Pivoting your cost base to respond to coronavirus COVID-19

by | May 12, 2021 | Insights

Opportunities to reduce indirect costs to ensure that schools survive the economic crisis caused by COVID-19

Many private schools are now facing dramatic changes to their economic models as a result of the COVID-19 pandemic. Online learning is becoming the new norm, parents are facing unprecedented challenges to pay school fees and secondary income streams such as swim schools and gymnastics clubs are being cut-off. The changes have been abrupt, but plans are now being put into place for the new normal. The next question is how to achieve cost reductions to align with the new normal and the economic recovery ahead. Reviewing indirect spend via external suppliers presents a number of opportunities to directly impact the bottom line. ​ Unlike sales initiatives where $1 of additional sales income may result in 5 to 10 cents of extra profit, savings from supplier purchasing goes directly to the bottom line. $1 saved results in $1 of extra profit. Five targeted opportunities to reduce your indirect cost base:
1. Understand your indirect spend profile 
A quick way to assess your indirect spend profile is to assess spend by external suppliers. Running a GL journal for 2019 by supplier and analysing on a Pareto basis (the 80/20 rule). Ranking the suppliers by spend and focusing in the top ones which represent 80% of the spend. Then assigning to spend categories such as utilities, maintenance, capital works, insurance, marketing, subscriptions, travel, cleaning, security, catering, IT, telco, printers, buses, sports, outdoor ed, performing arts, OSHC, other general expenses, etc.  While many of these services are often provided by external suppliers, some may be in-house operations run by school staff. For example, in-house maintenance and gardening teams, cleaners, caterers, etc. These should be assessed as well, although short term changes may be more difficult. 
2. Assess avoidable costs
The immediate period when school campuses are largely closed to students presents a short term cost saving opportunity by identifying costs which are avoidable. For example, reducing energy usage to reduce power bills by consolidating classrooms and offices to save on air conditioning and lighting, and focusing on heavy uses of energy such as pools, assembly halls and gyms. Assessing how areas of the school be reduced to a hibernation mode. And working with suppliers such as cleaners, buses and catering to curtail services where no longer needed. Taking a partnership approach to suppliers is often important. While some purchases are transactional, others involve longer term relationships. In many cases it’s in the school best interest to ensure that suppliers survive the crisis and are there to support the school when needed.In some cases, it may be important to ensure that certain individuals are retained by the supplier through the closure period.  ​ Having an open discussion with suppliers about their particular situation and commercial model can often uncover an outcome better suited to both parties. This may involve a review of their unavoidable costs and their plans to retain and support their workforce. In many cases the suppliers may benefit from government COVID-19 funding packages such as JobKeeper, Childcare or Boosting cashflows for SMEs, and potentially rent relief or bank loan repayment deferrals from banks. 

3. Consider immediate cost saving opportunities 

There are several areas where immediate cost savings can be achieved for the medium to longer term. In terms of electricity prices have dropped significantly over the past year and the outlook for 2021 is even better. Government incentives for energy efficiency programs such as LED lighting are currently very attractive with a 2-4 year payback, however the scope of these incentives will be dramatically reduced after October 2020. Rooftop Solar PV systems also offer an opportunity for cost savings while achieving sustainability credentials. Financing options are available which avoid the need for upfront investment by the school while achieving immediate cost reductions. Significant savings in other categories are often achieved through a competitive tender process or benchmarking existing suppliers. Whilst cost is a key outcome in the current economic climate, it is critical to ensure that service levels and quality is not sacrificed in the process. This can be achieved by developing a thorough understanding of the school’s needs and selection criteria, and running a robust procurement process with pre-qualified suppliers.

4. Take advantage of bargains resulting from COVID-19 

Many businesses are seeing their sales drop off a cliff as the economy is put into lock down. The closure of offices, factories, clubs and restaurants, and cancellation of events are causing widespread impact. Corporates are focused on saving every penny and delaying capital expenditures to ensure they survive the storm.

As a result of steeply falling demand, many suppliers are offering major price reductions. These are particularly noticeable in businesses with high fixed costs, high inventories, foreign exchange exposures and exposure to industries where closures are widespread. One example are the printer companies who are seeing a dramatic reduction in corporate sales. So prices offered to schools are even more attractive than in recent times where reductions of over 30% were common.
5. Benchmarking to keep suppliers honest 

Benchmarking assessments is another effective way to extract additional value from existing suppliers while avoiding the disruption or risks which may be caused by a change of supplier. Often there is loyalty and trust with existing suppliers, but schools are uncertain as to whether the pricing is competitive, or the processes represent best practice. In some cases, suppliers become complacent after years of service and may not be delivering the expectations at the start of the contract. How can you ensure that you get the A team working for your school?

Benchmarking can address the balance between service and costs. Understanding how services can be improved to address previous issues and better suit the needs of the school and considering where processes could be re-engineered to improve overall efficiencies.

This can involve conducting feedback surveys with staff and students, visiting other schools and assessing best practices from other suppliers.Then working with the supplier to prioritise opportunities for improvement and to determine how best to ensure a successful implementation.

For example, a catering service can be enhanced mid-contract by re-tuning the service offering to suit the needs of the school, or changing the management structure or personal on-site. A printer service can be enhanced by introducing software for follow-me printing, or restructuring the manpower and process flow in print rooms.

Conclusion 
While the COVID-19 crisis is challenging the operating model of schools, there are significant opportunities to work with the supplier base to position schools to survive the crisis and the resulting economic fallout. Pivot is a new buzz word. By being agile schools will be able to pivot their cost base and improve the well-being of their operating model.
Alister Danks
Principal, SchoolProcure, a division of GPS Learn More

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