Unlocking Funds For Innovation By Lowering Run Costs

UNLOCKING FUNDS FOR
INNOVATION BY LOWERING
RUN COSTS
Helping Clients Leverage Global Services & Sourcing
Advisory | Supply Monitoring | Governance Support
www.NeoGroup.com | www.SupplyWisdom.com
www.NeoGroup.com | www.SupplyWisdom.com
Copyright © 2016 Neo Group, Inc. All Rights Reserved.

UNLOCKING FUNDS FOR INNOVATION BY LOWERING RUN COSTS
Quarterly Earnings are reported and the results are not what
the street expected or for that matter what your
shareholders expected. Corporate starts making calls to all
the business unit and key functional owners to start thinking
about next year’s key initiatives. Without even hearing it
from anyone else, you know reducing your run costs will be
in the top 3 of the corporation’s key priorities.
2
Introduction

This time it will have to be what they call “radical” or “out of the box” or input your own clever “catch
phrase” for reducing the cost of operating your business.
You scramble your team and start scheduling brainstorming meetings to figure out how to cut more costs
from your operations in the midst of trying to stay ahead of the competition with new products, entering
new markets to capture more share and meet key customer commitments with existing products. Sound
familiar?
Typical run cost strategies tend to focus on several areas: tactical across the board cuts, reducing
staffing levels and implementation of continuous improvement programs to reduce operating costs.
These standard initiatives are certainly a step in the right direction, but do they deliver the needed step
function, sustainable cost savings and strategic value needed for companies to remain relevant in
today’s global economy?
3
INTRODUCTION

Copyright © 2016 Neo Group, Inc. All Rights Reserved. 4
Today, more and more companies are focusing on how to cut costs, while continuing to
invest in growth. They are looking not only at their traditional methods of reducing their run
costs, but are also looking at new ways to fund growth. With technology advancements
and the breath of global talent available today, companies are looking at fueling innovation
to stay ahead of their competition.
INTRODUCTION

APPROACH TO
INNOVATION
The term innovation can mean many things
depending on the audience. It is critical
before one begins to establish any type of
initiative to be specific and clearly define
what kind of innovation is expected for the
company as a whole, a particular business
unit or specific functional team. By doing so,
expectations and the associated risks can
be clearly communicated both internally as
well as externally to key suppliers.
5

As the type of innovation varies so does the approach used to enable it.
We view
innovation as:
Innovation is not only about designing a new product
or service to sell, but also focusing on existing
business processes and practices to improve
operational efficiency. Innovation can also be in small
incremental steps or significant breakthroughs that
change the game.
APPROACH TO INNOVATION
• Incremental Innovation: Innovation that keeps existing offerings competitive.
• Breakthrough Innovation: Innovation with new value propositions that allows
extention into new markets.
• Transformation Innovation: Innovation that creates a new market or industry.

Some companies have a bottom up approach
to innovation. There is an inherent culture
within these companies that has either been
around from the beginning or that developed
over time. Each business unit, each functional
organization has an embedded and disciplined
innovation process that constantly pursues
innovative ideas to improve their teams’
performance and bring business value to the
company. Typically this method is a self-
funding approach to pursuing innovation that is
specific to that organization or business unit.
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Another approach is to drive innovation from the top
down. The company’s leadership team sets the top
innovation objectives for the corporation and diverts
funding to those projects to be pursued. A variation to
the top down approach is the use of dedicated teams
solely focused on moving ideas through a formalized
innovation gate process from the incubation stage
through commercialization of the idea. This approach is
typically independent from the mainstream business,
uses a VC type approach to funding and has more
flexibility when it comes to the business case hurdles
since it is primarily focused on the long term.

While approaches vary, what is consistent with
companies who are successful at enabling
innovation is the focus they place on the talent
of the team, resilience of the leadership to stay
the course and not being afraid of failure, and
a disciplined governance method put in place
to ensure diversity of thought and progress
toward delivering business value to the
company.
For example, companies like Procter &
Gamble and Boeing found out early on that
their talent pool and diversity of thought
expanded when they found ways to include
their suppliers in their innovation process.
Boeing
Boeing builds the most complex commercial
product in the world. Each project almost
literally is a “bet-the-company” experience. The
Boeing 787 “Dreamliner” aircraft was such a
project that involved 50 partners from over 130
locations working together for more than four
years. Boeing’s objective was to leverage the
unique capabilities from this advanced network
of partners and share risks with them. While
Boeing continues to possess deep individual
technical skills, a competitive advantage
Boeing has acquired is the ability to
orchestrate, manage and coordinate a network
of hundreds of global partners.

P&G
P&G’s degree of corporate growth could not be
achieved without significant innovation across all
aspects of P&G’s business even extending to their
relationships with suppliers and partners.
A concept P&G institutionalized to do this came to
be known as Connect & Develop. The goal was to
gain half the ideas from inside and half from
outside the company. This flipped the conventional
sourcing approach of incenting based on
Performance Metrics or SLAs to challenging and
incentivizing its’ suppliers for innovation.
P&G would focus much of the business model
around contracting for transformation instead of
contracting for day-to-day work under a
transaction based or managed services
agreement. Key to their success was making
innovation a disciplined, reliable, repeatable and
measureable process. Another key to P&G’s
success is their choice to work in a highly
strategic and collaborative manner with their
suppliers.

OPPORTUNITIES TO FREE UP THE FUNDS TO INNOVATE
Today, more companies look to free up funds to fuel
innovation by implementing some of the following run
cost reduction strategies:
LEVERAGING NEW
TECHNOLOGIES
1. Move to Cloud Infrastructure
Cloud services can provide significant cost reduction
and flexibility to a company’s operations. The reason
is because the Cloud was designed from the ground
up to harness the internet, virtualization, and
automation to streamline business operations. Most
Cloud options are self-service, so that one can easily
scale resources up and down.
The Cloud also employs systems management
and automation tools to ensure that resources
are being used to their full capacity and that
resources are available in case demand
increases.

Companies like Amazon and Salesforce.com
pioneered the cloud with their respective
Infrastructure-as-a-Service (IasS) and Software-
as-as-Service (Saas) offerings.
Platform-as-a-Service (PasS) offerings are also
available, which enable the development of
custom applications or add-ons to existing ones
through API’s.
There are many companies today that provide
strong cloud or SaaS offerings. ADP, for example
offers many key services such as payroll over
cloud. Tata Group’s Tata Communications
division offers an infrastructure as-a-service
(IaaS) cloud computing service. Accenture offers
its cloud platform to clients.
Infosys together through a partnership agreement
with China’s Huawei Technologies Co Ltd and
others offers its’ customers a portfolio of cloud
services. HP’s services arm also offers a portfolio
of cloud products and services.
While there are immediate flexibility and financial
benefits of enabling Cloud capabilities, one also
needs to be careful about reliability, security,
development roadmaps and support associated
with Cloud services that may be implemented.
Because Cloud has a shorter track record,
companies may start by using it for less critical
areas of technology before getting more
comfortable with it over time. Not everyone will put
their enterprise critical applications in the Cloud
and most companies will want a mix of both.

While the storage of massive amounts of data
on big computers is not a new idea, what has
changed is the need and expectation of
mining that data for making key decisions.
That’s what is called Big Data analytics and
all experts agree that the ability to analyze big
data will be the difference between success
and failure in almost every type of business in
the coming years.
Companies with superior data analytics
capabilities have found ways to build long-
term advantages. FedEx Corp., for example,
has for years used its team of analytics
professionals to create and maintain a
competitive advantage through lower costs
and increased revenue as a result. One of the
factors that has helped Wal-Mart Stores Inc.
become one of the world’s largest and most
successful retailers is the strength of it
analytics.
More companies are creating data science
capabilities to enable competitive advantages.
Building internal capabilities can be time-
consuming and expensive, especially since
the limited pool of data scientist is in high
demand. Because data science talent is rare
and the demand for such talent is high,
organizations often work with outsourced
partners to fill important skill gaps.
Before one decides to source analytics, a
fundamental question to ask is, “how critical is
the data to your business”? If the data is
essential to the company’s business survival,
some companies may decide it should be kept
in-house. Other analytics can be outsourced.
Companies should be careful to not to lose
their expertise or their core intellectual
property (IP), which suggests that companies
should first do a thorough job of identifying
which capabilities are core and which could be
better severed by a partner.
2. Investments in Big Data Analytics

Enabling data science capabilities whether
internal or using a partner requires organizational
leaders to think about what the business is trying
to accomplish. They also need to understand
how data is used through the organization and
consider how the project or initiative will affect
people, processes, technology and decision-
making.
Sourcing analytics requires a carefully
constructed relationship, and the negotiation and
evolution of this relationship needs to clarify who
does what, who owns what and how each party
can use the information it has.
Today, the digital revolution has changed
everything. A generation of tech savvy
consumers is creating new demands that will
force enterprises to adapt or be forgotten. The
focus is not on “how much”, but on “when”,
“where”, and “how good is it”.
3. Leverage Automation
Businesses are now looking to work smarter
rather than cheaper. Some analysts estimate that
automation technologies can achieve cost
savings of as much as 60 percent savings and
reduce headcount by around 50 percent. Smart
enterprises are learning to change the rules of
the game from a focus on scale to a focus on
outcomes, and intelligent automation is one key
lever that will enable this transformation.

An example of intelligent automation is what
is commonly termed Robotic Process
Automation (RPA). Companies are using
RPA to automate processes that are
repetitive, rules-based and frequent.
Here are some examples of RPA
impact on businesses:
1. A major global bank automated a wide
range of processes, including
Fraudulent Account Closure, Loan
Application Opening and Right of Set
Off, saving over 120 FTEs and reducing
their bad debt provision by £175million
pounds.
2. In a UK insurance firm, a team of just 4
people can process around 3,000 claims
documents a day (of which around a quarter
are on paper) – without RPA the team would
need as many as 12.
3. Following the implementation of RPA
technology, NHS Shared Business Services
is able to close 180 sets of accounting books
every month in just four hours.
4. A large US firm introduced a Service Desk
robot that was able to answer 62,000 calls a
month from the firm’s IT staff, solving 2 out of
every 3 of the problems without human
intervention.
Automation is evolving rapidly. As software gets increasingly more sophisticated, and more
and more processes can be automated, companies will take a DIY approach to managing and
automating their own processes. In the meantime, new service providers / systems integrator
are emerging that are focused first and foremost on RPA. These providers will take a set of
business processes, whether they have been outsourced or not, and automate them. The
remaining tasks that are currently too complex to automate are left for the traditional providers
to pick up.

LEVERAGING PARTNERS THROUGH SOURCING
Companies who successfully work with their suppliers,
find themselves going through an evolution – the ability
to move from a cost focus to one of enabling strategic
business value. The progression starts at the
beginning stage of basic labor arbitrage and efficiency
to a more mature and advanced stage that delivers
process and operational excellence to finally reaching
the leadership stage of driving strategic value.
Companies that are driving their suppliers for strategic
value want them to innovate constantly. Within high
performing relationships, the clients and suppliers
collaborate to perform a series of innovation projects
that deliver substantial long-term improvements to
operating efficiency, business process effectiveness
and strategic performance.
LEVERAGING PARTNERS THROUGH
SOURCING

Consider the following examples:
• A supplier to a health care company helped
improve the claims adjudication process by
using analytics to predict claims likely to
result in rework. The predictive tool now
intercepts more than 50% of claims that
would have been reworked, saving the
client $25 to $50 in administrative costs per
overpaid claim and $6 to $12 per
underpaid claim.
• An aerospace manufacture worked with its
supplier to add new key performance
indicators and processes to manage third-
party vendors. This allowed the client to
improve customer-order fill rates for new
parts from 60% to 85% and turnaround
times for delivering parts to grounded
vehicles from 21 hours to 17 hours.
• A supermarket chain collaborated
successfully with its supplier to implement
new forecasting tools, techniques and
methods that improved the client’s stock fill
rate from 80% to 95%, reduced inventory
by 27% and reduced error rates by 50%.
• A semi-conductor firm leveraged advisors
to evaluate engagement models and align
them as per program intent. Moving
significant portions of applications support
and infrastructure monitoring enabled them
to reduce run costs by over 30% a year.

Companies and their suppliers must work together to
foster innovation.
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Companies must motivate suppliers with
incentives and both parties must nurture a
collaborative culture that produces
continuous waves of innovations that
accumulate to improve the overall business
performance. Here are some ways to
enable a co-creative relationship:
Focus on productivity
Collaborate with your service providers on
exploring ways to enhance productivity. We
see market leaders able to improve the
client’s productivity by 3% - 5% per year.
Reserve time to drive the ‘Innovation
Agenda’:
Innovation objectives slide down the priority list
when people are focused on operations.
Contractually dedicate time each year to drive the
innovation agenda.
Gain Share Specific to Innovation Projects:
Build business cases for each innovation project
and agree in advance how the financial
compensation would be allocated.
Use Governance to Incent Innovation within
Organizations:
Create special innovation governance provisions
that go beyond the existing committees governing
the day-to-day operational deliverables.

Ensure an ‘Idea Generating Culture’:
In many instances multiple organizations take
part in ensuring innovation happens. Each
organization needs to understand what’s in it for
them and what their part contributes to the overall
performance of the business. Unify the culture
across the organizations and make it one that
welcomes and rewards innovative ideas.
Encourage all levels of the organizations to
challenge the status quo, to question
assumptions and to identify innovations that will
improve overall business performance.
Developing People & Talent:
Working across internal organizational
boundaries and with suppliers, across many
countries and cultures to orchestrate and drive
innovative ideas that deliver true business
value requires unique skills. Evaluate
recruiting, training and reward processes to
ensure the right talent can be identified and
retained.
Embrace Change Management:
High-performing relationships understand that
they cannot wait for innovation. They must
aggressively manage the change that
innovation brings to their organization.
Implementing the resulting innovation requires
a strong commitment to change management
in order to transition individuals, teams and
organizations from the current state to the
desired future state.

Conclusion
In today’s global economy, organizations are
striving to explore and find ways to reduce their
costs to stay competitive and survive. While
traditional cost reduction initiatives are a
necessity, finding new ways to reduce operating
costs so one can fund innovation is even higher
on the priority list. Cloud Technologies,
Automation, Big Data Analytics and the use of
Strategic Outsourcing Contracts are just a few of
the ways companies are trying to strike a balance
between the need for control, cost benefits and a
co-creative innovative environment that brings
lasting business value.
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Neo Group Can Help
The global sourcing landscape is constantly evolving. For a deeper discussion on planning and executing a successful
globalization strategy, contact one of our lead advisors.
Adolfo Masini Brad Pickar Hemant Puthli
Partner & SVP Partner & SVP Partner & SVP
Adolfo@NeoGroup.com Brad@NeoGroup.com Hemant@NeoGroup.com
Kevin English Pankaj Sharma Vikram Naaidu
Partner & SVP Partner & SVP Partner & SVP
Kevin@NeoGroup.com Pankaj@NeoGroup.com Vikram@NeoGroup.com
About the Authors
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Adolfo Masini has over 30 years of experience leading
global business transformations. As a Partner & Senior Vice
President, Adolfo plays a critical role in assisting clients
across the full sourcing lifecycle, including strategy, sourcing,
governance and organizational management services. Prior
to joining Neo Group, Adolfo held a variety of executive
leadership positions at Comverse, Mobileum, Alcatel-Lucent
and Motorola.
Sachin Ghanekar has over 12 years of experience
in business process migrations of major scope and
complexity, and process consultin. He has
managed several process migrations from North
America and UK also participated in process
diagnostics, due diligence activities and
development of outsourcing transition plans. He is
a subject matter expert for process mapping of
business processes identified for outsourcing.

About Neo Group
Founded in 1999, Neo Group helps organizations meet business objectives and address business
challenges by leveraging global services and sourcing. To learn more about Neo Group, please visit
www.NeoGroup.com.
About Supply WisdomSM
Supply WisdomSM is a unique cloud-based service that provides data and intelligence for sourcing risk
and opportunity monitoring of global countries, cities and suppliers. To learn more about Supply
WisdomSM, please visit www.SupplyWisdom.com.
No part of this report may be reprinted/reproduced without prior permission from Neo Group.
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