Growth Strategies

Attack of the Penny Savers

Small companies don their creative cost-cutting caps to shore up cash reserves and ride out the downturn.
David McCannMay 1, 2009

When Primo Water, a four-year-old maker of environmentally responsible bottled-water products, decided to trim travel costs, it took an unusual tack: public embarrassment.

Starting with the new year, Primo began producing a monthly report ranking all company travelers by their travel expenses per day on the road, broken down by hotels, meals, entertainment, and car rentals. The list is sent to group leaders, who share it with their teams.

The report evokes a healthy dose of ribbing at the water cooler — and more, says Mark Castaneda, Primo’s CFO. The strategy is apparently working; travel costs per traveler day were down 5% in the first quarter, year over year. “It’s more a way to embarrass people a bit about what they spend than to monitor every expense,” he notes.

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Primo also adopted more conventional cost-cutting measures, such as reducing head count by 10%, freezing managers’ salaries, and raising bonus targets. But the new business travel report underscores the creative microsurgical expense trimming that companies are engaged in — especially small ones, for which assorted tiny cuts can add up to something meaningful.

Even for a company that more than doubled in size last year, as Primo did, the recession and its related foibles can trigger an intense focus on cutbacks in every conceivable area. While sales continue to shoot up, thanks in part to the 2008 launch of two new product lines, the weak capital markets put Primo in a position where cash conservation is paramount. “We expect to grow another 50% this year, and we need capital to do that,” says Castaneda.

Yet in one sense, cost savings outrank growth on the priority meter. Primo has cut back on human capital, advertising, and promotional costs associated with the new product lines, a move that will limit their growth. “We want to hang on to our capital through this down cycle and not spend as much,” the CFO says.

Part of that effort was a 40% first-quarter reduction in capital expenditures compared with last year. Much of that came from reduced purchasing of the display racks, recycle bins, and back-room inventory racks Primo provides to the grocery and other retail stores that distribute its products. The company analyzed the quantity of these items and the inventory turn store by store, and found a significant degree of oversupply.

Further, just by issuing weekly reports on collections activity, as well as meeting weekly with the people assigned to handle collections, Primo has reduced its average days sales outstanding from 56 days to 35 days in a mere five months’ time, notes Castaneda.

Like every executive interviewed for this article, Castaneda acknowledges that many such cuts would have been good ideas notwithstanding the recession. “It’s back to basics, but this is stuff we should have been doing all along,” he says.

Driving a Hard Bargain

At MWW Group, a 225-employee public-relations and marketing firm, one of the biggest changes on the cost front was in its attitude toward its vendors.

Seth Rosenstein, MWW’s finance chief, says he went to all the vendors the firm deals with from an operations standpoint — providers of everything from telecommunications and travel to printing and carpet cleaning — and demanded a rate reduction of at least 25%, threatening to switch to their competitors if they didn’t comply.

Rosenstein had not appraised the competitors to determine if that would be a viable plan, so the threat amounted to a bluff — but one that the suppliers did not call. “Every one of them gave us revised rates,” he says. The move saved “several hundred thousand” dollars.

MWW saved another big pile of coin by shedding many of its contracts with car services and directing employees, when possible, to use self-drive cars from ZipCar. The company provides low hourly rates and abundant pickup and drop-off locations in the 13 major metropolitan areas where it does business. Using ZipCar, plus a reduction in nonessential car usage, will put $150,000 on MWW’s bottom line this year, according to Rosenstein.

Moving down the savings list, the firm also has cut down on the number of seats it buys at the many charity events it attends with clients that support nonprofit organizations. Many of the seats it does buy have been reduced in price, so overall spending on these events has fallen 40% this year.

And a decision to stop providing free sodas and juice for staff is saving $1,200 a month just at MWW’s New Jersey office. “Our revenue is a function of our clients’ budgets, and they’ve cut those budgets, so we needed to react to that through our operating expenses,” says Rosenstein.

This, That, and the Kitchen Sink

Joe Money Machinery, a regional dealer of heavy construction equipment with five locations in the Southeast, has been hard hit by the steep falloff in building that has accompanied the recession. The flow of economic stimulus funds from the government has improved the company’s outlook somewhat, but CFO Ron Box is not easing his soup-to-nuts vigilance on costs.

Common types of savings have come from reductions in salaries and workers’ hours, cutting in half the 401(k) program employer-match percentage, and debt retirement that will save $85,000 in interest expense this year. Then the creativity starts. “We took the attitude that no savings were too small to be worthwhile,” says Box.

On a credenza in Box’s office are two remote scanning machines provided by banks where Joe Money has accounts. The devices allow users to make deposits from their offices by scanning checks. Some banks started offering this service for small and midsize companies a few years ago, but usage is still relatively low. Box thinks the recession could change that: he says that after netting out nominal transaction fees for making the remote deposits, he’s saving about $1,500 a month in transportation costs and lost productivity that come with sending employees to make in-person deposits. Scanning checks directly into a bank account also dramatically reduces delays in the availability of the funds, Box notes.

Another couple of thousand dollars in monthly savings comes from Joe Money’s decision to cut loose most of the uniform services that each week picked up the uniforms the company’s 85 mechanics had worn that week and delivered freshly laundered ones. The company purchased its own shirts for the mechanics, told them to wear jeans, and provided a small clothing allowance in exchange for the employees doing the laundry themselves.

Other savings have come on the IT front. For one, the company has consolidated its computer servers. “We had developed server sprawl,” says Box. That comes from adding servers to handle the load as existing servers near their capacity; over time, they become redundant to some extent. Reorganizing all the server functions into a more efficient setup has allowed Joe Money to retire two older servers that cost an average of $1,000 a month in repairs. The more-efficient servers also use less electricity.

Box also directed that when a workstation or desktop computer fails, it be stripped down for parts instead of junked. There is now an inventory of spare parts, and when new computers are needed they are assembled from the parts rather than bought new. “We haven’t had to buy anything at all in some time,” he says.

A bigger coup came from renegotiating the company’s general liability and umbrella insurance premiums, based on its now-lower revenue, with $20,000 falling to the bottom line.

The Bull by the Horns

Not all cost-saving activities are emanating from the C-suite. In a recent survey by the Institute of Management Accountants and Ajilon Finance, 59% of the 600 participating accounting and finance professionals said they are spending more time on cost-cutting initiatives as a result of the financial crisis.

IMA’s chairman-elect, John Brausch, is a vice president and property-operations controller at Edens & Avant, a developer and owner of 134 shopping centers on the East Coast. There, an aggressive program to reduce bad-debt expense was entirely devised and implemented by the company’s accounting organization, he says.

The program involves several elements. One is training property managers on making collections from shopping-center tenants, who pay rent and in some cases a portion of their sales above a certain threshold, as well as a share of the expenses for maintaining the center.

Another aspect of the program is an increase, “by a factor of three or four,” says Brausch, in meetings with both property managers and with tenants. Personal contact with the tenants is vital in these days of regular bankruptcies and liquidations by retail companies that rent space at malls. “Some of them are leaving in the middle of the night,” he says. “We want to make sure they remember us when writing their checks early on rather than when they’re dividing what’s left among their creditors.”

A particular urgency is attached to getting the payments for shopping-center upkeep, which are billed to tenants at year-end. Some real estate companies might drag out the process of collecting those funds for six months or more, Brausch claims, but Edens & Avant now makes sure to get it done in three months.

The accounting department also pushed through a quarterly bonus for property managers who are in the top quartile in extracting cash flow from tenants. This, along with the other steps, has “really impacted our ‘days to cash’ metric — how long it takes to turn billings into cash,” Brausch says, though he declines to quantify the results of the bad-debt-expense program.

Meanwhile, Edens & Avant is saving 15% to 20% off its expenses for property operations this year by moving to regional and systemwide contracts for services such as security, landscaping, lighting, porterage, and cleaning. Previously, such services were arranged on a property-to-property basis.

Qualities of Leadership

Innovation from the ranks is a hallmark of companies that are cost leaders — but something that too few strive for, according to Jonathan Schiff, an independent consultant to CFOs and a professor at Fairleigh Dickinson University. “If you look at the most recent studies from Harvard, most of the best innovations don’t come from leaders, except odd ducks like [Apple Computer’s] Steve Jobs or [Oracle’s] Larry Ellison,” says Schiff.

Many top executives, he adds, make the mistake of issuing cost-reduction mandates and then not paying much attention to how they’re being addressed down through the organization. “You can’t be an aloof leader and expect people to really dig deep — analytically, intellectually, and emotionally — to achieve cost leadership.”

The most sophisticated cost leadership is rarely made public, Schiff says, because it directly relates to competitive advantage. For example, he notes, auto companies tear down their competitors’ vehicles to find out, say, how cabin-noise level was lowered and estimate the cost of achieving that. The resulting competitive insight can have dramatic cost impacts that aren’t visible to company outsiders, Schiff says.