Getting a line on cost control

While companies ramp up their compliance practices, CFOs have to find cost savings in other departments. Communications costs are an excellent place to start

By Stephen W. Massel, CMA, CA

CFOs are under new pressures right now, managing compliance issues and corporate governance reforms. At the same time, they are providing management with information to make the best business decisions — to manage risk, set strategic directions, and forecast accurately, all while enforcing controls,  increasing transparency and meeting new accounting standards.

Not surprisingly, finance and accounting costs in most companies are increasing to deal with the added complexity of new compliance controls. For instance, it is estimated that companies with revenue of $1 billion shoulder, on average, an incremental cost of $1 million in year one to comply with the Sarbanes-Oxley Act alone. This is a direct hit to earnings before interest, taxes, depreciation and amortization (EBITDA). The question then is, what savings can we find to offset these added costs?

The cost reduction/savings mandate continues

CFOs want to aggressively control expenses regardless of how the economy performs — it is the nature of our work. Over the years, we’ve done a good job of controlling direct expenses; witness supply chain management systems, enterprise resource planning systems and other processes that have increased efficiency and driven down costs in ways that we now take for granted.

What we haven’t been doing as well is controlling indirect costs. This is because indirect costs are a smaller cost in relation to direct expenses, are notoriously difficult to identify, categorize and control, and the technology hasn’t been there to solve the problem. Without the technology, we haven’t had staff resources to dedicate to the problem.

Yet, reducing indirect expenses is as important as finding new sources of revenue. The challenge is finding indirect costs that can be effectively managed now. Controlling communications costs, for instance, is now at that sweet spot where it should be more manageable than was previously possible.

Controlling communications costs would be a new area of oversight for many CFOs. The telecom market is competitive and complex, and because of this, most CFOs don’t know the marketplace or have had the opportunity to learn how to effectively manage communications costs. As few as 2% of CFOs are effectively managing their communication expenses; and approximately 7-12% of communication service fees paid are billed in error.

The time is right to change this scenario for a number of reasons. First of all, long distance use, calling cards, phone and Web conferences, data networks and especially largely uncontrolled wireless use are driving communications costs. Costs are rising quickly because of spiraling usage, even though rates are falling. In fact, the falling rates often create the illusion that expenses are falling, when a look at total spending shows that communication costs are rising  substantially.

Secondly, the technology is here to do the job. A critical mass of invoices are now available in electronic form from carriers, making it possible to introduce automated matching, compliance, reconciliation and audit for the first time.

Thirdly, there are a variety of options for managing these expenses that relieve internal financial, purchasing and accounts payable responsibilities. Telecom expense management has a potential return on investment (ROI) of less than one year.

In addition to managing current expenses, effective telecommunication management pays dividends in the future. By understanding your communications spending and your actual usage requirements, you are better prepared for contract negotiations.

Aggregate, monitor, analyze

Most companies have no single person or even a group of people responsible for the financial management of communications assets. After your data managers say “not my job” to telecommunications expenses, and your telecom people say “not my job” to data expense management and everyone says “not my job” to wireless expense management, the buck stops at your door. If anyone is going to manage this issue, it will have to be you, the CFO.

Managing communications assets is the same as any expense control function. You have to aggregate, monitor and analyze the expenses and then apply the controls necessary to succeed. You can do this through technology and process management. 

This requires the aggregation of vendor invoices. This is simplified through the use of electronic presentment of invoices either over an electronic data exchange (EDI) network or through CD-ROM disks.

The invoices are automatically entered into the communications expense management system and monitored for accuracy at this level. They are then analyzed against tariff rates and usage patterns, and also justified against both physical equipment and logical (circuits, lines, leased services, etc.) inventories of the communications system. For example, the system checks to make sure that disconnected lines are actually removed from the invoices. Prior to the development of automated telecom expense management services, this would take many people and a long time to figure out.

There are a few ways to effectively introduce communications expense management:

Software: For some companies with communications expense analysts, or a small office with staff available to monitor the process, software is the answer. Tools are available off the shelf to make the analysis of communications data more effective.

Hosted service: Hosted services involve a service company that runs the operation and delivers reports that empower the company’s staff to better analyze and manage costs.

Managed service: A company can also outsource some of the business functions involved in managing communications costs, including dispute resolution. The outsourcer receives the bills, reconciles them and provides a feed to the company’s enterprise system for approval and payment.

The time has come to look at controlling indirect costs, and communications is an effective place to start. In an increasingly communications-focused office, it only makes sense to be sure you’re getting value for money from your systems.

Stephen W. Massel, CMA, CA (stephen.massel@avotus.com) is chief financial officer at Avotus Corporation of Mississauga, ON.

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