Thinking about the why and how of costs

 

Entrepreneurship is about thinking differently, creatively. Innovation is not limited to having unique ideas or projects. Innovation can be in the way one manages operations, the way one implements projects or in a combination of all this.

One of the key problems faced by entrepreneurs… and no prizes for guessing… is shortage of money. Some entrepreneurs have come up with creative solutions to manage with limited finances at their disposal. What may seem like an essential cost to most persons, have been reviewed and innovatively reduced or managed.

One such cost is the cost of routine administration work. While it may seem like a non-essential, it is a critical underlying function which has to be smoothly done in order for the company to deliver to customers and for growth. A classic example is accounting costs. It is not unusual to find start ups that do not have a grip on their numbers. In one company the CEO kept spending, assuming that he was earning a surplus. Towards the close of the year, he realized that he was dependent on a senior manager who did not understand numbers. The manager had permitted spending out of advance cash received and had overspent on multiple projects. The CEO was forced to take a high cost loan to tide over the situation.

By outsourcing the accounting function, in addition to salary costs, associated costs such as the costs of a dedicated system for accounting (hardware and software) are also reduced. In addition, this is a good strategy as this also reduces the worry re the back up and security of confidential data and dependence on availability or non availability of an employee.

In the last few years Bangalore has seen the emergence of a host of such service providers for entrepreneurs, in areas ranging from accounting to HR to marketing and more. While some provide basic services, at the other end of the spectrum, we have experts who help entrepreneurs look at their business strategies. These high end service providers or experts come with their domain expertise, ranging from technology to finance to brand building etc.

Many times, outsourcing provides much more than cost saving. Service providers are experts in their domains and can bring some best practices onto the table, which an entrepreneur may otherwise not have been able to afford. In addition this also frees time for the entrepreneur to concentrate on developing the core business.

A company I know has taken this business idea to the next level. They have been able to reduce certain kinds of high salary costs. The management has connected with reputed experts in different fields and gets them involved in projects on a need basis. Project revenues/profits are shared. In this way, the company gets the benefit of the expert’s time at a reasonable cost.

Thus experts and associates may be hired in a modular fashion by the entrepreneur in a kind of plug and play model on need basis. Financial terms may be designed according to expected usage, with a base minimum payment plus some based on usage.

There are a few service providers who are experimenting with innovative pricing models, such as pricing linked to the clients revenues and profits. In this way, the service providers get more into partnership mode with the entrepreneurial ventures they are working with. As the ventures grow and become profitable, the service providers benefit. On the other hand, if the client company does not perform upto expectations, the service provider also gets a reduced fee. Of course such flexi, performance-linked pricing models need a mind set change on the part of the service providers … and also the entrepreneurs.

In all such models, the terms of engagement and commercial terms between the company and service providers / experts have to be set out with care. A good working relationship is also based on mutual trust. In one company in Bangalore, the experts are hand picked. The CEO has worked with these experts in the past and had taken extra effort to get them on board the company.

Quite a few startups and entrepreneurs share office space. This is not so easy to do. The persons sharing space need to spell out clearly a plan and formula for sharing. For example if a conference room is shared by three parties, the three groups need to co-ordinate and have an understanding of the rules of this game. The rules could be simple, i.e. certain days and times could be allotted to certain groups on a pre-determined basis. Alternately, the dates/times could be blocked through a shared calendar on a first come first served basis. Or a combination of this could be put in place.

The point is that the parties to this need to sit together and decide on what is possible and what is not and then implement this. It is not to say that this initial plan will work. The groups need to periodically review the mechanism in place and modify it if required. Such periodic reviews and joint discussions will reduce the possibilities of conflict between the parties. After all, this is similar to what happens in a larger entity. Conference rooms in a company are also typically booked in advance. The difference is that in a company, this is based on the company’s guidelines and all parties interested are employees of the same organization. In the case of multiple groups, the difference is that these are affiliated parties in a limited sense… i.e. they are sharing common facilities. We are seeing more of such sharing of space in Bangalore these days. Oorvani Media, publishers of Citizen Matters is one such company. Mango Technologies, currently incubated at IIMB is another such company which started its operations in the premises of another company. My own startup operates out of the office of a CA firm.

Some companies are taking this whole cost cutting to another dimension and offering equity stake in their company in lieu of payments. A startup has offered its advisors stake as well as stake in lieu of rent as it does not have money to offer.

So where do you find persons to share office space with? How do you connect with service providers in Bangalore? Some suggestions and ideas… in another post.

When money is tight, it is good to bring some lateral thinking and flexibility into play. What may seem like a fixed spend can probably be viewed in depth and the essentials and non essentials really looked at. Good luck and Happy thinking.

Do you have any such ideas on managing costs that you may like to share? Have you tried something? When have you succeeded? Why have you succeeded? When have you failed? Why have you failed? Is there something you would like to share?

Anjana Vivek
About Anjana Vivek 45 Articles
Anjana Vivek, Director, VentureBean Consulting Private Limited, is a consultant, teacher, writer; CA & visiting faculty at IIM(B). Her specialties are business models, funding strategy, entrepreneurship, M&A and valuation.

1 Comment

  1. Revenue based pricing models won’t work when the service provider is from “non-Core” activities side.

    revenue sharing might work when both parties are sharing a stake in “Top Line”. Just look at the “fate” of Indian joint families:)

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