Expense ReductionAnalysts

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A guide to reducing non-core operating costs in the economic downturn

Issue 1: Property and Premises

Introduction

02 Introduction

Whether you lease a state-of-the-art city centre HQ, own a commercial unit on an out-of-town business park or manage a multi-siteestate across the country, the cost of yourbusiness premises will be a significant overhead.

But the largest overheads can also offer themost potential for savings.

As company directors come under increasingpressure to reduce costs, this guide aims toprovide a range of practical advice, examplesand 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?

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

Energy and Utilities

Energy and Utilities 03

1 Show me the moneyWhilst it is important to make sure suppliersare not building excessive margins into theiroffers when negotiating energy deals, manyclients are not aware that it is actually thewholesale cost of the energy component itself which now makes up 70 per cent of theend price. With energy prices now fluctuatingon an hourly basis, constant monitoring ofthe market and careful timing of renewals is the key to making real savings.

2 Timing is keyTraditionally, 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 availablejust prior to contract renewal. In fact, it isnow likely that your offer will increase inprice, or even be withdrawn, the closer thedeadline for acceptance comes. Clients therefore need to time their renewals carefully and be ready to make a quick decision when the time is right.

3 Effective portfolio managementOne method of keeping better control of yourenergy costs, as the markets fluctuate, is totake a proactive stance towards managingyour portfolio of contracts. Particularly important for clients with multiple sites, are simple initiatives such as ensuring that allcontract 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.

By checking and validating energybills to eliminate discrepancies asthey are generated, Expense Reduction Analysts can save between 3-5 per cent of your energycosts. With Office of GovernmentCommerce calculations estimating the average cost for a company toprocess and pay an energy bill at £65, this represents a saving of between £1.95 - £3.25 per bill.

The dynamics of the utility markets present an ongoing challengeto businesses large and small, says Neil Middleton, and there havebeen fundamental changes in the way energy is bought and soldin recent years. It is therefore essential that companies take a focused approach to energy procurement.

Legal and finance

04 Legal and finance

“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 CleverDespite Government attempts to the contrary, most commercial leases still providefor upwards-only rent reviews so tenantsneed to find creative solutions to their rentalcommitments. This might include sub-lettingpart of the lease to generate an additional income stream or reassigning the lease to another party, thereby transferring the obligation.

A client in Kent was reluctant to move out of an inefficient, partlyused building because of potential dilapidations costs of £145,000.Through negotiation with the land-lord, Expense Reduction Analysts were able to identify a no-cost exitroute based on the redevelopmentpotential of the site, which reducedthe dilapidations to nil, allowed closure of the office and securedwider business benefits and cost savings for the client.

2 It’s good to talkIt’s not just tenants that will be looking toachieve greater certainty and control overtheir finances; landlords will also want tomanage the risk of their tenants defaulting or vacating a property. With rental values and overall demand falling, tenants are in astrong position to negotiate an exchange ofgoodwill with a landlord, which can deliverbenefits to both parties.

3 Break outBreak clauses allow parties the opportunityto exit a long-term lease ahead of time. However, particularly in the current climate,these can present a significant risk to land-lords who suddenly find themselves saddledwith the liability of servicing, payment ofempty rates and re-marketing a propertythey thought would be occupied for sometime. As a tenant, you can add value to alandlord’s lease by suggesting the removal of a break clause in return for a cash flow advantage such as a rent-free period.

The Dynamics of the Utility Market 05

“Expense Reduction Analysts estimates that the removal of abreak clause that’s effective within the next three years, over alease term of at least six years, could result in an offer in today’smarket of two - six months rent free occupation.”

4 Avoid Empty RatesTax relief for commercial property ownersand occupiers with vacant units was significantly reduced in April 2008 in thebiggest shake-up to the system since 1990.However, there are still ways to mitigatethe additional cost of maintaining anempty, or partially vacant, building. Consider a short-term let to another commercial tenant as this reduces outgoings and, following the sub-tenant’svacation, it may be possible to re-apply for further empty rates relief. Furtherscope 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 assessmentThe rateable value of your property is basedon a 5-yearly revaluation by the Valuation Office – but don’t feel you have to accept itwithout question. There’s every opportunityto appeal your rating assessment if you believe it is incorrect and, if successful, the saving could be backdated to 2005 with interest.

Expense Reduction Analysts recentlysaved a national education providerover £750,000 over a retrospectivethree-year period through a review of their square footage, altering thebasis of their valuation and mergingrating assessments into a much reduced rateable value.

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

Building, plant and facilitiesmanagement

06 Building, plant and facilities management

The scope of the FM function is ever-widening as regulatory demandsincrease 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 powerToo often, management of the effectivenessof a company’s FM function relies on anecdotal evidence rather than hard factsabout supplier performance. It’s 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.

2 Shop aroundRelationships with FM supply chain partnersare 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 areimmediate resource benefits in dealing witha single point of contact, single source supplychains are not necessarily the panacea theyseem and clients need to ensure they havefull visibility of the costs and value of eachindividual service provided.

3 Get more for your moneyEvery building needs ongoing maintenanceof one sort or another and there are savingsto be made not only in the cost of materialsthemselves 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 centralisedpurchasing function for all sites, a supplierconsolidation 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.

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

The next step 07

We were able to make savings of £175,000 per annum for an agricultural client supplying fresh produce to Tesco and Sainsbury’sthrough 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 world’slargest cost management consultancy and focuses on reducing non-core operating costs for private, not-for-profit and publicsector 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 optimumvalue from suppliers, often successfully retaining incumbents and using expert analysis and market intelligence to combat‘contract fatigue’.

Expense Reduction Analysts has 150 consultants across the UK, 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 FinanceIssue 3 – Back Office Functions

For more information contact Expense Reduction Analysts on: 02380 892 737

or visit our website at: www.erauk.net

Expense ReductionAnalysts

www.erauk.net

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