Creating Resilience – Part III Other Margin Protection Options

Creating Resilience – Part III Other Margin Protection Options

Identifying Acquisition Targets

One strategy to protect and/or increase margins is through acquisitions that can contribute to financial performance. According to the Harvard Business Review (HBR), companies spend more than $2 trillion on acquisitions every year. Yet study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%. As a strategy for the resilients, acquisitions should be performed with great care with the level of due diligence necessary to avoid some of the pitfalls such as those related to strategy, leadership alignment, culture, leadership, …, etc.

A simple search of the internet will provide numerous challenges and the steps that can be taken to avoid some of the most common pitfalls. The attractiveness of a potential acquisition lies in the effectiveness of both the soft and hard due diligences whereas the soft due diligence focuses on people, customers, culture, employee compensation, supplier relations, etc., while the hard review deals with the numbers. Although some of the information associated with the hard due diligence can be found in the consolidated income and balance sheets, individual Line of Business (LOB), margin analysis may be misleading if conventional managerial cost accounting systems, as described previously, are used.

The following tools can be applied to both product/service analysis as well as to potential acquisition targets.

Needs Analysis

A needs analysis compares the customer/market needs against the features and benefits associated with an existing product/service offering or a possible acquisition target.

Creating Resilience – Part III Other Margin Protection Options

For a competitive product/service, an unmet need (e.g., Service Reporting/Tracking row) might provide justification for a higher selling price over that of a competitor’s offering for a product/service that better meets the customer/market needs. If this needs analysis applies to your own offering, a higher price, or even the current price, may not be justified if the competitor addresses this need. A similar analysis can be made of an acquisition target – an unmet need on the part of an acquisition candidate might make the acquisition lessdesirable or affect the acquisition price. On the other hand, if a feature or benefit (e.g., Local Offices column) associated with a competitive offering is required in the market, a higher price may be justified if your organization provides local offices. However, if local offices are not required in the market and your organization provides local offices, an opportunity for cost reduction may exist.

Performance Evaluation

A performance evaluation compares several possible acquisition targets based on how well they each meetweighted customer/market needs. Such an evaluation, along with a number of other factors, may help determine the fit of an acquisition. This analysis can be made for a single product/service acquisition or that of an entire business acquisition.

Creating Resilience – Part III Other Margin Protection Options

Layoffs – a last resort

As a strategy for margin protection, layoffs should only be considered as a last resort. There are viable reasons where staff reductions may be the only choice. However, if possible avoid layoffs as a primary strategy for cost cutting as the negative effects from downsizing may offset any gains in cost performance. According to the Harvard Business Review (HBR)…

Layoffs tend to increase employees’ levels of stress, burnout, and insecurity and to decrease morale, job satisfaction, and trust. Such perceptual changes are linked to greater turnover, diminished willingness of employees to help one another, and poorer job and company performance.

However, there are other strategies that should be considered for cost improvement before pulling the trigger on layoffs, just a few are listed below:

External Spend Analysis – Procurement analysts have indicated that most companies are still leaving10%-30% on the table across large expense categories. The impact of 20% savings in external spending might negate, or reduce, the need for layoffs. Spend analysis begins by segregating costs into non-controllable and controllable costs…

Creating Resilience – Part III Other Margin Protection Options

…then apply a number of strategies to reduce external spend and remember that expense are not paid severance:

  • Understand leverage - % of the vendor’s revenues
  • Set price reduction targets
  • Identify competitive alternatives
  • Reduce vendors – increase volume
  • Assess quality
  • Review specifications (loosen/tighten)
  • Standardize products/services
  • Standardize/approve vendors
  • Balance service and costs
  • Establish long-term vendor relationships
  • Share savings – partner with vendors
  • Consider vertical integration
  • Analyze make vs. buy

Hiring Freeze – a hiring freeze coupled with natural attrition might negate or reduce the need for layoffs.

Reduce Outsourcing – become more vertically integrated. Case in point, the Legal department of a major corporation, under a directive to reduce headcount rather than overall expenses, outsourcedstandardized work once performed internally, to a legal firm charging a significant hourly rate. The result was nearly $1 million more spending in excess of the savings from the headcount reduction.

Hire Talent to reduce contractors – hire employees necessary to reduce the use of more expensive contractors.

Reduce/Eliminate Overtime – overtime should be aggressively restricted and approved only by top management.

Consider Top-Management Compensation Adjustments – such a move demonstrates to employees that management is part of the solution, sensitive to the pain that they and shareholders might be experiencing and are willing to take the necessary sacrifices.

Reduce Travel Expense – encourage the use of virtual meetings as they have become more routine since COVID.

Freeze Raises & Bonuses – institute such freezes for highly-compensated employees as an alternative to layoffs – could possibly contribute to natural attrition.

Reduce Unproductive Employees – if reductions are unavoidable, rather than “across the board” cuts that punish managers that run a tight ship, identify employees that are redundant, do not add value, and/or are toxic to employee morale.

Organizational Structure – the organizational structure plays a key role in financial management and the following should be considered with regard to improvement opportunities:

  • Centralization vs. Decentralization. There are advantages and disadvantages associated with the structure of the organization. A decentralized structure is more responsive to market changes that require quicker decision making but carries greater costs due to functional duplication whereas a centralized structure where functional responsibilities are consolidated are more cost effective but are more bureaucratic and less responsive to market changes.
Creating Resilience – Part III Other Margin Protection Options
  • Functional Overlap & Duplication. Look for areas in which multi-departmental efforts are required where consolidation may improve both costs and performance.
  • Activity Fragmentation. A high ratio of the number of employees as compared to the full- time equivalent (FTE) content associated with an activity is highly fragmented and a significant contributor to poor performance for which improve performance can be achieved by consolidating the activity across fewer, more specialized, employees.
  • Non-Mission-Critical Work and Staff Utilization. Examining departmental activities to pinpoint non-value-added work and identifying highly-compensated employees working below their grade level that can be a lucrative opportunity for improvement – having people do more of what they should bedoing and less of what they should not be doing is critical to financial and operational performance.

Keep in mind that if layoffs are unavoidable, the work content must be eliminated before layoffs are instituted so as to avoid over-burdening the remaining staff which will reduce productivity; financial and operational results; and create stress and burnout that will impact long-term performance.

Growth is a tenet of building resilience and growth cannot be accomplished without resources, the source of which can be accomplished by freed resources from product/service divestitures.

Read Part IV

Identify your path to CFO success by taking our CFO Readiness Assessmentᵀᴹ.

Become a Member today and get 30% off on-demand courses, tools and coaching!

For the most up to date and relevant accounting, finance, treasury and leadership headlines all in one place subscribe to The Balanced Digest.

Follow us on Linkedin!