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Summary
Any company has business units or departments that usually get what they ask for and others that do not. Sometimes these differences are unique to the company and its history or peculiar to an industry, and sometimes they are common to a specific department in any company. What management finds strategic – or not strategic – is based mainly on rational decisions, but some attitudes can be a matter of corporate culture rather than the result of objective assessments of opportunities to improve returns. As a rule, companies do not wildly misallocate capital, but sometimes they can benefit from spending a little more money on the parts of the business that usually get the short end of the stick, particularly when it comes to information technology. Ventana Research encourages companies to look for these potentially productive if unnoticed opportunities.

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In theory, companies allocate their capital budgets rationally, investing in the opportunities most likely to maximize their returns. In reality, while this often is what happens, anyone who works inside a corporation knows that politics and other nonrational factors play an important role in these decisions. For example, sales organizations and other profit centers have an easier time justifying their needs than cost centers when it comes to making decisions on capital spending and other budget items. Similarly, we have observed that retailers traditionally underfund their IT budgets because executives running the company believe that superior merchandising is the key to success, not “the back-office stuff.” And Accounts Payable is nearly invisible in almost any company. (We mean no offense to anyone reading this who works in AP.) 

In our experience, companies do not grossly misallocate their capital budgets. Yet unquestionably there are areas of any business in which the “redheaded stepchildren” work – areas that traditionally have low priority when it comes to investment. It is precisely in these areas where we expect companies to find profitable opportunities, especially in using information technology more effectively, if only they look for them.

Accounts Payable is one of our poster redheaded stepchildren. Processing invoices is neither glamorous nor obviously lucrative. Yet a majority of companies in North America are not taking advantage of discounts for prompt payment available to them as part of their vendors’ standard terms. Instead they have created a web of rules and systems designed to slow down the payment of invoices. Typically, this counterproductive process is the result of an irrational approach to handling the disbursement of corporate cash (that is, creating complexity to provide the illusion of control) rather than the result of an analysis of how to optimize these outlays. When rates were at high single digits or even double digits a generation ago, not spending money was a rational approach. During recessions when cash is king, preserving options, not taking discounts, is a rational approach to managing the treasury. But today, when companies are flush with cash and short-term rates are (at most) in mid-single digits, not taking a 15 percent discount for payment in 30 days is a waste of money.

Why, then, do companies fail to take advantage of discounts? Habit and culture are the real reasons, in our judgment, not rational cost/benefit analysis. In our research on how companies use enterprise resource planning (ERP) software to innovate, we found that only half of the companies we surveyed have any sort of procure-to-pay system in place. Only one-third have deployed an electronic imaging system that would enable them to speed the invoice-matching process, allowing them to take advantage of discounts for prompt payment. Earning 5 percent to 15 percent discounts for payment within a month in an era of abundant cash and low short-term rates is admittedly a pedestrian way to fatten the bottom line, but it is dependable and largely risk-free. Especially for companies that have narrower gross margins (that is, a relatively higher percentage of purchased parts and materials than of expenses such as payroll or rent), spending money faster can have a meaningfully positive impact on the bottom line.

Another overlooked area where software can have a significant payoff is real estate management. Success in retailing certainly depends most on getting the concept right and effectively executing the merchandising. But once they have a successful concept in place, one way retailers can increase returns is by managing the back-office details well. Real estate costs are one of the top three expenses in any bricks-and-mortar consumer business. Yet we find that companies often neglect support functions such as managing the real estate aspects of the business (both finding new sites and managing leases for existing ones). Real estate departments usually do not get the kind of attention (and investment) they need. Thus, many retailers do not manage the details of their leases well and do not select sites strategically enough to optimize their market presence. They rely too much on intuition, not facts, to manage these operations. While executives with good fashion sense, not bookkeepers, get the attention, better analysis, insight and discipline can ensure that more of the benefits flow to the bottom line.

Assessment
With the budgeting season at many companies about to begin, we recommend that CFOs and controllers look for opportunities to invest more in neglected areas of their business that have the potential for sustainable returns. These need not be major investments or represent more than a small percentage of the budget, but they can have significant returns on profitability and long-term competitiveness.