As published in the July/August issue of Western Banker, the official publication of Western Independent Banker’s Association
by Gary Storm
Increasing shareholder value can be a tricky endeavor. On the one hand, it can lead to short-sightedness and a focus on immediate benefit at the risk of long-term growth as management seeks to cut costs and increase current bottom line results. On the other, focusing purely on long-term growth can mean making strategic investments that reduce immediate shareholder value.
Within this context, it seems that there are few, if any, actions that can be taken or strategies that can be implemented that will increase shareholder value in both the short and long term. However, we’ve found a way to do it. It’s a bold statement, but stay with me.
Consider your top three expenses after payroll. For most organizations, telecommunications will fall within that bucket (if it doesn’t, I invite you to take a closer look at how your telecommunications expenses are categorized across your organization and if you’re accurately capturing the impact of the related costs of all your voice and data networks – fixed and mobile – and the related IT costs). There are two types of cost savings that can be derived from improving your telecommunications management. The first type is hard costs gained from identifying errors, resolving disputes and identifying cost savings, which can directly translate to immediate return to your bottom line. The second type is soft costs, which include efficiencies in process that free up your teams to do other tasks and maximizing the utility of your current telecom environment and enabling planning for future growth, resulting in long-term value.
Industry research – and our own findings – indicates that approximately 10 percent of telecom expenses are in error. These are hard dollars that should be returned to your organization and that ultimately impact your bottom line. Additionally, analysts tell us that companies are overspending by 10-20 percent on their telecommunications. This happens when there isn’t an effective telecommunication management strategy in place, and there’s little visibility into inventory and expenses. Improvements come from a variety of sources, including contract negotiations and leveraged buying power; audits and optimizations to ensure your telecom assets match your telecom needs; and efficiencies in processing invoices and allocating costs to the correct business unit. Aside from the immediate impact of realizing these savings, there are the carry-through savings and efficiencies that can help drive positive ROI for your organization and therefore increase shareholder value.
As an example, a regional commercial bank that provides services to retail customers and to small and mid-sized businesses, recently engaged us to manage their telecom environment. By outsourcing their entire telecom lifecycle, the bank realized a 30 percent reduction in spend, or about $480,000 annually. When you look at this within the context of shareholder value, with a P/E ratio of approximately 15:1, this translates to over $7 million in shareholder value. At first glance these savings might not seem significant. But when you look at it through the lens of shareholder value it can be a rather important decision.
More than just low-hanging fruit in the search for enterprise-wide cost savings, telecom management is a strategic initiative that organizations should take in order to better manage their voice and data networks for both fixed and mobile communications; and make informed business decisions about their communications strategy. While short-term savings are tempting, very real, and deliver immediate ROI, it’s the long-term value gained through thoughtful implementation and adoption that should be the true driving factors. Lastly, make sure you consider shareholder value when looking at your cost saving initiatives.