibly your credit rating and it certainly won't help when other suppliers ask for credit references. Unnecessary obstacles begin to hinder your business operations. It all costs in the long run. 1-2% per month is a good approximation of the interest value, then add usage and convenience value of having the cash in the bank ... yes, delaying payment of $100,000 for an extra month may be worth $5,000 to you and -$5,000 to your supplier.

Considering this, it's hardly surprising that your debtors like holding you to ransom over the slightest issue. It might be in the documentation, the product might have a problem, delivery may have been delayed and then there is the often-used excuse of only doing cheque-runs once a month. If debtors want to pay you, a cheque can always be drawn, and it doesn't take weeks to find the appropriate signatories.

Reputation/Image:

It's true, people gossip! Your organisation is talked about in the marketplace. Whatever the comments concern in regards to your company, there will be both good and bad things said. Don't be so naïve as to think they balance out. It's human nature to often only casually listen to positive comments, but pay particular attention to anything negative. Excuse the cliché, but bad news travels faster and further than good news and 'wildfire' isn't a term normally associated with good news!

Comments made might only concern things that are easily rectified i.e. some of the issues mentioned within this paper, but if rumour and hearsay persuades potential customers against approaching your organisation ... you can count the cost. How much 'pre-lost business' don't you know about?

It has to be understood that all of the above cost-producing activities are totally in your control and although many seem intangible at first, I can assure you that they are all quite tangible, and serious parts of your business. Considering that new business is about 3-5 times more difficult to secure over business from your existing customers, and the costs associated with developing a new supplier relationship are quite high, is it really worth the gamble not to seriously ensure a win-win scenario at all times? And I mean "at all times", not just for appearances sake when a sales transaction is imminent.

Promises are fine, but they must be lived-up-to. Again, excuse the cliché, but it's always better to under-promise and over-supply, than vice versa. It's actions that count, not guarantees, and the most dangerous customer (industry gossiper) is an unhappy one. Who knows what damage they might cause?

A business relationship, like any relationship between people, needs to be continually worked at. It isn't easy to maintain a company-wide culture conducive to long-term, mutually-profitable business dealings. Sure, the lunches, gifts and sailing days are gratefully accepted, but they are not the crucial ingredients; they are simply the added very-transparent sweeteners.

Never lose sight of those rather important, very tangible 'intangibles', that won't ever "just disappear" no matter how much you try to avoid them. They are real, and biting hard!

Remember, you pay for what you get. And if your only concern is the purchase price ... good luck! All you'll get is the product.

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About the Author

Steve Underhill (MD - Business Rationale) is a business consultant dedicated to helping SME's (Small-Medium Business Enterprises) understand more about business techniques. Download his E-Book 1000+ Free Business Tips & Ideas and also take a look at the many Other Products that are available from Business Rationale.