Is your business costing you?

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A guide to reducing operating costs

Issue 1: Property and Premises

Expense Reduction Analysts

Introduction

Occupying, running and maintaining property is one of the largest areas of expenditure for any business.

Whether you lease a state-of-the-art city centre HQ, own a commercial unit on an outof-town business park or manage a multi-site estate across the country, the cost of your business premises will be a significant overhead. But the largest overheads can also offer the most potential for savings. As company directors come under increasing pressure to reduce costs, this guide aims to provide a range of practical advice, examples and market intelligence from experts in the field to help ensure your business is generating, not costing you, money when it comes to property and premises.

It includes tips and advice on the following areas:

Energy and utilities are you maximising your chances of getting the best deal on energy prices? Legal and finance do you understand the terms under which you occupy your property and are you up to speed with the latest tax developments? Building, plant and facilities are you getting value for money from your building services suppliers?

02 Introduction

Energy and Utilities

The dynamics of the utility markets present an ongoing challenge to businesses large and small, says Neil Middleton, and there have been fundamental changes in the way energy is bought and sold in recent years. It is therefore essential that companies take a focused approach to energy procurement.
1 Show me the money
Whilst it is important to make sure suppliers are not building excessive margins into their offers when negotiating energy deals, many clients are not aware that it is actually the wholesale cost of the energy component itself which now makes up 70 per cent of the end price. With energy prices now fluctuating on an hourly basis, constant monitoring of the market and careful timing of renewals is the key to making real savings.

3 Effective portfolio management

One method of keeping better control of your energy costs, as the markets fluctuate, is to take a proactive stance towards managing your portfolio of contracts. Particularly important for clients with multiple sites, are simple initiatives such as ensuring that all contract renewal dates are aligned and implementing a consistent contract across the estate which can reap benefits not just in terms of cost but also internal admin/ accounting resources.

2 Timing is key
Traditionally, energy prices have been negotiated in the weeks running up to a contract renewal. However, given the volatility of the markets, the most competitive rates are now seldom available just prior to contract renewal. In fact, it is now likely that your offer will increase in price, or even be withdrawn, the closer the deadline for acceptance comes. Clients therefore need to time their renewals carefully and be ready to make a quick decision when the time is right.

By checking and validating energy bills to eliminate discrepancies as they are generated, Expense Reduction Analysts can save between 3-5 per cent of your energy costs. With Office of Government Commerce calculations estimating the average cost for a company to process and pay an energy bill at 65, this represents a saving of between 1.95 - 3.25 per bill.
Energy and Utilities 03

Property and nance

In testing economic times, both tenants and landlords have much to gain from a review of the terms of commercial leases and a creative approach to building occupation, says Paul Giness.

1 Box Clever
Despite Government attempts to the contrary, most commercial leases still provide for upwards-only rent reviews so tenants need to find creative solutions to their rental commitments. This might include reviewing your present needs and finding ways to remove excess liability or create value.

3 Break out
Break clauses allow parties the opportunity to exit a long-term lease ahead of time or to renegotiate better lease terms. However, particularly in the current climate, these can present a significant risk to landlords who suddenly find themselves saddled with the liability of servicing finance cost and no income for an uncertain period. As a tenant, you can add value to a landlords lease by suggesting the removal of a break clause in return for a cash flow advantage such as a rent-free period or reduced rent.

2 Its good to talk

Its not just tenants that will be looking to achieve greater certainty and control over their finances; landlords will also want to manage the risk of their tenants defaulting or vacating a property. With shortening leases, rental values and overall demand falling, timing is key. Tenants are in a strong position to negotiate an exchange of goodwill with a landlord, which can deliver benefits to both parties.

04 Property and nance

A client in Kent was reluctant to move out of an inefficient, partly used building because of potential dilapidations costs of 145,000. Through negotiation with the landlord, Expense Reduction Analysts were able to identify a no-cost exit route based on the redevelopment potential of the site, which reduced the dilapidations to nil, allowed closure of the office and secured wider business benets and cost savings for the client.

Expense Reduction Analysts estimates that the removal of a break clause or an extension of an existing lease is a signicant cash ow benet to many businesses.

4 Avoid Empty Rates

Tax relief for commercial property owners and occupiers with vacant units was significantly reduced in April 2008. However, there are still ways to mitigate the additional cost of an empty, or partially empty building. Consider a short-term let to another commercial tenant as this reduces outgoings and, following the subsequent vacation, it may be possible to re-apply for further empty rates relief. Furthermore, the rating assessment can be split into smaller unit sizes that will benefit from exemption if vacant. Further scope to avoid empty rates charges is possible through charitable occupations or by declaring that the building cannot be occupied, perhaps because it is in disrepair or is not yet complete.

5 Check your rating assessment

The rateable value of your property is revalued every 5 years with the latest Revaluation effective from April 2010. This exercise is carried out by the Valuation Office but dont feel you have to accept it without question. Theres every opportunity to appeal your rating assessment if you believe it is incorrect and, if successful the saving could benefit your revised liability over the full 5 year period up to 2015. Some regions are experiencing large increases of up to 100% and if companies are concerned about the impact on their revised bills, Expense Reduction Analysts can provide a budget forecast.

Due to individual site circumstances, it is always recommended to take professional advice before taking any action of this sort.

Property and nance 05

Building, plant and facilities management

The scope of the FM function is ever-widening as regulatory demands increase and budgets come under pressure. FM professionals are having to do more with less, says Ian Morrison, and, as a consequence, value for money from suppliers is the order of the day.
1 Knowledge is power
Too often, management of the effectiveness of a companys FM function relies on anecdotal evidence rather than hard facts about supplier performance. Its vital that organisations implement comprehensive and uniform systems for the measurement of supply chain effectiveness so that accurate data can be collated and meaningful decisions made about the renewal of contracts.

3 Get more for your money

Every building needs ongoing maintenance of one sort or another and there are savings to be made not only in the cost of materials themselves but also in the way they are procured. To ensure you get best value, consider putting in place value-added procurement solutions such as a centralised purchasing function for all sites, a supplier consolidation programme or a Vendor Managed Inventory (VMI) solution whereby a supplier might set up shop at your premises and take on responsibility for maintaining an agreed inventory of materials on site.

2 Shop around
Relationships with FM supply chain partners are becoming increasingly complex as a result of the trend towards one-stop-shops whereby various services are grouped together in one contract under the umbrella of a single managing agent. Whilst there are immediate resource benefits in dealing with a single point of contact, single source supply chains are not necessarily the panacea they seem and clients need to ensure they have full visibility of the costs and value of each individual service provided.
06 Building, plant and facilities management

In Expense Reduction Analysts experience, only 30 per cent or less of supply chain contracts are reviewed/renewed annually. This means that, in the majority of cases, suppliers are not being held to account on a regular basis for their performance and clients do not have adequate visibility of the value they are delivering.

We were able to make savings of 175,000 per annum for an agricultural client supplying fresh produce to Tesco and Sainsburys through the introduction of a VMI solution. This involved establishing local stores for vital engineering consumables at each of their sites, ensuring spare machinery parts were always available and thereby reducing plant downtime.

Expense Reduction Analysts is the worlds largest cost management consultancy and focuses on reducing non-core operating costs for private, not-for-profit and public sector organisations. Handling an annual supplier spend of millions of pounds on behalf of clients in all sectors, the consultants at Expense Reduction Analysts use their significant purchasing influence to achieve optimum value from suppliers, often successfully retaining incumbents and using expert analysis and market intelligence to combat contract fatigue. Expense Reduction Analysts has 170 consultants across the UK, as well as having global influence in over 35 countries specialising in more than 100 non-core business expenditure categories.

Look out for future issues of these cost reduction guides covering: Issue 2 Banking and Finance Issue 3 Back Office Functions Issue 4 Insurance

For more information contact Expense Reduction Analysts on: 02380 892 737 or visit our website at: www.expense-reduction.co.uk

The next step 07

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Expense Reduction Analysts

www.expense-reduction.co.uk