Thank you for taking the time to visit our website. Below you’ll find instructions on how to open your money box and release the pound. We sent you this puzzle because we think it reflects how, in the current economic environment, businesses are looking to improve their bottom line in any way they can. However, many do it on their own meaning they miss out on savings opportunties. By using Auditel’s expertise and buying power many businesses have been able to boost their bottom line and save them time. We’d like to talk you about how we can help your business.

First of all, place the money box in front of you with the coin slot at the top. You need to ensure that the Auditel wording is facing you as shown below.

Before you do anything else it may help you to understand how this trick works: there is a second smaller box inside the main box. You are going to slide this second box out of the larger box. You may also find it useful to know that two of the corners of the larger box are missing. The missing corners are instead to found on the smaller box as shown below.

Next place your thumb and index finger on opposing corners of the right hand side of the box, your thumb on the near side at the top and your index finger on the far side at the bottom. Now pinch the two corners as if you trying to make the diagonal between them slightly shorter. This does not need to be that hard, but some pressure is required as you will see below.

Whilst maintaining the pinch, pull the corners of the box outwards so that the box slides out and hey presto you have your pound.

Now put the pound in your pocket.

This could be the first of many. We’ve helped many business like yours in the UK make savings and add money straight to their bottom line.

We’ll call you shortly to see how you got on with your money box and to see if you’d be interested in hearing  more about our self funding approach to cost management. Of course if you’d like to get in touch sooner for any reason please feel free to contact us.

Auditel first looked to ascertain what service they were currently buying and at what price. We also needed to check that they’d been invoiced correctly (the last 12 months invoices and the supplier contract helped to fill in much of this detail). These showed that a fixed monthly price was charged for a set number of hours cleaning. In addition there were ad hoc invoices for the supply of consumables such as toilet roll. Comparing these invoices to the contract prices showed that everything invoiced in the last twelve months had been done so correctly.

It was also noted that during the year, the fixed monthly fee had been increased substantially along with a corresponding increase in hours. This was found to be due to an additional service being sold in by the cleaning company to improve protection against swine flu.

In summary, expenditure and hours worked were as follows:

Auditel’s next task was to check whether the current level of service being provided was adequate for Daiichi-Sankyo’s needs. With the help of the incumbent supplier, Auditel put together a ‘Contract Cleaning Specification’. This document specified in detail everything that is to be cleaned, how often, and the method by which it should be cleaned. An example of what a Contract Cleaning Specification contains is shown below.

This document was important for a number of reasons; the first of which was to ensure Daiichi-Sankyo was happy with the level of service being currently provided. But it was also critical for the pitching process, as it ensured all prospective suppliers were working off the same brief. The contract cleaning specification, along with other important information (the most important being hours worked), provided the basis of the brief, and allowed the client to judge all responses on an equal basis. Finally, the document was also useful on an ongoing basis, as it set out what was expected of the cleaning company, so should they fall short it would be very clear that they had done so.

As part of this process it became apparent that the additional swine flu cleaning was the daily cleaning of all door handles, lift buttons and reception desk with an anti-bacterial spray. This was a temporary measure to run over the winter.

Recommendations and savings

Prior to briefing in other suppliers, Auditel challenged the client on the brief, in connection with the additional swine flu cleaning. Daiichi-Sankyo’s cleaning all took place in the evening as it does with most offices. However, according to the government website on swine flu, the virus can only live on surfaces for a maximum of 8 hours:

From the CDC and Flu.Gov web pages:

“The H1N1 virus is new. Research is being conducted to better understand its characteristics. Studies have shown that flu viruses can survive on hard surfaces and can infect a person for up to 2 to 8 hours after being left on items like cafeteria tables, doorknobs, and desks. Frequent handwashing will help you reduce the chance of getting contamination from these common surfaces.”

Auditel recognised that there was little benefit to this additional cleaning taking place, and consequently recommended to the client that this be stopped immediately and removed from the brief. The client agreed.

The revised brief was given to six cleaning companies, including the incumbent. The responses were collated and presented to the client. Whilst the incumbent was not quite the cheapest, it was thought to be the best value as they were a reliable company that Daiichi-Sankyo had used for many years. As a result the client chose to retain the incumbent on better terms. A saving of 19% for exactly the same cleaning service from same people!

Taken together with the swine flu saving total annual expenditure was 28% lower than the previous year as shown below:

Client Comment: Dharmendra Lakhani of Daiichi Sankyo

‘We were initially sceptical that Auditel could make us savings in this category without there being a drop in service levels. But the provision of the contract cleaning specification was a really smart way of ensuring this could not happen.

For the 80% of businesses who buy their energy in October (the anniversary month of deregulation), the risk is very real. Prices fluctuate considerably over a 12 month period, and even more over longer periods. In the chart below, we can see that businesses buying in October would have set their price at a peak in the market 3 years out of 5. That’s a 60% chance of getting it wrong!

 Until recently only very large companies, the likes of Ford and Sainsbury’s, have been able to protect themselves from this risk, by trading on the wholesale energy markets. This allows them to buy their energy at several points across the year, thus limiting the risk of buying at the top of the market. Fortunately, the wholesale markets are now open to much smaller energy users. In fact if you’re spending more than about £50k a year then this could be an option for you.

The Basic Principle

The basic principle is exactly as described above. You purchase your energy at several points across the year in order to manage your risk, by trading on the wholesale market rather than the retail market. The charts below illustrate the difference between the two approaches. In the retail market businesses purchase their energy for the year ahead one month before the contract start date. Whatever the market price is at the time of purchase, that is the price paid for the next twelve months. By contrast, in the wholesale market businesses purchase their energy in several stages over a much longer period. Spreading the risk like this leads to a lower average price.

Lock and Unlock

This basic principle simplifies things somewhat. In reality things are rather more complex, as energy can be both bought and sold on the wholesale market. Traders refer to this as ‘locking and unlocking’. By taking advantage of market volatility it increases the opportunity to reduce the average price paid.

The above chart shows how locking and unlocking works, in both a rising and a falling market. In the first example, a rising market, energy is initially bought at point X at a price of £65 per megawatt. The market then rises and at point Y energy is sold, resulting in a net benefit of £30/MW. However, this leaves the business short of energy, so a further purchase is made at point Z at £85/MW. The overall benefit of this trading is to reduce the average price paid from £65/MW to £55/MW.

In the second example, a falling market, energy is initially bought at point A, at £65/MW. The market starts to fall, so energy is sold at point B resulting in a small initial loss. But because the market continues to fall, the repurchase of energy at point C leads to a net benefit, again of £10/MW.

But isn’t this more risky?

Clearly the above approach still has some risk – what if the dealer gets it wrong? Could you end up paying a lot higher rate than you would have done on the retail market?

The answer to this is effectively no. The probability of it happening is so small that it can be ignored, for a few reasons.

The first is that unlike the example above, where a small number of very large trades were made, trades in reality are numerous and of much lower value. Remember that this is a volatile market with prices constantly going up and down, offering plenty of opportunities to lock and unlock.

Also there is the concept of ‘virtual cap’. A virtual cap is the maximum price a business would be prepared to pay. In the example above where the initial purchase was at £65/MW, a business might set a virtual cap of £67/MW. The dealer will then adjust the number and size of deals to ensure that you never pay more than this. If the dealer gets things wrong and the average price starts to rise rather than fall, their scope to make further trades reduces. If this continues to happen and an average price of £67/MW is reached, all trading ceases.

Finally, it is worth pointing out that the dealers have much better market information than you or me, and will therefore have the best view on which way prices are likely to go next. Of course there is always a possibility of the unexpected happening, but that is what the virtual cap is for. This is always going to be less risky than accepting whatever price the market is offering one month before you need it.

Most businesses I speak to use a broker to obtain their insurance, and this is definitely Auditel’s recommended method. Not only will they help you understand what it is you are buying but they’ll also be able to get you better rates than going direct. However, most businesses I speak to have not done a competitive tender recently. Clearly this needs to happen if you want to be sure you’re getting the best value, but before you rush out and brief several brokers you need to be aware of how this market works.

Market Blocking

Unlike consumer insurance, you should not brief several brokers and expect to get several different quotes. With consumer insurance this is possible because the brokers do not communicate with the insurance providers until the point when they place the insurance. In business insurance however, brokers will always approach the provider before providing a quote.  What the incumbent broker may do if you are not careful is prevent you from getting competitive quotes from other brokers. They do this by approaching all the insurance providers and asking them for quotes on your behalf. Because they are the incumbent, the insurance providers will very often refuse to get involved in the politics, and offer the exact same rates should an alternative broker subsequently approach them. From this point on, it does not matter how many brokers you brief you’ll get the same prices. The market has been blocked!

To get around this you should brief one alternative broker well ahead of any renewal dates. Six months ideally, but as long as it is before you speak to your incumbent broker this should be fine. And under no circumstances should you let the incumbent become aware of you shopping around. If they get any whiff of this the market will be blocked before you can say ‘bye bye cheaper insurance’.

Does what you’re buying fit your needs?

Another benefit of briefing an alternative broker is to ensure you are buying the type and amount of cover the business needs. A fresh pair of eyes on your business insurance will at worst confirm your incumbent supplier has it right, but will often find something in the detail that needs changing. A decent broker with a sniff of some new business should be keen to find a way of adding value and building trust. A thorough audit of your current cover, T&Cs, and of course your business itself should be the least you can expect. Having helped many Auditel clients review their insurance we have found that site visits by the broker are particularly helpful as they can see what the words in the documentation relate to. When a site visit does take place it is unusual not to find something that needs changing.

Also get your broker to explain to you any preconditions or exclusions with your insurance. The wording of insurance documents is rarely clear to the uninitiated – and often means something very different to what you think it may mean. Get a professional to confirm it in simple language so you understand your responsibilities.

Do your own research

Finally, before selecting your broker you need to do some research of your own. Is the company financially sound? What is its track record like on payouts? A credit history search will help answer these questions but you should also look around on the internet for feedback from other customers. Of course this won’t guarantee an easy settlement should you need one, but it will help you avoid rogue suppliers.

Sadly the reality is not so simple. Whilst IP telephony can bring many benefits to businesses, for most of my clients it is still not the lowest cost option. That is not to say that it cannot be but for most businesses I look at it is not. So how come?

The Skype Effect

First it is necessary to deal with some of the preconceptions of IP telephony. The advent of Skype has brought free calls over the internet to the masses and with it a perception that IP telephony means free calls for everyone. With Skype you can log in and make free calls to another Skype user, wherever they are in the world. This is a great proposition for consumers but is less appealing to businesses for a couple of reasons. The first is the quality of the call. Skype uses much smaller packets of data to transfer the voice data (about a third of the size of a business grade solution), which means that the call quality is nearer to that of a mobile phone. Business grade IP telephony on the other hand is almost indistinguishable from a regular fixed line call and most businesses expect this higher call quality. The second is that both the caller and the recipient need to be signed in to Skype for the call to take place. For consumers a little co-ordination in advance is fine, but for business users this can seem too clumsy to be practicable.

The Land Grab

The sales staff of telecommunications companies have also been very busy telling prospective clients how right they are that IP telephony can reduce their expenditure. Many sales people will even say this without knowing that much about the client.

Their motivation for giving IP telephony lots of hype is easier to understand when you know that a move to an IP solution is a one way move. OFCOM regulations do not currently extend to the IP arena so suppliers are under no obligation to release your telephone number to another supplier should you wish to move again in the future. Most businesses are reluctant to change their number so in effect this is a one way move. I have heard suppliers describe this as a ‘land grab’. As every supplier is worried the competition will get more business signed up and locked in on IP telephony contracts, they themselves feel forced to go out and grab as much as they can. Add to this the significant revenue they’ll get from selling the required IP equipment and you can see they have a powerful motive to get business in.

Low Market Penetration

Market penetration of IP telephony is still less than 1% of businesses in the UK. This means it is unlikely that any company with IP telephony will have many people to call for free. This is because 99% of the time the call will have to ‘break out’ onto a telephone network such as BT. As soon as another network is used then costs are incurred. Of course as penetration grows the number of calls that can be made for free will increase too. At some point this will reach a level where the economics start to make sense and IP telephony will start to become the norm. However, we are a long way from reaching any tipping point yet, as we will see below.

SIP Trunk or Hosted

There are two different types of IP telephony that businesses can use. Assuming businesses don’t decide to use Skype alongside their existing telephone infrastructure then they have two choices. The first is called ‘SIP Trunks’ which is the name of the technology that allows calls to be made over the internet. This requires a significant upfront investment but does allow a company to call anyone else with a SIP trunk for free. The second is called ‘Hosted’ which means that the telecoms provider hosts the SIP Trunk technology and all your calls are routed via them. Whilst this reduces the upfront investment it means that you can only make free calls to other users on the hosted network. This service is popular with companies with many sites who call each other frequently. However, it does limit the number of places you can call for free. Clearly the more businesses that choose a hosted solution, the fewer places there will be to call for free.

UK Broadband Capacity

Another limiting factor is the broadband capacity of the UK. Whilst this isn’t a problem for large businesses who have their own leased lines, smaller businesses that rely on ADSL may find their internet is not strong enough to support calls on top of what they are currently using it for. With many smaller businesses not able to support IP telephony, then market penetration will remain low for the foreseeable future.

I think it is worth explaining this issue with an example. Suppose a business has a 2Mbit ADSL connection and they have chosen a business grade IP solution that requires each call to take 100Kbit of space. On the face of it there is plenty of space; in fact they could handle 20 calls at the same time. However, ADSL works by giving much greater download capacity than upload capacity. So with a 2 Mbit ADSL connection you can download up to 2 Mbit per second, BUT you can only upload 256 Kbit per second. Because a 100kbit call is the same speed in both directions you can see that it starts to get a bit tight. If someone else in the company were to send a large email at the same time as a call was being made there is the potential for the call to get disrupted. In fact this is more likely than you think given that businesses will typically be sharing their broadband with up to 20 other companies. This could in theory make the potential speed only 256/20 = 12Kbit. In reality it is unlikely to get this low but you can see there is a real danger of available capacity falling below 100Kbit.

It’s not all bad

ThoughIP telephony can bring cost savings only to organisations with very specific call profiles, it does have other benefits. For example IP telephony is much better suited to disaster recovery (you simply plug in at another location), and it also offers much greater control and information about your calls. If you are worried about business continuity, or are a business with a lot of incoming calls from customers this may be right for your business – just don’t believe the sales hype about it reducing your costs.

Auditel’s first task was to examine their current bills for any historical errors to see if any rebates were due. In this case no errors were found but it is not unusual to find them in the telecoms sector. In fact Auditel obtain rebates for about 1 in 4 clients.

The next step was to examine their usage patterns. Unsurprisingly for a company buying international currency, their profile was heavily biased to international calls. However, the analysis also showed that calls to mobiles accounted for the largest portion of spend. When looking for savings then Auditel would need to find a supplier that offered attractive rates for both mobile and international calls.

Although most of Currency Solutions spend was on calls, 19% was on line rentals. Currency Solutions use a number of analogue lines as well as ISDN 30s, which Auditel would also need to take into account when working out who the best value supplier would be.

Benchmarks

 The analysis of Currency Solutions’ bills has allowed Auditel to understand their usage and needs as we have seen . But the analysis also performed another important function – benchmarking. Benchmarks are the prices currently paid by a client to incumbent suppliers. They are the means by which Auditel and the client work out how much has been saved.

The table below shows the key benchmark prices charged by the incumbent supplier in this example.

Savings

 Auditel analysed a number of suppliers’ tariffs to see how they would affect Currency Solutions’ total bill. By comparing these tariffs against Currency Solutions’ actual usage we were able to work out how much each supplier could save them. The two best value suppliers were a new supplier and the incumbent. Both suppliers are well known to Auditel and have agreed ‘Auditel tariffs’ in place. These tariffs reflect the volume of business Auditel generate for them and are significantly lower as a result. The new supplier offered slightly better savings at 39%, with the incumbent offering savings of 36%. Auditel always show every saving that is possible as we believe it is up to the client to choose what is appropriate for them. In this case, given the small difference in savings, the client thought it more appropriate to stay with the current provider.

Client Comment: Christina Weisz of Currency Solutions

 ‘Having moved away from BT, we thought we were getting pretty good value for money on our telecoms.  We certainly weren’t expecting to see such a large saving and were delighted with it, especially as we didn’t even need to change supplier. The bills just came in lower the next month.’

Wait for the competition to fail

Amazingly businesses may be able to carry on as they are and see growth. Even if the size of their market remains flat for the foreseeable future, they may see their size grow. How? By waiting for the competition to fail. There are over 40,000 business failures forecast this year, many of which are expected to happen in the back half of the year when the HMRC tax holidays come to an end. With fewer companies around, there will be more of the pie to share between those that are left. A dangerous strategy though – will your company be one that survives or dies?

Steal market share

Of course most businesses will be trying to do something proactive by stealing market share. But stealing market share is incredibly difficult to achieve. Businesses are in competition with each other every day, fighting for as big a slice of the pie as possible. This is after all their core competency, and it is what they went into business to do: to provide customers with a service or product that is in some way better than the competition. Sadly, in the current environment a lot of businesses will be paying attention to this, so they may need to spend more time here just to stand still.

Review your costs (yes again)

Most businesses I speak to have done some kind of cost review during the recession. These vary in scope and success but it is unusual to find anyone who has not done something. The benefit of reducing costs is clear; all the savings go straight to the bottom line. If you are in any doubt about the importance of this, think how much a business would have to increase revenue by to get the same addition to the bottom line and how difficult this would be in the current climate.

For example suppose you have revenue of £1m with a 20% profit margin. Reducing your £800k cost base by £50k would increase your profits from £200k to £250k. To achieve the same £50k profit increase by increasing revenue would require an additional £250k in revenue, which is a staggering 25% increase. Which do you think is easier in the current environment?

If you think you’ve addressed costs already and there is nothing more that can be done then think again. Costs need management just like every other aspect of the business so you need to make sure you have a strategy in place that maintains a constant downward pressure on them. If you don’t you may miss opportunities to reduce them or worse they will start to creep up. Cast your mind back to just before the recession and the inflationary pressures the UK was facing. The recession has subdued these pressures but the underlying causes have not gone away. Also remember that your suppliers are facing the same pressures on revenue that you are so they will be looking for ways to increase their revenue too. This all needs careful monitoring to ensure costs do not start to creep up.

Of course this requires time and expertise, which is why it often gets only irregular attention. So how can you ensure costs are managed effectively without taking resources away from the rest of the business? Most businesses will have a handful of areas that account for most of their costs. Normally rent, staff and the cost of goods (industry dependent) will make up about 80% of the cost base, with a much larger number of other overheads making up the remaining 20%. Businesses quite rightly put most of their effort into managing the larger costs as these are likely to bear larger savings. These larger savings make it worth the investment of management time. This is not the case for the ‘long tail’ of smaller costs which can be complex and often have hundreds of suppliers in the marketplace. As a result these areas are rarely tendered as effectively as they could be. Consideration should be given here to outsourcing. Although a relatively new industry, there are companies out there, such as Auditel that specialise in these markets and buy on behalf of thousands of businesses; thereby getting the best value and avoiding rogue suppliers. This leaves management time free to concentrate on the larger cost areas and the difficult task of increasing revenue.