Reducing costs through workflow automation
A complete area of knowledge is dedicated to the study of costs, and most importantly, how to calculate them. In this practical post, I will focus on reducing costs through workflow automation. I will cover those specific aspects applicable to any company that produces goods or provides services, from the point of view of an adequate cost management, and how business process management (BPM) and workflow automation can help to reduce them.
Reducing costs through workflow automation
Cost management most useful equation
Although it seems obvious, it’s always worth remembering that the profitability of our organization depends on the utility of our sales. And the profit of each sale is calculated as:
Profit from a sale = Price of this Sale – (Total) Cost of this sale
The sales price is the amount of money that the customer is willing to exchange for our product or service. Cost is the amount of money we spend to sell a product or service. It is important to note that the total cost of the sale is not only the direct cost of producing a product (e. g., raw materials) or providing the service (e. g., man-hours); it also involves indirect costs (e. g., renting the office).
It doesn’t matter if we are a traditional company that has been selling similar physical items for decades, or an innovative startup that sells online services. There is always a sale price, and a cost. From them, there is a profit from each sale, and at the end of the month or year, a return.
The selling price
The selling price of our goods or services, many times (I would say most of them), is limited by the market. Competitors may provide similar items or services at a certain price, which prevent us from setting any desired price. We have little margin to use the price increase as an instrument of profitability.
What an illogical vision, that of those who say that a certain segment of customers “is not price sensitive”. Of course it is. Every client is. Some are simply willing to spend more, hoping to receive more. But always, always, always, the customer looks at the price. Imagine that you have a lot of money and you’re going to buy a car. Actually, you have so much money, it doesn’t matter the price of the car. You choose your model, a truly world-class sports car. You go to a dealership you never went to before, and it’s $350,000. Then you go to your trusted dealer, with whom you’ve been working for years, and for the same car, the price is $355,000. Where do you buy it? In the trusted one, of course. Now, if your trusted dealer were to charge you $400,000, would you stick to the decision? What if it was $500,000? Or would you feel directly ripped off and never go back to that place? Well, so delicate is the matter of fixing the price, and above all, of increasing it by seeking profitability. We can not only lose sales, but also the confidence of our customers and brand positioning.
But not everything is lost. We can still work on the second factor in the utility equation of a sale: reducing costs through workflow automation for the products or services we sell.
Costs can be classified in several ways: indirect vs. direct, fixed vs. variable, etc. Variable costs are those that change depending on how much we sell; fixed costs will be there whether we sell or not. For example, if our company is a startup that sells Internet services to customers around the world, the salaries of the development team will be fixed costs, we have to pay them no matter our sales, and the size of the development team does not vary if we sale more or less. On the other hand, the space used in cloud servers for each customer will be variable, since we will require more space (and therefore will have to pay for it) if we have a new customer (a new sale).
In the case of tangible products, it is even easier to differentiate fixed and variable costs. If we sell sandwiches, the rental of the facilities will be a fixed cost, and the bread will be a variable cost.
Cost of selling = fixed costs + variable costs
If we want to manage properly, we must look and reduce both, fixed and variable costs.
Reducing variable costs
Variable costs usually have a lot to do with what the client receives; it is risky to reduce them radically because they can affect the quality of the final product or service.
However, there are variable costs that can be drastically reduced by automating processes. By way of example, if after completing each sale I have to send a valid document to the customer, I have two options. In a manual process, I should print that document, sign it, envelope it and mail it to the customer; I have variable costs there: paper, envelope, postal service. The other option is by automating this sales process, and at the end of it automatically generate a PDF file with all this information, electronically signed automatically with a digital signature and sent by e-mail; I will have eliminated all these variable costs. Note that these variable costs may be small in relation to the sale, but since they can be completely eliminated, they directly impact the profit of the sale, and therefore directly increase the profitability at the end of the period. And if there are a lot of sales, the savings will be relevant. (See pre-defined process example for Identify Business Opportunities and sales).
In this case, reducing costs through workflow automation also increased our contribution margin.
Reducing fixed costs
Reducing fixed costs, without affecting the product or service, puts our creativity and management capacity to work.
One of the most important tools for reducing fixed costs is to automate and streamline all possible tasks. In other words, spend less where you can spend less.
The automation of processes, among other benefits, allows us to make people more efficient in their tasks. Each person receives the tasks to be performed, completes them, measures the time taken, and automatically assigns work to other people. Or maybe those tasks could be performed automatically without the participation of people (even greater savings).
For example, all companies have recruitment processes, far away from sales, but absolutely necessary and in many cases, expensive. Clearly, maintaining the team of people who perform these tasks is a fixed cost for the company. Now, if you also have manual processes, more people will be required to do them and therefore the fixed cost will be higher. Let’s imagine that we receive the applications by email, with the curriculum vitae attached. Someone should review it, read it, and re-type the applicant’s data in some system or form to follow up during the selection process. Then you should send the most relevant information to other evaluators by e-mail. You should write an email or call the applicant to arrange an interview. In case of hiring him/her, you will have to send another mail with his/her data to every department that needs to grant access to systems, etc. On the contrary, if the process is automated, it could receive the applications by web (so you should not re-type the data and avoid typing mistakes), immediately access the CV and be able to enter observations, set an interview date and when pressing a button, send it to the applicant by email. Likewise, you may approve or reject the applicant, and depending on this, a revision task may be assigned to the corresponding person. Reducing costs through workflow automation in this case, also improved data quality and speed up the whole recruitment process given a better experience to the candidate ad involved evaluators (See pre-defined process example of personnel recruitment).
Contribution margin, key instrument
Now that we fully understand fixed and variable costs, we can introduce the concept of…
Contribution margin per unit = unit sale price – variable costs per unit.
In other words, if I make a sale and pay the costs of it, how much remains to cover fixed costs and give profit?
Of course, if the contribution margin is greater than zero, the more units we sell, the better, and the more money will be available to pay fixed costs and make profit. After covering fixed and variable costs, what remains of reducing costs through workflow automation, is happiness 🙂
On the contrary, if we sell little, and considering the price is set by the market, we should put even more focus on costs (both fixed and variable). This is closely related to the scale of our company. The more units we sell, if each one of them leaves a positive contribution margin, even if it is small, the more likely we will be able to cover all fixed costs and make a profit.
It is often believed that only large companies automate their processes. Mistake. Large companies of course automate their processes. But in small and medium sized companies, which have a smaller scale and smaller sales volumes, it is equally or even more important to automate their processes, in order to reduce fixed and variable costs, to ensure a positive contribution margin.
Let’s look at an example. Imagine that our company grants loans. The client completes a form on our website with their data, which triggers an email with that information to a reviewing officer. This reviewing officer checks the data, contacts the client to verify their phone and pre-authorizes the loan.
Cost of evaluating a loan = Cost of all reviewing officers / Number of Requests + Fixed Costs / Number of Requests + Other variable costs.
Clearly, if the number of applications increases, the fixed cost is divided into a greater number of request reducing the individual cost. But if the influx of applications increases, we’ll also need more desk officers. This is a variable cost in steps, but a variable cost at last, which increases as applications number increase and at the limit can be seen as linear: More loans, more officers reviewers, more costs.
On the other hand, if we automate the process, and replace those officer reviewer’s manual tasks, we will reduce the variable cost of evaluating each loan. The checking of the applicant’s data can be done by means of an intelligent form (with fields and validation formulas); the verification of the customer’s phone can be done by means of an automatic call sending him/her a verification code, the pre-authorization of the loan can be carried out by an adequate customer profiling and his credit history.
With this change, the cost of evaluating each loan would be significantly reduced, and more importantly, it would not increase as much when there is more applications. Reducing costs through workflow automation in this case, also enabled our business to scale better.
In our library of pre-defined processes, we gather several examples that can serve as an initial kick-off to identify processes that can be automated and improved reducing costs through workflow automation.
A fundamental duty of a company’s management is to properly manage costs, both variables (which are always the most visible) and fixed ones (the most complex to identify and reduce). The challenge is to do it without affecting the quality of the product or service delivered. A proven successful path is reducing costs through workflow automation. I mean, the automation of the business processes and workflows we use until the delivery of the product or service to the customer. Eliminating manual tasks (automation), increasing the number of tasks that each person can complete each day (productivity), allowing the customer to do part of the work (delegation), are concrete tools that Business Process Management and Workflow Automation tools as Flokzu provides, and allows you to reduce fixed and variable costs of any organization.