Managing Services Spend ...


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Managing Services Spend
Presented at Procure con china2004_final

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  • In today’s ultra-competitive environment, companies are looking for every possible way to improve their bottom line. A relatively new discipline—spend management—promises to deliver significant savings by enabling companies to gain control and manage their enterprise spending on an ongoing basis SGA aka Services aka Indirect …very little focus Lots of untapped opportunities Usually “procured” by non procurement specialists
  • Issues faced by CEOS/ CFOs,Procurement Professionals =  $$$ Cost Savings, Productivity, Profitability / Bottomline , Increase Stakeholders wealth The average indirect spend for a Fortune500-size company, excluding service companies, is 50 percent of the total spend. The percentage of indirect spend varies by industry, from a low of 35 percent to a high of 60 percent (see Figure 1). As companies continue to outsource non-core capabilities and bundle services with their products, the delineation between direct and indirect spend is becoming blurred. For example, if a computer manufacturer also offers consulting services, should consultant travel be classified as a direct or an indirect spend item? Controlling spend that is difficult to identify, quantify, and assign to particular users is challenging for all companies. Good eg : HP , IBM
  • The spend management discipline can be described as an iterative three-step Find-Get-Keep savings process. As illustrated in Figure 1, and discussed in more detail below, each step includes key activities and enablers relevant to specifi c spend management objectives. Find Savings: Companies begin the spend management process by gaining an understanding of current expenditures. After gathering data from a variety of internal business systems, they then normalize and cleanse it, and fi nish by classifying all expenditures into categories. Get Savings: After identifying top spending categories, companies analyze the information to understand which categories have the highest potential for savings, and how they can best leverage sourcing. Organizations then pursue sourcing activities such as rationalizing their supplier base and negotiating more favorable terms—resulting in savings per category of 10-to-30%. Keep Savings: Once optimized sourcing agreements are in place, organizations need to ensure that both the buyers’ employees and suppliers can easily access and use them. Employees need to know about and use the agreements, and suppliers need to supply goods and service
  • Establish and develop effective spend analyses reporting : By Categories, By Business Groups by region/locations
  • Lack of understanding of spending. Often, spend data isn’t captured and classified in a way that makes it easy to analyze. Lack of resources. All organizations are being asked to do more with less, so they don’t have adequate resources for every program. Poor compliance with existing corporate agreements. Although purchasing departments create master agreements with suppliers to maximize savings, up to half of the purchasing within a given organization typically bypasses these mechanisms. High cost of spend management software solutions. Enterprise software solutions require large upfront financial commitments—significantly increasing total cost of ownership. Hurdles to supplier enablement. The number one failure of e-procurement systems is under-estimating the cost and effort to get suppliers’ catalogs into the system and keeping them updated. Lengthy implementation timeframes. Implementation cycles for technology-focused projects can take more than 12-18 months before they begin producing results
  • Speaker Notes: Agilent is a diversified technology company. Our products and services help our customers accelerate vital progress in communications, electronics, life sciences and chemical analysis. In communications and electronics, our innovative test and measurement technologies and semiconductor components enable cell phones; high-speed wireless, wireline and optical networks; the Internet; satellites; computers; CD players and much more. Our communications and electronics products, services and support solutions facilitate the entire technology product lifecycle: research, design, build, manufacture, test, install, maintain and manage. In life sciences, Agilent solutions help researchers analyze genes and proteins to discover the causes and cures of disease faster and more effectively than ever before. In chemical analysis, Agilent tools enable customers in the petrochemical, environmental and related industries to analyze compounds, test water quality and more.
  • Speaker Notes: Agilent has a strong global presence. The black dots show where the company’s larger offices and manufacturing sites are located. Agilent’s corporate headquarters are located in Palo Alto, California, about an hour south of San Francisco. In the U.S., Agilent has significant presence in the San Francisco Bay Area of California, in the Pacific Northwest, in northern and southern Colorado, and on the East Coast in and around Delaware. In Europe, Agilent’s manufacturing sites are in South Queensferry, Scotland and Boeblingen, Germany. In Asia, Agilent has a significant presence in Japan, China, Malaysia, Singapore, Korea, Taiwan, India and Australia.
  • Agilent’s History : Agilent dates back to the earliest days of Hewlett-Packard, which started as a test and measurement company in 1939. Agilent embodies historical commitment to innovation and contribution, uncompromising integrity, teamwork, trust and respect for the individual. Agilent’s headquarters is the site of the first HP headquarters. Explain : Phase I … good .. Pioneering spirit ..however still BIG MNC mindset .. No curb in spend Phase II : SURVIVAL mode … PRIORITY No 1 … return to financial profitability … embark on Spend Mgt program … the ISR program … very painful but much needed !!
  • Stress : GLOBAL INFRASTRUCTURE umbrella … SHARED Services
  • ISR Program : Survivial Mode … TOP DOWN .. CEO / COO led initiative … across all business and functional groups .. All hands on DECK !!!
  • Using the simple three step approach to illustrate : Step 1 .. Establish good understanding of our spend patterns using spend analysis reports for identified wrt to key business drivers
  • SET … Initial “high aspirations” target ranges
  • Work thru all categories across all business groups
  • Step 2 : Implement Spend Mgt strategies .. Internal and External across all business … track spend sucessess
  • Step 3 : “Keep” Savings .. Focus on “PLUGGING” process leaks Reduce “maverick spend” .. Unauthorsied spend Implement compliance process .. Set compliance targets Establish WIN WIN strategic alliance ..relationship program with Key suppliers
  • VERY Recent 2004 Hackett benchmarking … shows that we have outperformed world class and 1 st quartile comparisons wrt to cost avoidance and cost reduction thru spend management program
  • Managing Services Spend ...

    1. 1. Managing “Services” Spend in Today’s economy Peter Woon Asia Pacific Procurement Director, Global Sourcing Agilent Technologies [email_address]
    2. 2. Presentation <ul><li>Part I : “Services” Spend Management </li></ul><ul><ul><li>What is “Services” Spend Mgt ? </li></ul></ul><ul><ul><li>Types of “services” </li></ul></ul><ul><ul><li>Spend Management Strategy </li></ul></ul><ul><ul><li>Challenges of “Service” Spend Management </li></ul></ul><ul><li>Part II : Agilent Experience </li></ul><ul><ul><li>Introduction : Agilent the company </li></ul></ul><ul><ul><li>Indirect Spend Reduction Program at Agilent </li></ul></ul><ul><ul><li>Best Practices Comparisons </li></ul></ul><ul><li>Conclusion </li></ul><ul><ul><li>Critical Success Factors </li></ul></ul><ul><ul><li>Q&A Session </li></ul></ul>
    3. 3. What is “Services” Spend Management ? <ul><li>Key Buzzwords in Today’s competitive environment : </li></ul><ul><ul><li>Improve profitability, productivity, efficiency, cost reduction etc… </li></ul></ul><ul><li>Spend management + “Services” </li></ul><ul><li>Spend Management ($$$) </li></ul><ul><ul><li>New “value add” approach aka Cost Savings </li></ul></ul><ul><ul><li>Cost Savings ; </li></ul></ul><ul><ul><ul><li>typically price per unit focused, one off program / project </li></ul></ul></ul><ul><ul><li>Spend Management : </li></ul></ul><ul><ul><ul><li>rigorous, discipline on-going approach to re-look at People, Process and Technology around Procurement </li></ul></ul></ul><ul><ul><ul><li>Cost savings + Cost avoidance </li></ul></ul></ul><ul><ul><ul><li> Optimise spend $$$ to deliver same utility / consumption value </li></ul></ul></ul>
    4. 4. Why Services Spend Management ? <ul><li>Total Purchasing Spend $$$ at typical company averages </li></ul><ul><ul><li>30%-60% of revenue </li></ul></ul><ul><ul><li>** For Contract Mfg and turnkey companies : 60-80% </li></ul></ul><ul><li>Direct vs (Indirect & Services) : </li></ul><ul><ul><li>Average is 50% / 50 % </li></ul></ul><ul><ul><li>Depend on Industry type </li></ul></ul><ul><ul><ul><li>Gen Mfg : 70 / 30 </li></ul></ul></ul><ul><ul><ul><li>Consumer Products : 45 / 55 </li></ul></ul></ul><ul><ul><ul><li>Chemical / Pet. : 60 / 40 </li></ul></ul></ul><ul><ul><li>** exclude services companies </li></ul></ul><ul><li>“ Services”  Indirect Goods & Services </li></ul>Source : CAPS Critical Issues report : Indirect Spend 09/2003
    5. 5. Some types of “Services” Spend Professional services Telecommnications & Networking services Human Resources Marketing & Advertising services Transportation & Logistics services Travel & Hotels Real Estate & Facility Management Energy / Utilities Offshore services Outsourced services Direct procurement : Product or Commodity groups “ Services” : Category groups
    6. 6. Typical “Services” Spend distribution Source : CAPS Critical Issues report : Indirect Spend 09/2003 Indirect / “Services” Spend has great potential !!! (mostly untapped)
    7. 7. Spend Management Strategy : 3-step Find-Get-Keep <ul><li>Find Savings : </li></ul><ul><ul><li>gaining an understanding of current expenditures . </li></ul></ul><ul><ul><li>gather data from internal business systems, </li></ul></ul><ul><ul><li>classifying into categories . </li></ul></ul>The spend management discipline can be described as an iterative three-step Find-Get-Keep savings process.. <ul><li>. </li></ul><ul><li>Get Savings : </li></ul><ul><ul><li>Identifying top spending categories, for highest potential for savings , and how they can best leverage sourcing. </li></ul></ul><ul><ul><li>Target efforts / activities such as rationalizing their supplier base and negotiating into formal contract agreements with more favorable terms—resulting in savings per category of 10-to-30%. </li></ul></ul><ul><li>Keep Savings: </li></ul><ul><li>Maintain and manage formal contracts . </li></ul><ul><li>Establish and Build formal strategic supplier relationships for long term win win benefits </li></ul>
    8. 8. Strategies for Spend Management <ul><li>Internal Strategies : </li></ul><ul><ul><li>Establish and develop effective spend analyses reporting </li></ul></ul><ul><ul><li>Organisation for procurement accountability </li></ul></ul><ul><ul><li>Streamline Source to Pay processes </li></ul></ul><ul><ul><li>Standardization of purchases </li></ul></ul><ul><ul><ul><li>Brands / Models thru’ purchasing catalogs </li></ul></ul></ul><ul><ul><ul><li>Volume Purchase agreements (VPAs ) / Master Service Agreements (MSAs) </li></ul></ul></ul><ul><li>External Strategies: </li></ul><ul><ul><li>Utilise e-Procurement tools : </li></ul></ul><ul><ul><ul><li>Online reverse auctions </li></ul></ul></ul><ul><ul><li>Leverage Industry volume or consolidated buys through “consortium purchases” </li></ul></ul><ul><ul><li>Outsource non critical purchases </li></ul></ul><ul><li>Other Innovative Strategies : </li></ul><ul><ul><li>Pay per use models / utilisation models </li></ul></ul><ul><ul><li>On-demand models </li></ul></ul><ul><ul><li>Vendor managed models </li></ul></ul><ul><ul><li>Asset ownership vs Leasing </li></ul></ul><ul><ul><li>Business Process Outsourcing (BPO) and Offshoring </li></ul></ul>
    9. 9. Challenges of “Services” Spend Management <ul><li>Lack of understanding of spending. </li></ul><ul><li>High cost of spend management integrating software . </li></ul><ul><li>Lack of proper formulation of corporate agreements </li></ul><ul><li>Lack of skilled professional procurement resources </li></ul><ul><li>Existence of “preferred” supply base </li></ul><ul><li>Lack of available base Supplier enablement for standardization </li></ul>
    10. 10. Presentation <ul><li>Part I : “Services” Spend Management </li></ul><ul><ul><li>What is “Services” Spend Mgt ? </li></ul></ul><ul><ul><li>Types of “services” </li></ul></ul><ul><ul><li>Spend Management Strategy </li></ul></ul><ul><ul><li>Challenges of “Service” Spend Management </li></ul></ul><ul><li>Part II : Agilent Experience </li></ul><ul><ul><li>Introduction : Agilent the company </li></ul></ul><ul><ul><li>Indirect Spend Reduction Program at Agilent </li></ul></ul><ul><ul><li>Best Practices Comparisons </li></ul></ul><ul><li>Conclusion </li></ul><ul><ul><li>Critical Success Factors </li></ul></ul><ul><ul><li>Q&A Session </li></ul></ul>
    11. 11. Agilent’s Focus Communications Electronics Life Sciences & Chemical Analysis Agilent’s Purpose Strengthen our position as the #1 Test & Measurement company in the world, while leveraging our technology and expertise to provide components, software and services to attractive new markets To provide critical enabling technologies to advance the state of the art and help our customers achieve their business results Agilent’s Strategy
    12. 12. Agilent Around the World <ul><li>Customers in more than 110 countries </li></ul><ul><li>More than half of revenue generated outside U.S. </li></ul><ul><li>Global manufacturing and R&D </li></ul>Agilent Facts $ 6.1 billion Net revenue (FY03) Employees 28,000 employees Headquarters Palo Alto, California
    13. 13. The Agilent Journey … Winning through Innovation … Breakeven Phase 2: FY01-03 Survival Phase 3: FY04-05 Restore Core Businesses Phase 4: Invest In Growth WE ARE HERE Phase 1: FY99-00 Company Launch Growth Company Value Company Growth Company
    14. 14. Agilent Businesses A diversified company with synergy Global Infrastructural Organization Global functional support teams Sourcing, Finance, Information Technology, Human Resources, Workplace Services, Legal, Trade and Tax etc Semiconductor Products Life Sciences and Chemical Analysis Test and Measurement Automated Test Shared Infrastructure (Global Infrastructure Organization, GIO) Agilent Laboratories Technology Synergy
    15. 15. Agilent’s Experience … Indirect Spend Reduction (ISR) Program to Manage “Services” Spend
    16. 16. Step1 : Find Savings … Spend Analysis and Compliance reports Step 1 : Find Savings … Indexed spend reports
    17. 17. Step 1 : Find Savings thru’ Spend Analysis Step 1 : Find Savings … Spend Targets by Categories PSA 1. Rationalize / Restructure PSA Contracts (PSA 1) 2. Establish PSA Control Gate Process (PSA 2) 3. Reduce ETW Usage (PSA 3) Initiatives FY03 Savings Target Agilent Total = $188 - 221MM Technology Services $ 15-20 MM $15-20MM 1. Infrastructure (Company X / Y) (TS 3) 2. Rationalize Managed Service Contracts (TS 2) $ 25-30 MM 3. Rationalize Software / Hardware Spend (TS 1) 4. Reduce Telecom Spending (TS 4) $10-15MM 4. Audit Billing of ETW Invoices (PSA 4) $10MM $35MM $14MM $1 MM Other 1. Drive compliance with Preferred Travel Vendors (OT 1) 2. Negotiate New Travel Agreements (OT 2) 3. Track and Monitor Marketing Spend (OT 3) $2-6MM $2-5MM $46-51MM 4. Track and Control Office-related spend (Equipment, Furniture, Express Mail) (OT 4) 5. Transition Facilities Maintenance to a Single Global Provider (OT 5) $11-13MM $0.5MM 6. Rapid Source Chemicals & Gases (OT 6) $1MM Tech Svcs FY 02 Managed Services Telecom Infrastructure (X, Y) HW / SW Rationalization
    18. 18. Find Savings thru’ Spend Analysis
    19. 19. Step 2 : “Get Savings” Phase <ul><li>Strategic Sourcing </li></ul><ul><ul><li>Consolidated Volume purchases </li></ul></ul><ul><ul><li>Sourcing from Low Cost countries </li></ul></ul><ul><ul><li>BPO and Offshoring </li></ul></ul><ul><li>E-Solutions </li></ul><ul><ul><li>e-Bidding / Close Reverse auction </li></ul></ul><ul><ul><li>e-Catalog Purchases </li></ul></ul><ul><ul><li>e-Invoicing </li></ul></ul><ul><li>Supply Base rationalisation </li></ul><ul><ul><li>Supply Base Cleanup </li></ul></ul><ul><ul><li>P-Card for small one-offs purchases </li></ul></ul><ul><li>Contract Negotiation and management </li></ul><ul><li>Lease instead of BUY </li></ul>Step 2 : Get Savings … Spend Management Strategies
    20. 20. Step 3 : Keep savings <ul><li>Reduce “Everyone is a Buyer” </li></ul><ul><ul><li>Appoint “Authroised” purchasing ownership </li></ul></ul><ul><li>Implement Discretionary Spend Management </li></ul><ul><ul><li>Spend Guidelines </li></ul></ul><ul><ul><li>Compliance to use Preferred Suppliers </li></ul></ul><ul><ul><li>Supplier Relationship Management (SRM) </li></ul></ul>Step 3 : Keep Savings … Discretionary Spend Management
    21. 21. Results : Achieved Improvement trends: Indirect spend and SGA as a %tage of Revenue Overall improvements approx 10-15 % as compared to 2001 .
    22. 22. Cost reduction and cost avoidance savings far exceed median and 1 st quartile Comparisons (source : recent Hackett benchmarking study @Agilent) Cost reduction and cost avoidance savings as a % of total spend
    23. 23. Process best practice comparisons <ul><li>Formalized and documented global sourcing strategy developed for each major spend category </li></ul><ul><li>Existence and utilization of a standard enterprise-wide spend classification methodology </li></ul><ul><li>Utilization of a company-wide supplier master file </li></ul><ul><li>Enterprise-wide standard process to add and remove suppliers from supplier master file </li></ul><ul><li>Degree transactions are processed in an automated fashion </li></ul>Best practices Agilent World Class Process Median No Moderate Moderate No Yes Moderate Yes Extensive No Moderate Extensive Yes Moderate Extensive Extensive
    24. 24. Global procurement operations best practice comparisons <ul><li>Existence of Global Procurement operations </li></ul><ul><ul><li>Indirect </li></ul></ul><ul><li>Cross divisional, cross-functional team (procurement, finance, IT, WPS, marketing) utilized to develop to support strategic sourcing and supplier relationship management </li></ul><ul><li>Utilization of global enterprise spend teams </li></ul><ul><li>Utilization of global strategic supplier teams </li></ul><ul><li>Utilization of global process improvement teams </li></ul><ul><li>Formalization and documentation of Global Procurement operating model principles (currently under development) </li></ul>Best practices Organization Agilent World Class Yes Yes Extensive Extensive Moderate Moderate Median Yes Moderate Extensive Extensive Moderate Moderate Limited Moderate Moderate Extensive Moderate Extensive
    25. 25. Presentation <ul><li>Part I : “Services” Spend Management </li></ul><ul><ul><li>What is “Services” Spend Mgt ? </li></ul></ul><ul><ul><li>Types of “services” </li></ul></ul><ul><ul><li>Spend Management Strategy </li></ul></ul><ul><ul><li>Challenges of “Service” Spend Management </li></ul></ul><ul><li>Part II : Agilent Experience </li></ul><ul><ul><li>Introduction : Agilent the company </li></ul></ul><ul><ul><li>Indirect Spend Reduction Program at Agilent </li></ul></ul><ul><ul><li>Best Practices Comparisons </li></ul></ul><ul><li>Conclusion </li></ul><ul><ul><li>Critical Success Factors </li></ul></ul><ul><ul><li>Q&A Session </li></ul></ul>
    26. 26. Critical Success Factors <ul><ul><li>Executive leadership, support, ownership, and accountability </li></ul></ul><ul><ul><li>Goal and objective alignment (within procurement and across business partners) </li></ul></ul><ul><ul><li>Clear accountability measurements application </li></ul></ul><ul><ul><ul><li>Understanding Spend Analysis and Trends </li></ul></ul></ul><ul><ul><ul><li>Ownership of these Spend Management </li></ul></ul></ul><ul><ul><li>Strategically focused Enterprise Commodity Management roles and responsibilities (within procurement and across business partners) </li></ul></ul><ul><ul><li>Strategic Supplier partnership program </li></ul></ul><ul><ul><ul><li>Improved supplier communications </li></ul></ul></ul><ul><ul><ul><li>Supplier Relationship Management training </li></ul></ul></ul>
    27. 27. Q&A Session Peter Woon Asia Pacific Procurement Director, Global Sourcing Agilent Technologies [email_address]