Monday, December 24, 2012

Contracts: Two Types of Savings

How do you save money? In my thirty years as a State of NJ procurement officer (buyer), I only learned two: cash-out and cost avoidance.

When you go to Kohl's and buy a pair of jeans on sale, they may be discounted 20% or more off the ticketed price. Janet and Kate both live for Kohl's discount coupons, and have probably "saved" hundreds of dollars in their time. But a discount is not cash, its actually cost avoidance. You would have paid $30, but with a coupon you only pay $20. The vast majority of shoppers would tell others they saved $10. But not so.

This is not cash savings, its cost avoidance. You would have paid $30, but actually only paid $20. You "avoided" paying $10. This principle is the same with all sales, and is usually true for most  discounts. So, on your Kohl's receipt, where it says "You saved $10," well, you didn't. Oh, it may still be a bargain, and probably is, but that's not the point. We all like bargains and savings. It's a major motivator for spending. Almost all coupons are cost avoidance.

But some discounts and coupons actually provide cash-out savings. When we had a $1,000,000 contract, and because of poor budgets or cash availability we had to cut costs, which was our standard modus operandi, we only had limited ways to save money. One way was to cut the inventory covered by the computer maintenance coverage contract. So from 10,000 pieces covered, we'd cut 1,000 pieces, usually the oldest equipment. or, if software, we'd cut the number of licenses. This lowered the actual bill. That's cash-out savings. Real cash. Our cash.

Another way to achieve cash out savings was to cry the blues to the vendor -- to make them part of the problem/solution. So when our budget was cut, we called the vendor in and brainstormed ways to cut their bill. It usually worked, especially in hard economic times, or during budget woes, and most vendors gave us extra discounts, cash-out savings, rather than lose the contract entirely. 

We never threatened our existing vendors by saying we would bid out their services. We didn't have to. They all recognized that could be a real possibility at any time. When we actually did consolidate all our maintenance contracts and bid them out in the 1990s, some vendors cried -- and many lost their contract. We saved money in the long run, but it was always tough severing ties with a vendor who had been doing a decent job, for a new, unproven vendor. But we took the risk, bid out five huge contracts, and saved millions on four. The fifth bid had to be cancelled because the bid was higher than the existing contract. That sometimes happens when you deal with a sole-source vendor.

This was all cash-out savings. We had been paying more, out of our own pocket, now we were paying less.

Another way to cut costs was to twist the vendor's arm for discounts. In this case, when a discount lowered our actual cost, it was cash-out savings. Again, it saved money from our pockets. Sometimes we'd give the vendors targets, other times we asked for creative ways, like refinancing, to lower costs. You can only do so much of that before you're down to bone.

That's where governments at all levels and many businesses find themselves today. Cutting staff equals saving salary expenses. Cutting vendor services cuts out-of-pocket costs. It's the same everywhere, even down to personal levels by cutting out desserts or coffee daily, or forgoing a new TV. Cash out savings means cutting your spending, and its the hardest thing to do.

Avoiding costs, on the other hand, is easy. Just like the example of the jeans at Kohl's. On new purchases, whether for $1,000 or a $1,000,000, we always compared prices for the same products and services. Using the Internet has made that a thousand times easier. We however, usually had to use the bidding process for big contracts, and that's always harrowing. When you're sitting there reviewing seven bids, in manuals three inches thick, it's a daunting task comparing apples to apples. That's why NJ State contracts are so rigidly written. We couldn't evaluate "extras," no matter how nice to add.  That's why bids often get thrown out, some for major deviations from the specifications, and some for minor ones. Ah, but that was part of the job, sometimes the most exciting.

Another example is borrowing. Right now interest rates are low. It's the best time to borrow. Again, its only cost avoidance, but on a 30-year mortgage that's tons of real money.

I've led public bid conferences with a roomful of potential bidders, and I've recommended sole-source contracts where only one vendor was capable of doing the job. That's rarer and rarer these days, what with open standards and architectures in computing and in services. There was a time, in the early 70s, when the State only owned IBM computers. Then Honeywell won a bid after they protested, and ever since we've had to support two completely different systems, with programming staffs, operators, administrators, the whole nine yards. Standardization is easier and cheaper. Getting there is very difficult, especially in government when a lot of purchasing (not all), is open to public scrutiny.

So tell me, do you have any other ways to save money besides cash-out savings and cost avoidance? I'd be interested in hearing them. Join the site to leave a comment, its free.

No comments:

Post a Comment