Cost Reduction Primer


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The Spend Reduction framework is a detailed guide for conducting an Enterprise Cost Reduction project. The objective of this document is to describe and provide guidance around the approach and practices applied on spend reduction engagements.

- What is Spend Reduction: Spend reduction involves reducing operating expense on purchased goods and services through demand management, strategic sourcing, and procurement-related tax minimization. It also addresses the importance of a well-designed procurement function to achieving and sustaining spend efficiencies.

- How much does it save, how fast, and how many times have we done it: Spend reduction can lead to significant cost savings typically in the range of 10-25%. It usually identifies a mix of short and longer term cost reduction opportunities.

- How comfortable are we with existing content: Developed content has been reviewed and approved by SMEs. Additional content, potentially in a stand alone document, should be developed to outline techniques and practices specific to optimization of employee benefits.

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Cost Reduction Primer

  1. 1. Spend Reduction A Project Guide Date
  2. 2. Table of Contents I Spend Reduction Overview 3 Page # I. Spend Reduction Overview 3 II. Spend Reduction Approach 8 III. Spend Reduction Lessons Learned 42 IV. Developing a Procurement Organization 43 Appendix 48 2 This document is a partial preview. Full document download can be found on Flevy:
  3. 3. Savings Lever 1: Reduction in Unnecessary Spend through Demand Management Usage reduction programs are often difficult to measure but can result in significant benefits once the true demand drivers are identified. Savings Lever 1: Reduction in Unnecessary Spend through Demand Management demand drivers are identified. Demand Management Lifecycle Key Components • Develop baseline by collecting historical purchasing data for all categories Key Components • Increase transparency of spending through tracking expenses to source • Ensure business expenditures are not • Understand demand drivers and usage trends • Interview key business constituents to accurately assess business needs – di ti i h b t “ t h ” d p wasteful for the organization as a whole (e.g. reuse PCs, furniture, printers) • Identify spend avoidance areas ( it l d ti )distinguish between “must have” and “nice to have” requirements • Assess projections in light of overall business strategy (capital and operating) • Tie cost reduction efforts directly to budget reductionsDrive Appropriate Usage & Track Savings Key Components • Instill a culture of cost awareness; encourage “frugal” usage and purchasing – increase implications ofusage and purchasing increase implications of wasteful spending • Tie cost containment achievements to key individuals’ performance evaluations • Establish performance metrics and measure actual spending to budget 4 spending to budget • Provide monitoring and controls to eliminate cost creep • Develop management reports on savings and usage This document is a partial preview. Full document download can be found on Flevy:
  4. 4. Savings Lever 5: Tax Related SavingsSavings Lever 5: Tax Related Savings Identifying and integrating tax savings opportunities (e.g. recovery, minimization, savings preservation) as part of the overall procurement process are often overlooked.of the overall procurement process are often overlooked. Tax Recovery Opportunities Overpayment Source • Suppliers act in their own self interest, not the company’s as they Tax Savings Preservation • A company needs a formalized approach to track tax law changes, evaluate their impact and create a response Tax Decision Tables • Sales/Use Tax • Customs/Duties • VAT • Excise Tax collect a significant portion of taxes • A purchase exempt status may often be overlooked or debated • Tax decision making process is often manual resulting in significant errors Operational Support Audit Management • Company employees frequently encounter tax issues, but do not know to whom to address these issues; a tax outsourcing arrangement can be provided to support operations • Once a company centralizes its procurement and accounts payable process, the transaction tax audit managementExcise Tax • Credits & Incentives • Other (e.g. Licenses) • The burden of making tax decisions is often placed on procurement or in the field (non-tax functions) • Tax legislation locally, nationally, and globally, changes constantly Tax Planning • Early identification of significant transactions will allow for their timely review, in order to minimize associated current and future tax costs payable process, the transaction tax audit management process is further enhanced and can also be outsourced l / li i b d• Some exemptions (e.g. credits and incentives) require a refund claim Tax Minimization Formation of a strategic procurement company to integrate tax planning opportunities and streamline compliance Implementation Considerations T l i h ld b i d i ll l h i Outsourcing • Sales/Use tax compliance function can be outsourced to increase efficiency and minimize inconsistency in reporting planning opportunities and streamline compliance Operating Company • Tax planning processes should be integrated into overall supply chain strategy and approach • Efforts to reduce tax costs and improve performance need to be aligned with business objectives and process scope A i f hi i l d h ld b l d i i ll i ld Procurement Supplier Transactions with Sales Tax Delivery of Goods • A review of historical spend should be completed as it typically yields many opportunities for the recovery of erroneously paid or calculated taxes • Ongoing benefits can be realized by tracking tax spend, identifying savings opportunities and actively pursuing tax cost reduction 6 Company Supplier Purchases without Sales Tax savings opportunities and actively pursuing tax cost reduction This document is a partial preview. Full document download can be found on Flevy:
  5. 5. A structured six-step approach to spend reduction ensures accurate analysis of improvement opportunities and II. Spend Reduction Approach Six-Step Project Approach realization of maximum savings. i. Diagnose and Develop Spend Strategy ii. Implement Improvements 1. Establish Baseline and Analyze Spend 2. Assess Supply Chain 3. Perform External Market Analysis 4. Rationalize Category Spend* 5.Recover Spend 6. Implement and Capture Savings Major Activities: • Gather top-down and bottom-up financial data and reconcile • Gather volume • Define category markets relative to target categories • Analyze market • At category level, understand usage patterns, existing requirements and • Conduct interviews and gather insights on procurement processes and organization • Review past payments, invoices and other billing data • Identify payment and • Prepare for implementation; establish: − Transition andGat e vo u e information • Develop spend cube and validate with business owners • Perform spend a y e a et trends/category evolution • Perform Porter’s Five Forces analysis • Establish supplier q demand drivers • Develop specifications standardization/ rationalization strategy and gain buy-in g • Capture demand driver and specification information • Review existing contracts and y p y billing anomalies/ errors: − Overpaid sales/ use/VAT taxes − Discrepancies between change communication plan − Supplier management Benefits analysis: – Segment spend by: business units, suppliers, categories – Develop TCO universe • Develop external spend management strategy • Issue RFP to pre- selected suppliers • Use key leverage points during negotiations • Select suppliers and finalize contracts agreements • Assess existing policies and procedures • Develop perspective on rigor of existing between invoices and payments − Discrepancies between contracted rates − Benefits tracking mechanism • Establish clear savings ownership • Hand-off to – Develop TCO • Identify target categories finalize contracts • Optimize procurement- related tax spend on rigor of existing monitoring and compliance mechanisms and payments • Request recovery implementation team Key Deliverables: • Spend Cube • Total Cost of Ownership (TCO) • Target Category List • Demand, supplier and tax driven spend reduction programs • Hypothesis on efficiency and effectiveness of procurement operations • Market intelligence and per category points of leverage • Identified overpayments • Recovery strategy • Improvement implementation and savings capture 8 Spend Reduction Strategy Sustainable Savings and Recoveries Major Outcome: * Content on tax related spend reduction/avoidance opportunities may need to be developed further This document is a partial preview. Full document download can be found on Flevy:
  6. 6. 1. Establish Baseline And Analyze Spend Constructing an accurate spend baseline is critical for defining the right target categories and ensuring credibility of subsequent analyses and performance improvement recommendations. Baseline Construction and Reconciliation Top-Down Analysis Based on P&L Data % 100% 10 90 15 Bottom-Up Analysis G/L Spend Cube 35 40 Accounts Payable Reconciliation 35 Total One- “Normalized” Goodwill Personnel Totaly b e Purchasing Reconciliation Reported Expenses Time Items Expenses & Other Non-sourceable Related Sourceable Expense Sub-CategoryCategory % of Total Spend Purchasing System • Supplier • Date Spend Attributes • Office Equipment • Benefits • Employee Services • T&E • Temps HR 14% • Telecom • Equipment • Computing • Market Data • Contract Programming IT 32% Transaction Log • Supplier • Buyer • Spend • Currency • Geography • Date • Units • Category • Sub-Category • Item T t l • Advertising Media • Direct Mail • Other Marketing & Promotion • Supplies • Professional Services • Printing Business Specific • Real Estate • Logistics • Other Facilities & Infrastructure 100% 9% 18% 27% 10 Total 100% This document is a partial preview. Full document download can be found on Flevy:
  7. 7. Spend Analysis Segregating operating expense by category business unit and supplier provides a multidimensional view Expense Breakdown by Category $Millions Expense Breakdown by Business Unit $Millions Segregating operating expense by category, business unit and supplier provides a multidimensional view of the expense base, and enables insights into existing procurement practices. Banking ExampleBanking Example $910M 142 141 96 $Millions Top 9 categories represent 62% of operating expense $Millions $1561M 1074 One business unit accounts for 69% of the operating expense 96 52 41 41 33 9 9 345 209 Total Operating Expense IT Facilities Prof. Services Office Supplies Cash Services Marke- ting Bank Eq. & Services Printing Travel Other Total Operating Expense Financial Services Regional Consumer Services Electronic Investments Small Business Insurance Other 114 91 28 45 $1.8B Expense Breakdown by Supplier $Millions Top 20 suppliers represent 60% Supplier Concentration By Category Percent Supplier % Banking Example Example Top 10 suppliers represent 83%$ Top 20 suppliers represent 60% of the operating expense 71 74 77 80 83 100 Cumulative % % Top 10 suppliers represent 83% of category spend, remaining 17% are split among 14 suppliers 23 14 14 9 6 5 3 3 3 3 17 23 37 51 60 66 71 74 $726M 12 Total Operating Expense Other Suppliers Top 20 Suppliers 6 5 3 3 3 3 Supplier A Supplier B Supplier C Supplier D Supplier E Supplier F Supplier G Supplier H Supplier I Supplier J Other 14 This document is a partial preview. Full document download can be found on Flevy:
  8. 8. 2. Assess the Supply Chain Supply chain data on existing processes organizational structures compliance and monitoring capabilities tools and IllustrativeSupply Chain Landscape Supply chain data on existing processes, organizational structures, compliance and monitoring capabilities, tools and technology platforms is gathered through interviews with key stakeholders. Users Vendors Sourcing and Vendor Management Test Payment ProcessingProcurement Operations Needs Profiling Strategy & Specification Development Bidding and Evaluation Negoti- ation Test Implementation and Monitoring Order Origination Approval Mgmt. Order Placement/ Tracking Delivery/ Confirm Invoice Capture and Coding Matching/ Proofing Payment Authorization Payment Organizational Specifications Contracts Breakdown Analysis: Sourcing Service Level Tracking Procurement Operations Variance Analysis against Payment Operations Central Procurement vs. Business Owned / Policies and Procedures Organizational Structure Breakdown Analysis: • By Vendor • By Category • By Spend Rolling Tally of Successful Failed Bids by Vendor Compliance and Monitoring Service Level Tracking for Procurement: • Accuracy • Timelines Transaction Log of Planned Purchases and Contracts Variance Analysis against Budget Exception Reports of Unauthorized Spending Rolling Forecast of Items d S dEfficiency Reports for Historical Review of: • Strategic Vendors • Approved Vendors • Alternate Vendors Monitoring Capabilities and SpendEfficiency Reports for Procurement Operations Tracking of Unplanned Purchases Tax Assessment and Monitoring Ratecards Purchasing Card Metrics Barcoding Imaging Procurement Packages Tools 14 Procurement Packages Workflow Management Technological Platform This document is a partial preview. Full document download can be found on Flevy:
  9. 9. 3. Perform External Market Analysis Porter’s Five Forces Analysis To assess the client’s market bargaining power and define possible negotiation strategies external market analysis is performed of the current environment and emerging trends. Buyers Have Bargaining Power When: • Purchase volumes are large or concentrated • Purchases represent a significant part of the supplier’s revenue structure Barriers To Entry Include: • Economies of scale • Product differentiation • Capital requirements Entrants • Purchased products are standard or undifferentiated • Few switching costs exist • Buyers earn low profits and can use this to negotiate a greater portion of the profits in the value chain A dibl th t f b k d i t ti i t • Capital requirements • Barriers to exit • Switching cost • Access to distribution channels • Cost advantages independent of scale Market I t l pliers uyers • A credible threat of backward integration exists • Purchased product is unimportant to the quality of the buyer’s product • Buyer has full information about the supplier competitive positioning and cost structure g p − Product know-how or design characteristics − Favorable access to raw materials − Government subsidies • Government policy Internal Competition Sup Bu Rivalry Among Competitors Is Strong If: • Numerous or equally balanced competitors exist • Industry growth is slow Suppliers Have Bargaining Power When: • A few companies dominate • Suppliers are more concentrated than buyers • No viable substitutes exist Substitutes • High fixed or storage costs exist • Products/services lack differentiation or switching costs • Capacity must be added in large increments • High exit barriers • No viable substitutes exist • Customer is not critical for the supplier group • Suppliers’ products/services are a major part of the customer market cost structure • Product differentiation has been developed Viability Of Substitute Products Depends On: • Relative value/price of a substitute compared to an i d t ’ d t • High exit barriers • Forward integration is feasible • Customers downstream of the supplier can pull the supplier’s product through (e.g., branded items) industry’s product • Cost of switching to the substitute • Buyer’s propensity to switch 16 This document is a partial preview. Full document download can be found on Flevy:
  10. 10. Potential Economic Levers A number of economic levers can be applied across categories to ensure that supplier costs are as low as Key Economic Levers possible and that the client pays the most competitive prices while receiving quality products and services. Increasing Leverage Through Competition Lever: Restructuring Supplier E i Increasing Price Transparency Reconfiguring Demand S ifi tiCompetition Economics p y Specifications Mechanisms for Applying Lever: • Identify alternative sources of supply • Communicate credible threat and willingness to switch from incumbent suppliers • Understand supplier economic drivers and cost structure • Redefine supplier roles • Disaggregate pricing to an appropriate level of granularity • Ensure components of pricing match underlying cost drivers • Reduce complexity by establishing standards • Push for lower-cost alternatives • Consolidate and manageincumbent suppliers match underlying cost drivers • Consolidate and manage internal demand Levers Traditionally Underutilized (Requires Customer/Procurement Partnership) Traditional Organizational Focus 18 This document is a partial preview. Full document download can be found on Flevy:
  11. 11. Target Categories Prioritization Illustrative Data and insights from diagnostic stage enable the prioritization of target categories for spend reduction through demand management, sourcing and tax minimization strategies. Prioritization Criteria High Telecom (Except Cellular) Sourceable Categories With Savings Impact Express Mail Travel Marketing, Promotion IT Procurement Contract Programming IT Maint. Address Immediately Credit Report Temp. Labor Office Supplies Legal Savings Potential Impact Low Cellular Wave I Wave II IT Peripher.. Checks Furnit. Copy, Fax ATM Forms Key Variables: Low Ease of Implementation Difficult Easy • Spend level • Market • Degree of centralization • Sourcing complexity • Required vs. elective spend • Business line support potential • Total cost of ownership −Contracts −Policies −Processes −PO and reporting p y − Specifica - tions − Supplier market dynamics p • Level of standardization of specifications • Metric l i pp • Business ownership of spend • Time needed to achieve lsystem • Management support − Number of customers/ users • Supplier economics • Implementation complexity • MIS availability approval 20 • Implementation complexity This document is a partial preview. Full document download can be found on Flevy:
  12. 12. ii. Implement Improvements During the implementation phase the set of improvement opportunities identified and prioritized in theDuring the implementation phase, the set of improvement opportunities identified and prioritized in the diagnostic phase are investigated in more detail, refined and rolled out to the business(es). In the following pages we describe how to: 4 R ti li C t S d* Eff t t ti li t d i l d4. Rationalize Category Spend*. Efforts to rationalize category spend include: a. Demand Rationalization: reconfiguring of product/service specifications and optimization of usage b Strategic Sourcing: reduction of costs by increasing leverage with vendorsb. Strategic Sourcing: reduction of costs by increasing leverage with vendors c. Procurement Tax Optimization: minimization of procurement-related tax spend While demand focused activities often precede supplier sourcing, both types of efforts should not be pursued in isolation of each other Tax strategies can be pursued in conjunction with demandpursued in isolation of each other. Tax strategies can be pursued in conjunction with demand management and sourcing or as part of an independent tax minimization initiative. 5. Recover Spend. In addition to reducing the operating expense base going forward, very often the opportunity exists to recover certain types of spend that have been incurred in the past due toopportunity exists to recover certain types of spend that have been incurred in the past due to errors/inefficiencies in the billing, payment and tax assessment processes. 6. Implement Improvements. When executing against a broad spectrum of spend reduction initiatives, ongoing organizational commitment and rigorous management against savings targets ensure successongoing organizational commitment and rigorous management against savings targets ensure success. 22 * Content on tax related spend reduction/avoidance opportunities may need to be developed further This document is a partial preview. Full document download can be found on Flevy:
  13. 13. Reconfiguring Specifications Reducing the number of specification variances enables larger order quantities and simplified operatingReducing the number of specification variances enables larger order quantities and simplified operating environment and can lead to sizeable reductions in spend . Eliminate “Add-On” Features Plastics “De-spec” Cli t ld d th b f l ti t it f 162 t 90 Disguised Client Example “Extra” design features costing the Client $240,000 annually can be eliminated with no discernable impact to the cardmember. Shell Platinum MasterCard Client could reduce the number of plastic types it procures from 162 to 90 by utilizing front-indent BIN printing. BINs Drive Multiple Card Types Number of Card Types 23 16243 Savings Specs: 000 00 0000 0000 0000 00 0000 0000 0000 00 0000 0000 0000 00 0000 0000 0000 00 0000 0000 0000 0 Base Plastic with M t C d 7 Additional Lith 4 Additional Silk Foil overlay f Sh ll Base Plastic + Colors + Silkscreen + Foil Base plastic with MC hologram, add’l litho and silkscreen colors and foil 96 23 90 Simplified Ordering Lower Risk of Shortage Cost/1000 Cards $182.85 MasterCard Hologram Litho Colors Silkscreen Colors for Shell Logo $185.72 $200.72 $225.72 $225.72 silkscreen colors, and foil overlay • Replace with ink • Replace with UV • Reduce # of colors being De-spec: Purchased Volume (‘000/annum) Volume 8,564 20 3,433 12,017 12,017 Chase Agent Banks Co-Brands Total in Current Environment "De-Spec" Environment of Shortage Lower ChanceLower Chance of Error Client can reduce its plastics expense by 12% per year while simplifying its current operating environment. colors g added Client can discontinue plastic types issued in very low volumes by migrating cardmembers to other plastics. Reduce Plastic Types Reduce Plastic Types Per Type (‘000) 89 0.9 80 74 133 1 2 Spend Reduction from Plastics “De-spec” $ Thousands current operating environment. 2,200 240 30 1,930 • Simplified operating Other Benefits Low Volume Cards Number of Card Types cardmembers to other plastics. 65 Select Gold MasterCard Card Type Potential Conversion Gold MasterCard Simplified operating environment requires fewer set-ups • Streamlined ordering and inventory management process will lower risk of 12 7 2 Business Visa Corporate Visa : Employee Corporate Visa Employee Corporate Visa : 24 Eliminate Low Volume Current Environment Eliminate "Add-Ons" Consolidate BINs and Cards "De-Spec" Environment will lower risk of shortages 2001-2003 Re-Issue Volume Forecast (‘000) 2 0-5 6-10 11-15 16-20 3 4 This document is a partial preview. Full document download can be found on Flevy:
  14. 14. While the strategic sourcing process follows a standard set of steps across sourceable categories, the rigor, timing and iterative nature of these steps depend on the specifics of the category b. Strategic Sourcing and iterative nature of these steps depend on the specifics of the category. Conduct Negotiations and Select Supplier(s) Finalize Pricing and Contract(s)Develop and Distribute RFP • Finalize workplan and timeline • Assemble team and conduct kickoff meetings • Determine supplier selection criteria and relative weightings • Analyze/score price and non-price • Conduct and monitor testing (if “new” supplier selected) • Negotiate detailed contract pricing, Key Activities g • Select suppliers to receive RFP • Conduct supplier notification meeting • Revise/finalize baseline assessment and savings targets • Draft RFP y p p characteristics of RFP responses • Identify key leverage points • Conduct multiple competitive rounds of negotiation with selected suppliers • Achieve maximum movement in price g p g, terms and conditions • Obtain agreement on final contract • Forecast savings • Develop supplier monitoring and reporting process • Incorporate stakeholder feedback • Submit RFP to suppliers p points and other deal principles • Identify recommended supplier(s) and gain stakeholder agreement • Outline high-level implementation plan • Develop plan for savings tracking p g p • Develop internal / external implementation and communication plans Deliverables • Detailed work plan • Detailed data request • Rationalized product specifications • RFP scoring model • RFP analysis/evaluation • Supplier selection approach p p g g • Final contract(s) • Category savings forecast • Enterprise roll-out implementation and• Rationalized product specifications • Revised spend baseline and savings targets • RFP • Supplier selection approach • Negotiated price points and other deal principles • Supplier recommendations • Enterprise roll-out implementation and communication plans 26 Timing 6 weeks 10 weeks 3-8 weeks This document is a partial preview. Full document download can be found on Flevy:
  15. 15. Request for Proposal A carefully and well-crafted RFP drives transparency around costs and SLAs, thus enabling consistent interpretation of requested information and accurate bid evaluation. Sample RFP 1. Introduction Key Objectives • Communicate purpose of RFP and overall vision 2. RFP Instructions • Provide instructions for submitting responses (timing, format etc.) • Outline terms and conditions for RFP (liability issues and incurred costs, confidentiality, rights reserved, selection process, and contract award) 3. Commercial Information • Solicit responses from suppliers on – Base price: What is the price for proposed volume and terms? – Alternate price: What if the supplier provides additional services? – Payment terms: What is the discount for early payment?y y p y – Volume discount: What is the discount for volume purchases? – Price adjustment: How should the contract prices be adjusted over time? – Warranty/substitutions: What are the provisions in cases of defects? 4. Technical/Functional Specifications 5 Additional Questions • Describe technical and functional specifications pertaining to the specific products or services to be provided • Obtain company-specific information5. Additional Questions Obtain company-specific information • List of key customer references 6. Response Media • Formatted response media (rate cards, questionnaire forms, etc) to enable efficient and accurate data analysis 28 efficient and accurate data analysis This document is a partial preview. Full document download can be found on Flevy:
  16. 16. Supplier Response Evaluation A careful and objective evaluation of RFP responses along pre-defined criteria helps narrow down the list of viable suppliers for more in-depth review. S i i d Analyses P i A l i Insights• Supports negotiation and enables team to drive to best overall deal (may chose to leverage synthetic price in negotiations)RFP Response: Price Analysis •Lowest bid by cost component •Lowest total bid •Difference from minimum •Savings from current Insights • Helps eliminate some suppliers and pre-select others for negotiations Si l li • Price • Quality • • Supplier 3 Savings from current •Price sensitivity • Price RFP Response: Supplier 2 RFP Response: • Signals supplier appetite to gain business • Highlights areas for incremental• Complements priceNon-Price Analysis + • Quality • •• Price • Quality • • p Supplier 1 improvement to that identified in diagnostic • Synthesizes key messages for retained li Complements price analysis and highlights possible improvements in non-price areas that might also drive savings (e.g. reduction in defects and Non Price Analysis •Coverage •Quality •Specifications •Delivery • Collect RFP responses from suppliers, review, follow up for • suppliers • Drives approach for next round of selection process R fi ti ti reduction in defects and substitutions minimizes downtime) •Value-add • Serve as “cheat sheets” d t ti ti Supplier Snapshots d i i / i i + clarifications and ensure completeness • Refines negotiation tactics and support negotiation strategy and ongoing communication with suppliers •Product variations/pricing options •Strengths and weaknesses •Terms •Negotiation potential 30 Negotiation potential This document is a partial preview. Full document download can be found on Flevy:
  17. 17. Key Considerations for Negotiations and Contract Development Provisions Elements Key/Issues Well-structured negotiations cover key contract elements and facilitate necessary trade-offs. A. Pricing Provisions a. Is the client protected against a change in the volume mix? b. Are volume ranges appropriate? c. Is the volume logical and acceptable? 1. Volume Spending Definitions 2 N ti P i i a Is the client protected against items not specified/priced in the contract?2. Negative Provisions a. Is the client protected against items not specified/priced in the contract? b. Is there a cap on the number of items and annual $ amount that the supplier can attempt to negotiate each year? 1. Specificity a. Is there an exhaustive list of metrics? b Are the definitions of the metrics clear? B. Performance Requirements b. Are the definitions of the metrics clear? c. Are the metrics easily measurable? 2. Penalty Trigger Definition a. Are the incentives/credits/termination levels defined clearly? b. Are the incentives/credit $ amounts appropriate and clearly specified? c. Do these definitions aid in problem resolution and correction? C. Duration 1. Tenure a. Is the tenure reasonable? b. Does the tenure provide the client with adequate flexibility? 2. Extensions a. Can the client extend the contract if desired? b A th i i f ti ti l t t f th t t i fb. Are there provisions for renegotiating select terms of the contract in case of an extension? 1. With Cause a. Are the performance conditions which trigger termination clearly defined? b. Are the costs for termination and transition to an alternate supplier sufficiently large and clearly defined? D. Withdrawal Provisions sufficiently large and clearly defined? 2. Without Cause a. Is there a provision for a notice period prior to severing the relationship? b. Are the costs to the client clearly defined? 3. Upon Examination a. Is the termination assistance process clearly defined? b D th li t h th ti t ti d th diti f l 32 b. Does the client have the option to continue and are the conditions for renewal specified? This document is a partial preview. Full document download can be found on Flevy:
  18. 18. c. Procurement Tax Optimization Procurement-related tax reduction opportunities can be pursued as part of an independent tax minimization initiative or as an integral component of comprehensive spend reduction. Tax Reduction Opportunities Criteria • A minimum of $50 Description • Procurement company (ProCo) can help reduce sales/use Required Information • Supply and asset spend Tax Reduction Opportunities Tax Advantaged Procurement Company $ million in annual supply and/or capital asset purchases p y ( ) p tax and property tax by employing one or more of the following strategies: − ProCo purchases supplies for resale to an affiliate and no sales tax is due at time of purchase. ProCo l li t th ffili t f l i pp y p by location • Legal structure • Procurement system capabilities to track inter- can resale supplies to the affiliates for lower price leading to lower sales tax. Additionally, supplies used in a lower sales tax jurisdiction will be subject to lower use tax. − ProCo purchases capital assets that will be sold p company transactions p p over time to an affiliate. In states with no property tax on inventory, tax will be deferred until the affiliate purchases and begins to use the assets. • A minimum of $50 million in annual asset purchases • Leasing company can provide sales and use tax deferrals and permanent savings: − Leasing company can purchase assets for resale and will not owe sales tax Then it leases the • Asset spend by location • Legal structure • Procurement system Tax Advantaged Leasing Company and will not owe sales tax. Then it leases the assets to the affiliated user, and collects and remits sales tax over the life of the lease thus reducing the NPV of total sales tax paid. − Early termination of the lease could eliminate the capabilities to track intercompany transactions and sales tax reporting 34 present value of any unpaid sales tax. This document is a partial preview. Full document download can be found on Flevy:
  19. 19. 5. Recover Spend Careful and structured analysis of contractual, billing and payments data helps identify one-time opportunities for spend recovery and potential areas for payment process improvements. Opportunities for Spend Recovery $ Millions Considerations Market Data Example 3 8 1.8 0.2 7.3 • A thorough review of existing contracts and past invoices helps identify, correct and recover erroneous charges and mistaken over/double-payments 25% 2% 3.8 p y • Spend recoveries provide relatively small, short-term financial impact – often within the range of 0.5-2% of reviewed spend • Longer term benefits are also realized; they 52% 100% $1.5M g y are related to uncovering and fixing issues with existing procurement capabilities: payment system and processes, contract compliance tracking, vendor performance measurement, etc.21% Sales Tax Overpayment/ Double Payment Invoice/ Contract Management Other Total Spend Recoveries 21% 36 This document is a partial preview. Full document download can be found on Flevy:
  20. 20. 6. Implement and Capture Savings Capturing full benefits of identified spend reduction opportunities requires detailed implementation planning, continued organizational commitment, and regular communication and follow-up.p g, g , g p Implementation/Transition Plan. A fully dedicated implementation team with clear responsibilities and ownership should be selected to execute against a detailed plan outliningresponsibilities and ownership should be selected to execute against a detailed plan outlining (1) the transition from old to new suppliers and (2) the communication of the new sourcing strategy, policies and procedures to all affected people. Savings Tracking Mechanism As improvements are implemented a tracking mechanismSavings Tracking Mechanism. As improvements are implemented, a tracking mechanism should be established to monitor the actual savings and timeline compared to the original estimates. Implementation progress should be communicated to the organization on a periodic basis. Supplier Relationship Management. A core team/function with clear responsibilities should be established to manage supplier relationships, monitor performance and drive continuous efficiency improvements. 38 This document is a partial preview. Full document download can be found on Flevy:
  21. 21. Savings Tracking Mechanism If savings cannot be measured and tracked they are not truly realized – a mechanisms to monitor and capture savings is essential to spend reduction success. Sample Process Overview i p Develop Savings Plan Update Forecast and Actuals Report and Monitor Savings Plan • Plan that details activities Savings Reports • Summary and detailed Forecast/Actuals P f i i i Plan that details activities required to achieve savings, including timing, accountability, and financial impact Summary and detailed reports that describe savings captured, slippage and savings at risk • Process for maintaining a rolling forecast and tracking captured saves Objective: • Develop an activity-driven savings plan that provides a basis for tracking savings • Maintain updated snapshot of all savings activities, purchasing volumes and user • Enable management to track progress and identify savings at risk Key Activities: for tracking savings purchasing volumes and user base changes at risk • Determine accountable managers • Update savings forecast for activities in plan • Determine distribution parameters (recipients timingActivities: managers • Create and distribute savings template • Collect and validate plans activities in plan • Account for volume/user base growth • Report completed activities and validate actuals parameters (recipients, timing, etc.) • Produce and distribute reports • Resolve slippage and “red” areas 40 This document is a partial preview. Full document download can be found on Flevy:
  22. 22. Comprehensive cost reduction initiatives that address each savings lever can deliver substantial and sustainable results. III. Spend Reduction Lessons Learned Lessons LearnedSavings Levers To maximize benefits, demand management activities should be implemented first; however they should not be pursued in complete isolation from sourcing Demand management benefits may not be fully realized until downstream governance and procurement changes are implemented Rationalizing and/or standardizing service level requirements is key; not doable without business line support Demand Management initiatives require tough choices; must be driven from the top; benefits will not be Demand Management Establishment of cost baseline is a critical first step; supplier negotiations and ongoing supplier/category management must account for total cost of category, not just price Demand Management initiatives require tough choices; must be driven from the top; benefits will not be sustainable without ongoing central oversight Governance & Procurement Greater supplier-related savings are often realized through efficiency improvements, service line standards or other cost-reducing actions than through negotiating a lower purchase price Industry best practices/price benchmarking are useful for setting standards of performance in supplier negotiations; however they should not be used in isolation or seen as absolutes Streamlining purchasing and fulfillment processes is a key savings driverg p g p y g A process to measure and track savings resulting from demand management, strategic sourcing, and/or other cost reduction initiatives is a key success factor (i.e. if it can not be measured, then nothing is saved) Tax Related Savings Tax recovery/avoidance opportunities often exist to some degree - realized via audit of past tax practices and payments A ‘ProCo’ (procurement company) can help capture and sustain tax savings 42 This document is a partial preview. Full document download can be found on Flevy:
  23. 23. Organizational Models A dedicated procurement organization helps institutionalize the sourcing strategy and increase spend under t th d i i f th i V i t i ti l d l i t d f ll f thmanagement thus driving further savings. Various procurement organizational models exist and for all of them some measure of shared infrastructure is critical for efficiency (e.g., admin functions, standard supplier-interfacing functions, etc.) Cons • Reduces flexibility in dealing with “special” commodities LOB h l t l Pros • Ensures maximum leverage of corporate spend All f i t t h Div. A Div. B Corporate Purchasing Centralized Alternative Models • LOBs have less control over procurement decisions • Requires coordination across multiple LOBs; Potential conflicts between LOB and • Allows for consistent approach across categories and regions • Allows for regional/functional approaches L d CM Decentralized/ Virtually Coordinated LOBs; Potential conflicts between LOB and corporate objectives • Corporate procurement group lacks authority to make decisions • Leverages corporate spend Div. A Purch. Div. B Purch. Corporate Purchasing Div. A Div. B Virtually Coordinated • May create unclear reporting relationships for procurement staff • Ensures consistency of approach across categories and regions CM CM Decentralized/ Globally Coordinated for procurement staffcategories and regions • Allows for regional/functional approachesDiv. A Div. B Corporate Purchasing CM Globally Coordinated • Leads to no/minimal leverage of corporate purchasing power • Allows for multiple, overlapping supplier • May drive higher costs and usage due to high degree of service customization CM Div. A Div. B Div. C Uncoordinated 44 p , pp g pp relationships and contracts Source: CONSULTANT Consulting research Purchasing Director This document is a partial preview. Full document download can be found on Flevy:
  24. 24. Many organizations take an incremental approach to building or transforming a procurement function, especially if ti f biliti i id l b i it Thi id iti l t iti f ‘ i i Approach to Procurement Transformation Planned Transition perception of capabilities varies widely across business units. This can provide critical opportunities for ‘mini- successes’, building momentum and enabling the broader organization to understand value Planned Transition Stage I – Demonstrate Value • Focus on corporate purchases to prove the concept of strategic sourcing and deliver ‘quick wins’ Stage I Head of Stage 0 – Multiple Purchasing Points Stage II Head of q Stage II – Maintain Momentum • Develop the organization • Continue to complete corporate categories • Commence high potential coordination Procurement Corporate Purchasing Corporate Purchasing Coordinated Categories Head of Procurement g p categories to capture ‘big wins’ Stage III – “State of the Art” Procurement • Complete transformation by developing infrastructure Stationery Catering Print Temps Statements Print Temps Catering Stage III infrastructure • Complete all remaining categories sourcing • Refocus on value to deliver ‘strategic wins’ p HR IT Market Data TelecomCatering Travel Office Equipment Security g Procurement Head of Procurement Corporate Co ordinated Business Procurement Support Corporate Purchasing Co-ordinated Categories Unit Specific Categories 46 This document is a partial preview. Full document download can be found on Flevy:
  25. 25. A diAppendix 1. Sourcing and Procurement Tools 2. A Spend Recovery Tool 3. Qualifications 4. Case Studies: a. Cash Services b. Market Data This document is a partial preview. Full document download can be found on Flevy:
  26. 26. CONSULTANT’s hosted e-Sourcing solution, XXXXX™, reduces sourcing cycle time by automating the RFP creation, distribution and response processes – bringing sourcing savings results significantly faster than traditional sourcing methods. The “XXXXX™” solution integrates Frictionless Commerce workflow tools with CONSULTANT category-specific sourcing practices. Users can access and customize CONSULTANT content in a Description traditional sourcing methods. g y p g p hosted on-line environment eliminating the need to develop category strategies, RFx templates, contract terms, etc. from scratch. • Speed to savings: Reduced cycle times required to strategically source a Benefits Workflow and Content Modules mirror the sourcing process for users as shown below. The CONSULTANT content described product or service − Access to CONSULTANT on- line tools, sourcing templates and benchmarks − Ability to re-use sourcing work • Demand management benchmarks and metrics • Category savings results for each process step is unique to each sourcing category. • RFx templates (directions, specifications capture spreadsheets, general • Communication plan templates • Transition plan templates Perform Program Management plans, templates and other work products • Better collaboration across departments divisions/ during the selection and evaluation phases from over 50 IT sourcing engagements questions) • Scoring and grading criteria • Sample compliance policies Analyze spend Develop Category Strategy Evaluate Supplier (as required) Negotiate / Contract (as required) Implement / Roll-out Perform Program Management • Ability to use reverse auctions (training, tools and templates) as a sourcing strategy, where it makes sense • Hosted environment limits costs • Category Prints detailing current industry conditions • Descriptions of Purchasing best practices • Negotiation worksheets • Sample Service Level Agreements • Templates for pricing 50 best practices • Total cost models Templates for pricing schedules This document is a partial preview. Full document download can be found on Flevy:
  27. 27. h d i l i i i li d i i b l d l 3. Qualifications We posses the resources and experience to not only minimize client costs and improve earnings, but to also develop a more efficient organization capable of rendering superior customer service and returns to shareholders. CONSULTANT Sourcing & Procurement Practice Overview • Over 300 sourcing and procurement practitioners globally with cross-industry experience and deep category expertise • 16 500 FSI practitioners serving clients in Europe Asia and the Americas; only global provider able to CONSULTANT Sourcing & Procurement Practice Overview • 16,500 FSI practitioners serving clients in Europe, Asia, and the Americas; only global provider able to bring full range of services (e.g. consulting, risk, tax, legal, audit) • Successful and proven track record in sourcing and procurement transformation with significant cost- savings delivered through demand management, strategic sourcing, and other process-related improvements • Extensive experience in designing and building complex purchasing alliances Best-In-Class Sourcing & Procurement and FSI Practices • Extensive experience in designing and building complex purchasing alliances • Only global provider able to bring full range of services (e.g. consulting, risk, tax, legal, audit) to bear for our clients • Collaborative and collegial working style key to effective socialization of recommended improvement opportunitiesopportunities • Change management tactics imbedded in our approach • Experienced in working across business and technology stakeholders • Combination of recent sourcing methods with traditional supply-chain management strengths • Development of industry and category-specific solutions (e.g., tools, strategies, methods) • Benchmarking capability for appropriate categories (maintained Firm wide) Proven, Integrated, Consensus Building Approach • Benchmarking capability for appropriate categories (maintained Firm-wide) • Sustainable sourcing savings balanced by high service levels and organizational capability • Skills / knowledge transfer integral to approachFocus on Effective Solutions Skills / knowledge transfer integral to approach • Processes and IT platform integration within scope • Access to tools and methodologies that are continuously updated and leveraged across our global engagements 52 This document is a partial preview. Full document download can be found on Flevy:
  28. 28. E i A C i We have deep cost reduction experience across a broad range of categories, some of which are listed below. Expertise Across Categories Select Category Experience General & Admin TravelIT Telecom Prof Services General & Admin >40 projects Travel >15 projects Representative Save: • Office Equipment (10-30%) Representative Save: • Agency (2-15%) IT >50 projects Representative Save: • Computers (10-30%) Telecom >50 projects Prof. Services >25 projects Representative Save: • Consulting (5-15%) Representative Save: • Long Distance (7-31%) • Office Supplies (12-42%) • Freight (5-30%) • Archiving (10-25%) • Courier (12-40%) May also include subscriptions fees • Hotel (5-20%) • Air (1-14%) • Car Rental (6-9%) • Expenses (10-25%) • Events (12-17%) • Peripherals (9-12%) • VAR (5-11%) • Maintenance (10-17%) • Software (1-6%) May also include managed services mainframes servers • Legal (2-5%) • Temp Labor (4-21%) May also include engineering support, IT contractors, audit, etc. • Local Voice (5-23%) • Data (15-50%) • Cell/Pager (10-22%) • Maintenance (10-18%) • Network (10-20%) Corp Services HR/ Benefits 0 j Print/Marketing 30 j Utilities 1 j subscriptions, fees, reprographics, mailroom, shipping supplies etc. services, mainframes, servers Real Estate 50 j>20 projects >50 projects>30 projects >15 projects Representative Save: • Waste Mgmt (15-20%) Representative Save: • Insurance (5-10%) • Benefits (3-14%) Representative Save: • Printed Material (8-31%) Ad & M di (8 12%) Representative Save: • Utilities (2-8%) Representative Save: • Rent & Lease (10-30%) M l i l d P t >50 projects • Janitorial (10-13%) • Landscaping (10-30%) • Security (9-15%) • Facilities Maintenance (2-8%) May also include Catering • Training (10-20%) May also include recruiting, relocation, payroll, hiring, etc. • Ad & Media(8-12%) • Forms(20-26%) • Direct Mail (13-33%) May also include Exhibition Services, PR Agency, Promotional Material May also include Property Management 54 May also include Catering, Vending, Concierge, etc. This document is a partial preview. Full document download can be found on Flevy:
  29. 29. 4. Case Studies a. Cash Services CONSULTANT led a major banking institution through our holistic spend reduction approach and delivered annual savings of over 33%, not including conversion costs. Situation Project Approach • Leading financial services provider spent approximately $84MM on the following cash services: – ATM maintenance (first and second line) – ATM cash replenishment – ATM equipment • A cross-functional team was assembled with the following goals: – Leverage purchase volume to negotiate pricing concessions (8-10%) – Challenge the demand set and cash processes – Rationalize the vendor base – Simplify the invoicing process – TCD maintenance – TCD equipment – Branch transportation and servicing – Cash vault services • Numerous service and cost challenges were prevalent. – Strengthen contracts by carefully defining service levels, terms, and conditions • Over 30 vendors were involved in a disciplined, systematic sourcing process Total Annual Spend $ Millions Baseline Spend ($millions) Spend after Cash Services S i Eff t ($ illi ) $85 Sourcing Effort ($millions) 58 33% Overall Savings Annual Run Rate Savings of Nearly $26MM 26 58 49% 36% 26 7 8 11 9 21 3 13 5 7 8 10 13 2 24% -18%33% 17% 36% 56 3 2 Grand Total Armored Transport ATM Cash Replenishment ATM Maintenance ATM Equipment Cash Vault TCD Equipment TCD Maintenance This document is a partial preview. Full document download can be found on Flevy:
  30. 30. b Market Data CONSULTANT and a global broker/dealer recently achieved 12% run-rate spend reduction and implemented Global Broker/Dealer b. Market Data g y p p processes and tools for ongoing sustainability following an internal initiative. Key Challenges: Approach Validate • Market data spend for global markets and investment banking had grown steadily over the last 3 years to $182 Million annually • Executive mandate to achieve 30% run-rate cost reductions Internal initiative unable Diagnostic and Prioritization Profiling, Substitution, & Negotiation Validate & Implemen t Sustainability & Governance • Analyze market data • Detailed requirements / • Guide business • Implement policies & Accelerating Market Data Spend cost reductions – Internal initiative unable to achieve targets Unclear Product spend • Identify, size and prioritize opportunities • Agree targets profiles • Define scenarios • Negotiate options decisions • Develop plans & implement savings – ‘walk costs t th d ’ p procedures • Implement governance and management processes • No clear short-term or long-term product strategy Strategy out the door’ • Define long-term strategies • High utilization of high cost services • Fragmented and inconsistent vendor Results R d d l t d b 12%+ d t d t f f thFragmented Operating Model g management limiting ability to optimize buying power • Businesses accountable for spend, yet Market Data support is insufficient and inconsistent across regions • Reduced annual run-rate spend by 12%+ and created momentum for further cost reduction – Actively ‘walked costs out the door’ • Influenced vendors to reconfigure products and positioned client to purchase lower cost niche solutions (e.g., modified Europro vs. Markets 3000) • Developed explicit product strategy and implementation plans• Developed explicit product strategy and implementation plans • Implemented governance processes and tools to provide ongoing sustainability and further cost reduction • Achieved accurate management reporting and financial transparency − Policies and procedures − Governance processes and service aligned organizational structure & Governance Limited Financial Transparency & Governance • Lack of financial reporting to support management decisions and actively manage spend • Lack of formal governance processes or policies and procedures 58 − Governance processes and service-aligned organizational structure − Globally aligned vendor management processes and operating model p p This document is a partial preview. Full document download can be found on Flevy:
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