Why schools should consider a cost management approach
Ruth Cohen interviews Grant Morrow, Principal Consultant from Expense Reduction Analysts. Grant has a number of clients in the education sector, and his experience together with that of colleagues in the Eastern states has led to this informative interview exposing the flaws he has seen in the internal cost management of many schools’ expenses.
Should schools review their cost?
Most definitely. Schools are now being run as businesses, and cash flow is critical. Any change in student numbers will bring about a significant change in their funding. To keep their fees down, a lot more schools are starting to review their costs on a more regular basis.
Despite saying that, in the past 12 months I have met with a lot of Finance Directors from private schools of varying sizes. I have come away with the same impression from many of them that they mostly think they are getting the best deal on their overhead costs. Although, I did meet one Finance Director who admitted he didn’t know how competitive his buying was and that he couldn’t stand in front of his board and confidently tell them that they were competitive.
One of the softer outcomes of a cost review is a visceral understanding of the details of their spending—clarity as to who is making the purchases, and where purchases are being made. That information can then be compared against any existing contracts or school policies.
I can probably hear the outcry now that “we don’t have time”, I suggest that it may well be more than worth the time.
How do schools know if they are cost competitive or not?
That’s an excellent question. There are some ways that schools, just like every other business, can tell how competitive they are.
For example: when reviewing categories for large dollar spends, schools should consider tendering or requesting an RFP from 3 to 4 suppliers to ascertain competitiveness in costs, but also service. Price isn’t everything, and it's more about getting a competitive price comparison for the services and goods required.
Most private schools belong to a larger organisation, and through that association, they should be able to benchmark some of their larger cost categories. Despite this, I am not sure it happens too often, and the real challenge with this is to make sure that you are comparing like for like.
Ensure you are monitoring prices in the market on a regular basis and comparing to what they are paying, if you find that you are consistently paying over the odds then I would talk to your supplier. Sometimes the group deals are not as competitive as they should be.
What are some of the cost areas that schools should consider?
Anything is fair game, but the significant costs take on a more critical role so that I would start there or those where any contracts or agreements are about to mature.
For boarding schools, catering seems to be one of the most massive single costs. Regardless of whether you have an “in-house” or a “fixed cost” approach we have seen significant savings in this category.
Depending on the schools, transport or bus costs are another area that contributes to a significant portion of costs. A deep dive into this category can also lead to substantial savings, or if the school has their bus transport, a more informed strategic approach to the combination of internal and external bus use can be designed.
Then there are the traditional areas such as office supplies, a quite separate category, but again if schools are willing to take the time and break down each of the individual segments there are opportunities available, probably not large individually but together they can lead to significant savings as a category. For example, we looked as purchases of pens and what we found was the spend on pens varied from $0.19 to $5.32 per pen, depending on who was purchasing the pens and where they were purchasing them from. People have their pen preferences.
Really all costs are an opportunity to make some savings if schools are willing to do the necessary analysis.
What are some of the areas that you have seen that are worth a look at?
There are savings to be realised from process improvement within the finance departments. In one instance we did some rough calculations and estimated we were able to save 4 hours per month in processing invoices from just one supplier. Many suppliers invoice multiple times per month. If we can consolidate those invoices into a once per month approach, it will lead to less work for the embattled finance department, and they can allocate that time to other more productive activities.
Another large spend we looked at was toilet paper and paper towels which is a considerable spend for most schools. In this instance for hand towels when we broke it down to a sheet basis, we saw a 40% difference between the costs in the two different specifications of paper hand towels used where the use was split about 50/50 between the different grades. For toilet paper, the difference wasn’t as large but on a per roll basis was still significant between the various specifications of paper. It’s worth a look.
So, what I am saying is that by doing the analysis you may unearth sayings from anywhere.
Another aspect that I found interesting was that, just because it is a large school, it doesn’t automatically mean that they are getting the best price. I have seen instances where a smaller school is getting a better deal on white photocopier paper than a school twice as large. It backs up my comments around benchmarking with peers.
Are there any other tips that you have for schools?
One of the simplest things schools can do is track and compare their costs over a period. This may expose some significant anomalies in what schools have been charged that previously went unnoticed.
What I always do is look at prices over the calendar year, and that gives me a good feel for how prices have evolved. Another recommendation is to break things down to a single unit or like for like basis to ensure a proper comparison.
For example, on the bus hire analysis, we took it down to a Km basis and then we were able to compare trips that fell within a similar distance albeit to separate destinations. Another example was in the case of paper hand towels as previously mentioned, where we broke it down to a per sheet basis that allowed us to compare different pack sizes, various specifications and different suppliers.
Another example, when looking at the costs of pens, we broke each purchase down to a per pen basis, and this allowed us to do a like for like comparison between different pack sizes.
Do you have any recommendations for school Finance Directors reading this interview?
Thanks, Ruth, I guess from my experience some of the recommendations I would suggest are:
Review your costs on a regular basis, even if it is each one on a rolling basis.
Monitor and track your costs over time for individual categories
On larger category spends to make sure you have some transparency on your expenses. Consider setting KPIs that you can measure your supplier’s performance against.
Request regular reviews with your supplier, don’t wait for them to come to you.
Try and benchmark your costs with your peers on a regular basis
For the huge costs, if you are not confident or don’t know enough about the category then engage someone like Expense Reduction Analysts, who does!
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