Why do companies overspend?

Every dollar saved drops straight to the bottom line—so why do 100% of the companies we've reviewed overspend in at least one category? Four root causes, from 30+ years of engagements.

The main purpose of a business is to increase shareholder value by providing growing profits and return on invested capital. To improve profitability, companies can pursue three basic strategies: increase sales, reduce cost of goods, or reduce expenses. Each has its advantages, but the third has one clear edge: every dollar saved drops straight to the bottom line. As Benjamin Franklin would say, “A penny saved is a penny earned.”

Executed with care, expense reduction won’t affect the quality of the product or service. A reduction in energy consumption, payroll processing, or liability insurance does not change what the customer experiences—it just makes the company more profitable.

Despite this clear advantage, many businesses still overspend. Our experience shows that 100% of the companies we have been involved with have at least one expense category where they consistently overspend, even those running a tight ship. The next logical question is: why?

Thirty years of engagements across multiple industries point to a distinctive pattern. The reasons group into four buckets: time constraints, lack of industry knowledge, focus on sales and direct costs, and inertia or lack of will.

In today’s hyper-competitive environment, managers and employees are extremely busy keeping up with customer demand, information overload, internal processes, and changing regulations. The main goal is to get the work done; cost remains a second priority with rarely enough time to analyze or improve.

A law firm needs documents printed and delivered on time—so as long as the printer and courier work, whoever is in charge has met their goal. A plant manager needs materials procured, staff assigned, and equipment ready; there is no time left to research the best energy, insurance, or waste-removal options. The service shows up; the box is ticked.

Even when time is available, the next challenge is knowing what to buy and from whom. Which vendor is reliable at the best cost? Which plan fits? Are there incentives available? What type of agreement should be committed to?

Multiply those questions by many vendors across several categories and the information becomes nearly impossible to gather and digest. We call deciphering these variables Industry Knowledge: the Who, the What, and the How. Lacking it, managers default to the safest choice—the best-known vendor or the current contract—and thousands of dollars are left on the table.

In a time-constrained environment, managers focus on what is strategic: growing sales and managing direct costs (raw and packaging materials, and direct labor). Direct costs can represent 30–70% of revenue and are specific to the business, so they deservedly get attention.

Indirect expenses—insurance, energy, payroll processing, courier, telecom, office supplies, garbage removal, maintenance, and more—are different. Individually, each is a small share of total spend; collectively they can account for roughly a third of the expense pie. Because no single category looks big enough to prioritize, they slip under the radar, and money is left on the table every day.

Even when managers have the time, knowledge, and awareness, there is one more factor: inertia—“a tendency to do nothing or to remain unchanged.” Change involves work, time, and risk, and many managers avoid it when they aren’t incentivized to push.

In these cases, an outside force is often what unlocks the savings. We were recently asked to find a new supplier for a warehouse item and located one at 15% below current cost. It later emerged that this vendor had been offering the company the same deal for months—it just needed someone to test it. A couple of hours of staff time converted into thousands of dollars of recurring savings.

There is a lot to be gained by reducing expenses, especially the indirect ones that tend to slip under the radar. Reductions rarely affect product or service quality and sales, and the improvement flows directly to the bottom line. The return on time invested by managers and employees more than justifies the limited effort required.