When you’re a Finance Director or CFO people always expect you to “have a tight grip on costs”, “rigorously pursue cost-saving opportunities” and “implement tight procedures to ensure maximum efficiency”…or at least that’s how job advertisements for Finance Directors and CFOs usually describe the role.
Of course any good Finance Director or CFO will have a keen eye on the running costs of the business. The last thing they’ll want to do is make it harder than it needs to be to create the profit the business depends on to survive and thrive.
But sometimes the need to control what people are doing to make sure costs are properly managed can be carried too far. More often than you might think, the costs of control far outweigh any potential savings the control might bring you.
I call this “spending 50 quid to save a fiver”. That’s something no rational person would do, but it happens more often than you might think.
The best way I can illustrate this is by way of an example from somewhere I used to work (no, I’m not saying where…). Most people find it hard to believe this control process was ever allowed to see the light of day…but it did.
People I use this example with tend to chuckle and say something like “that would never happen in my business”. Which is true to a point…this is undoubtedly an extreme example…but versions of this, at a lower order of magnitude, can easily be found in just about every business I’ve ever worked in.
Here’s the logic which sets a business up for “spending 50 quid to save a fiver” – if a little bit of control is a good thing, surely more control has to be better…doesn’t it?
That’s not necessarily true. There is a diminishing return from every control system and there comes a point where dis-economies start to kick in – that is the business would run at a lower net cost if it took out the costs of the control process and just let people act in a sensible manner instead.
I’m not advocating anarchy…I’m a Finance Director and CFO, after all…
Simple procedures with a proportionate level of sign-off are essential in any organisation to create a sense of order and provide a sensible level of assurance about the business having an appropriate level of management control in place.
So here’s the example from my own career…just to be clear, I didn’t play a part in designing this system and spent most of my time in this business complaining about it, but the powers that be prioritised increasing control over reducing cost, for reasons I’ll leave to your own imagination.
In this business we had to send people overseas on a reasonably regular basis to work with partner organisations and customers spread around the world. Most people would never go overseas at all. A small number of people would go overseas three or four times a year.
To be allowed to travel overseas, a staff member had to complete seven different paper forms…yes, seven…yes, paper…
Each of those paper forms had 70 or 80% the same information on them as all the other paper forms, but each also had a small amount of information that wasn’t on any of the other forms.
The form that went to the Travel Office (yes, we had one of those) had the visa details on it, for example.
The form that went to the Finance Department had the costs on it, but not the visa information.
The form that went to the Head of International (yes, we had one of those too) had a risk assessment for whichever country the staff member was visiting, but didn’t have either the costing or visa information on it.
The form that went to the Group Chief Executive…yes, they all did…had an essay on it explaining why this particular trip was necessary, even though all our client agreements specified a certain number of visits each year on a relatively fixed timescale to dovetail with our own business planning cycle back home, so none of the trips should have been a huge surprise to the Chief Executive or anyone else..
And so on, and so on…
The original idea was sensible enough. No organisation wants people incurring costs on unnecessary overseas trips willy-nilly. I don’t think any fair-minded person…including the people who had to handle multiple 7-form overseas trip requests each year…would object to that principle.
There were some sensible concepts in there too…even though the execution was flawed. For example, final approval for all business trips was given by the Chief Executive in practice, even though there was a limit in the process which said if the trip was less than £1,000 it could be signed off by the divisional head instead.
The trouble with that was most of our business was in the Far East and it took at least a week or 10 days to travel out there, do the work required with the client or partner and return home again.
Once upon a time it might have been possible to do that for less than £1,000 but those days were long gone. So, although there was, sensibly enough, a limit in place to avoid involving the Chief Executive unnecessarily, that limit was set far too low to be meaningful and in practice he got to sign off everything.
From perhaps even a relatively reasonable starting point…if I give the maximum amount of credit to those involved initially…over the years, the whole process just got out of hand.
There was a sensible solution, of course. One electronic submission which went everywhere with all the information entered only once…which, ironically, we did with other decisions in the business requiring multiple sign-offs, just not with travel requests…combined with a sensible view on what the costs of a 10-day trip to the Far East might reasonably cost would have been a good start.
However, that’s not the only downside of this process. There were some significant cost penalties from this “tight system of control” too.
For starters, in general, air travel is cheaper the earlier it’s booked. And the nature of this business was that most trips could be predicted a couple of months in advance.
But it took between two and four weeks to get the necessary “live” signatures on all seven travel forms before a booking could be made. So it wasn’t unusual for air fares to have increased in the time between the trip being requested and sign-off being received, necessitating another “go round” of the process to get a higher budget signed off.
So let’s think about this process…designed to “ensure tight cost control” and “ensure robust processes are implemented”…
We had a Travel Office to coordinate many, but not all, elements of this process. They didn’t do the travel bookings, for example…that was subcontracted to a travel agent…they just handled the paperwork.
Including salaries and on-costs, there was probably the thick end of £100,000 per year just in the costs of this department…even before a single flight or hotel was booked.
The dozen or so signatures required on the various bits of paper…some required more than one signature on them…meant that a whole range of pretty senior people were spending time scrutinising the travel arrangements for someone who, in practice, they didn’t know and had no way of fully appreciating (despite the essay-style forms in some cases) precisely why someone was wanting to arrange the trip they were being asked to sanction.
Because all travel requests ultimately went to the Chief Executive, you can bet your bottom dollar that everyone whose hands touched one of those seven forms made absolutely sure they knew as much as they could in case the Chief Exec asked a question about their particular part of the process.
In practice, there was a flurry of emails and phone calls from different senior managers to the person proposing to travel overseas just on the off-chance the Chief Executive asked that particular senior manager about the trip. He rarely did, in practice, but still…just in case…
So to “save money on travel” we had a system which required a department costing £100,000 to administer.
Taking account of all the preparation time for the seven paper forms and the multiple sign-offs by senior people, up to and including the Chief Executive, that must have cost at least another £100,000…with an opportunity cost probably a lot higher than that.
And because we tended to end up paying more for air travel than we needed to, due to the delays in making bookings which this convoluted system forced upon us, we probably dropped another £100,000 there.
This was in an organisation which, whilst by most business’s standards did “a lot of international travel” but spent less than £1 million each year on it.
When the “overhead” of running a supposedly robust process is one-third of the cost of doing the activity in the first place, that’s a sure sign the admin burden has got completely out of hand.
Metaphorically, that business spent 50 quid to try to save a fiver.
There’s always a better way than that. All it takes is an outbreak of common sense.