Implementation Considerations in Quantifying and Tracking Hard Cost Savings

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Sharlene Bruce
5 years ago
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Thomas Kase Thomas Kase VP Research, Spend Matters thomas@spendmatters.

2 Thomas Kase Thomas Kase VP Research, Spend Matters Lead analyst supplier management, sourcing Sourcing solution consultant, solution sales, and professional services delivery to the Global 2000 for over 20 years in procurement, supply chain and direct operations support Passionate about technology, procurement trends, and getting companies to run better! Lives in Atlanta, but can be seen at procurement and technology trade shows around the world Copyright 2015 Azul Partners Inc. All rights reserved. Not for distribution. - spendmatters.co.uk - 2

3 What will we cover? Perception problem Factors what constitutes a Hard Cost Saving? Spend Analytics what is going on? Supplier Management who are your 3 rd parties? Sourcing those pretty negotiated savings! Contracts what are you committed to? Procurement what are you actually buying? GSCRM what is your risk exposure? Along the way there will be practical advice for you! Copyright 2015 Azul Partners Inc. All rights reserved. Not for distribution. - spendmatters.co.uk - 3

4 Performance perception problem Procurement & finance teams agree that savings across all areas of 3 rd party expenditures are critical to delivering value, but poor spend visibility and unclear measurements of savings creates a procurement performance perception gap. The gap is usually greater in areas of indirect spend, as these are typically less tightly managed than core spend Systematic and comprehensive spend visibility is difficult to achieve, but without it realized savings cannot be effectively measured or tracked Firms define and track savings differently and inconsistently Many capabilities are needed to improve how procurement and finance work together especially with regards to managing savings information Copyright 2015 Azul Partners Inc. All rights reserved. Not for distribution. - spendmatters.co.uk - 4

5 The opportunity Uncertainty and economic volatility makes it paramount that the finance function have the ability to track non-core, or indirect, costs and document savings on these expenditures. The reason finance executives should care about measuring these savings goes beyond the fact that they can equal 15% to 40% of company revenue. Companies capable of tracking realized savings as they occur, as opposed to booking the savings promised at the time supplier contracts are negotiated, see 71% higher actual savings. The problem is that measuring savings on indirect spending is deceptively difficult. Achieving savings visibility requires a combination of technology, process and expertise and deep collaboration with the procurement organization. The Hackett Group Copyright 2015 Azul Partners Inc. All rights reserved. Not for distribution. - spendmatters.co.uk - 5

6 What are hard cost savings really? What does the Finance department recognize? Purchase price reductions only? But wait, what is the baseline we are saving against..? Copyright 2015 Azul Partners Inc. All rights reserved. Not for distribution. - spendmatters.co.uk - 6

Major issues Book negotiated savings, not implemented Headcount and PPV reduction thinking Maverick spend typically 1/7 th of spend but can you see

7 Major issues Book negotiated savings, not implemented Headcount and PPV reduction thinking Maverick spend typically 1/7 th of spend but can you see it? Copyright 2015 Azul Partners Inc. All rights reserved. Not for distribution. - spendmatters.co.uk - 7

8 Factors considered in order of recognition PPR new price versus historical baseline Stripping gold from the specifications Procurement financial benefits early payments, rebates etc Reducing carrying costs (raw materials, asset base) Headcount outsourcing, technology & other efficiencies Demand reduction Tax exposure reduction Internal process re-engineering Copyright 2015 Azul Partners Inc. All rights reserved. Not for distribution. - spendmatters.co.uk - 8

9 Factors considered in order of recognition List price discounts Initial or average RFP quote versus final Reduced cost of quality Financials currency hedging, derivatives Blocking supplier price increases Savings against market index Supplier collaboration Profit management supply risk management Copyright 2015 Azul Partners Inc. All rights reserved. Not for distribution. - spendmatters.co.uk - 9

Copyright 2015 Azul Partners Inc. All rights reserved.

11 Procurement maturity & strategy 1 Initial Impact 2 Capturing Spend 5 Dynamic & Fluid Generate innovation & more revenue streams for business. Direct & Indirect spend under procurement mgmt. P2P systems sync with all supply networks (physical, digital & financial) 4 Influence & Outcomes Increase the scope and impact of procurement within the organization. S2P processes are integrated with supply chain operations including supply chain financing. 3 Transactionally Aware Empower procurement strategic role to impact the bottom line. S2P processes are fully integrated and automated (full set of categories are enabled). Analytics starts playing a bigger role for buying decisions. Capture indirect spend under management with the support of an e-procurement solution and spend analytics to start generating savings. The procurement process is automated. Ensure supply with a lack of technology support and no visibility spend. The P2P process is disjointed. Copyright 2015 Azul Partners Inc. All rights reserved. Not for distribution. - spendmatters.co.uk

12 Spend Analytics what is going on? How sophisticated is your analysis/analytics? Level 1 the basics pull AP history, vendor names, tax ID Analyze the data off-line build procurement cubes 80/20 as needed rinse and repeat Leverage suppliers they almost always have better data The business value comes from seeing how much and where your money goes and being able to have conversations Copyright 2015 Azul Partners Inc. All rights reserved. Not for distribution. - spendmatters.co.uk

13 Spend Analytics what is going on? Get to the next level of insights items to understand: Go beyond the P-card issuer get visibility into Level 1 (spend by supplier not incl. tax) and Level 2 spend (incl. tax) MSP spend e.g. Staffing, 3PL, MRO What is not addressable spend? Give everyone access visibility to a common single source of truth is powerful to drive change Copyright 2015 Azul Partners Inc. All rights reserved. Not for distribution. - spendmatters.co.uk

14 Supplier management all those 3 rd parties Who are you really buying from? Please use technology here SRM/SIM/SLM, MDM Understand your risk exposure brand value is expensive Consider n-tier relationships Competitive value add with US, UK, EU clients Integrate with everything! Copyright 2015 Azul Partners Inc. All rights reserved. Not for distribution. - spendmatters.co.uk

15 Sourcing process Get the market clearing total picture never assume Understand the scope Communicate the scope with all stakeholders Capture your steps, create best practices, document this becomes your institutional memory Integrate with CLM and SRM Copyright 2015 Azul Partners Inc. All rights reserved. Not for distribution. - spendmatters.co.uk

16 Contracts Concluding the sourcing process Executing on the efforts avoid unimplemented savings Tracking performance Please use technology here both to find, onboard, and manage your contracts please. Integrate with P2P process Copyright 2015 Azul Partners Inc. All rights reserved. Not for distribution. - spendmatters.co.uk

17 Procurement Paper-based? eprocurement? Procure-to-pay system? Is spend really under management? Enable at first control later Sunlight and fresh air fixes many issues Copyright 2015 Azul Partners Inc. All rights reserved. Not for distribution. - spendmatters.co.uk

18 Risk GSCRM thinking Global Supply Chain Risk Management GSCRM Natural disasters Political events Labor issues Risk visibility Copyright 2015 Azul Partners Inc. All rights reserved. Not for distribution. - spendmatters.co.uk

19 CSR Sustainability, Diversity, Local Impact Another area to deliver profit impact Fair wages Local sourcing Economic impact the n-tier multiplier Mentoring supplier development Diversity Copyright 2015 Azul Partners Inc. All rights reserved. Not for distribution. - spendmatters.co.uk

operating model Effective value tracking methodology Reporting relationships Copyright 2015 Azul Partners

21 Savings Visibility comes from Spend Visibility Spend Visibility Process Visibility Measurement Visibility Audited, Visible Realized Savings Electronic master data technology Clear savings booking process Clear operating model Effective value tracking methodology Reporting relationships Copyright 2015 Azul Partners Inc. All rights reserved. Not for distribution. - spendmatters.co.uk

22 What we have covered Perception problem Factors what constitutes a Hard Cost Saving? Spend Analytics what is going on? Supplier Management who are your 3 rd parties? Sourcing those pretty negotiated savings! Contracts what are you committed to? Procurement what are you actually buying? GSCRM what is your risk exposure? It is all connected Copyright 2015 Azul Partners Inc. All rights reserved. Not for distribution. - spendmatters.co.uk

YOU RE MISSING THE POINT % Three reasons a margin point (or more) is walking out your door and how you can get it back

YOU RE MISSING THE POINT % Three reasons a margin point (or more) is walking out your door and how you can get it back Indirect spend is bigger than you think. It is a lot BIGGER. It s no secret that many