Two Can Live Cheaper Than One.

After an M&A, expense management can help you to increase shareholder value and manage higher costs.

In 1999, there was over $1.4 trillion in transaction volume from domestic M&A deals, vs. $356 billion in 1995, according to Mergerstat. And, surpassing the predictions of many analysts, merger and acquisition activity continues to expand after a decade of unprecedented growth, creating significant challenges and opportunities for corporate expense management.

Immediately following a merger, companies experience tremendous pressure to increase earnings performance. At the same time, their indirect costs, or selling, general and administrative (SG&A) expenses, often grow enormously through simple consolidation of these cost baselines.

For financial executives, the challenge then is to design a comprehensive plan that will consistently reduce bloated expenses -- in turn helping to boost your company's earnings. What's more, if you're a financial executive at a public company, a good expense-management strategy can help you prove increased shareholder value. If executed properly, this strategy can reduce post-merger SG&A significantly enough to measurably improve net income and earnings per share.

POP THE BALLOON

It's not easy to reduce indirect expenses quickly and rationally. But -- as with many other things -- there's a right way and a wrong way.

The wrong way is to focus only on cutting costs, for instance in corporate travel and entertainment (T&E) budgets, or purchasing outlays for office supplies and temporary labor. Blind cost cuts may work in a pre-merger environment, when indirect expense levels grow somewhat predictably from year to year. But on its own, this strategy won't work for long when two companies wed -- and indirect expenses suddenly balloon.

Furthermore, even if there are quick-hit reductions, you still need an ongoing strategy addressing other areas of expense management that have been changed by a merger or acquisition -- for instance, internal expense policies, processes and procedures.

What you need is a management program that comprehensively reduces expenses through a variety of focused, coordinated solutions. For example, in the area of corporate purchasing, an integrated expense-management strategy should offer solutions for more creative negotiations with suppliers to reduce, let's say, the price of staplers. But beyond that, it should also contain solutions -- including technology -- to reengineer administrative processes to cut the total cost of processing each purchasing transaction. In addition, performance assessment tools will enable you to gauge and prove savings resulting from the program. They'll also help you monitor how employees across varied cultures are embracing changes.

Also, unlike quick-hit cost cuts, an integrated expense-management plan puts the right solutions in place to keep producing savings year after year -- even as expense volume rises after a merger. Thus, the goal shifts from expense reduction to cost management.

Your new strategy should address these post-merger business imperatives:

* Increase earnings performance (for example, strengthen leverage with suppliers to garner more and deeper discounts);

* Create and demonstrate synergies with people, processes and information while maintaining and even improving service (for example, redesign expense report processing for increased efficiencies);

* Integrate disparate information systems (put e-commerce technology to work to reduce travel or industrial supply prices as well as their related administrative/transaction costs);

* Manage and alleviate internal confusion and conflict caused by changing culture and roles (develop incentives to encourage change among employees);

* Create tools that assess performance and demonstrate sustained improvement (for example, survey travelers to track acceptance of new expense management techniques; survey purchasing managers to gauge how you've affected industrial supply prices).

With assessment tools in place to keep abreast of the savings your expense-management program is producing, you can monitor the company's return on investment in this new strategy. If you're a CFO, controller or other financial executive at a publicly held company, you'll be able to trace how improved management of expense baselines has positively affected net income -- and, thus, shareholder value.

MORE FOR THE MONEY

Recently, American Express Consulting Services identified expense-management opportunities for a U.S.-based company that's made several acquisitions over the past few years. Consulting Services wanted to demonstrate how an integrated expense-management plan could help the company boost shareholder value, as the firm was suffering from lackluster stock performance since its most recent acquisition.

While we recognized that the company could save via better management of procurement of industrial supplies, our recommendations focused solely on its T&E expenses. With tens of thousands of travelers spending hundreds of millions of dollars per year in T&E, the opportunities for savings were significant.

Our analysis found that, while the firm had a standard travel and expense-reporting policy, due to differing corporate cultures, not all operating units interpreted the policy the same way. Some units had a classic suit-and-tie mindset that mandated strict adherence to details; others had a looser culture and thus a more liberal interpretation. As a result, procedures varied for things like the use of technology to create and submit expense reports, rules on reimbursable expenses and expense report review and approval.

Our recommendation was to standardize expense-reporting procedures and supporting technology tools across the firm, allowing it to reap widespread, consistent savings through improved processes. For instance, if all units used the same type of automation that lets travelers create and submit expense reports electronically, the company could maximize administrative savings. Those savings would come as travelers filed reports more quickly and accurately, allowing the firm to cur the manual tasks required to process those reports.

On another front, we recommended that the company implement change-management initiatives so employees would feel comfortable with new standardized policies, procedures and processes. Among possible initiatives: training for individual operating units, and incentives to encourage people to embrace the new procedures.

On the back end, we also advised the company to implement performance metrics to measure savings from standardized and centralized T&E expense-report processing. One measurement might monitor expense reports to see how well travelers comply with the company's negotiated discounts with preferred hotels and airlines. Another might be a traveler satisfaction survey to gauge change-management efforts.

We estimated that an integrated expense-management strategy -- in this case focused initially on T&E expense -- would net the company about $30 million over three years, with $5 million potential savings in the first year. The company would recover its investment cost to implement this plan in less than a year. Thus, we created a plan offering a speedy, positive impact on shareholder value.

The company's annual savings from this T&E expense-management plan could contribute as much as an additional two cents to three cents per year to its present earnings per share. However, if the company only moves forward with a quick-hit, cost-reduction initiative alone, its incremental earnings per share improvement would be less than one cent.

If you're faced with managing larger expense baselines after a merger, you need an integrated expense-management program to meet your strategic and financial goals. A comprehensive strategy can ensure success now and in the future -- success that escapes many companies after the merger is completed.

Paul W. Thurman is a vice president of the American Express Consulting Services group based in New York. He holds an MBA from the Columbia University Graduate School of Business, where he currently serves as an adjunct professor of management and management science.