Corporate Cost Reduction

Spend Reduction
A Project Guide
July 17th, 2010
John Gregg,
Head Emerging Markets,
The Monitor Group

Key Messages
The Spend Reduction project guide is one of eight detailed project guides supporting the FSI ECR
methodology. 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 goodsWhat 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 On our well established spend reduction track record seelonger term cost reduction opportunities. On our well established spend reduction track record see
appendix pages 51-54.
How comfortable are we with existing content: Developed content has been reviewed and approved
b SME Addi i l i ll i d l d h ld b d l d liby SMEs. Additional content, potentially in a stand alone document, should be developed to outline
techniques and practices specific to optimization of employee benefits (e.g., Consumer Driven Health).
1

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

I Spend Reduction OverviewI. Spend Reduction Overview
Spend reduction focuses on five savings levers for a successful and comprehensive spend management program.
Sourcing Cost Reduction
Illustrative
Savings Levers
Total
Expense
Reductions2
+ x x= +
Demand
Management
Increase
Spend Under
Management
Reduce
Category
Total Cost of
Ownership
Ensure
Compliance to
New Terms
Identify Tax-
Related Saves
Objective: Rationalize goods
and services
necessary for core
ti
Institute improved
governance model
Focus on
cost reductions
across all supply-
side drivers
Ensure adherence
and transparency
through
t d
Minimize tax cost
The combination,
sequencing and extend to
which each lever is used
depends on the existing
Tie spend to
business needs
Enforce
operations
Gain firm-wide
spend view
Establish spend
Baseline TCO
Rationalize
supply base1
side drivers
(not just price)
Design
tracking and
feedback tools
measurement and
tracking
Identify/correct
overpayments
Quantify carry-
Mechanisms
for Applying:
practices and the
commitment of the client to
spend reduction
o ce
appropriate
usage patterns1
Design new
procedures1
Establish spend
accountability
Define
standards and
specs1
i i li
supp y base
Benchmark1
Hardwire to
financials1
Qua t y ca y
over effect
from reduced
spend1
Design
procurement
Institutionalize
compliance1
p
company entity
Typical
Savings 2: 5-10% 10-20% 1-3%
3
1Mechanism applicable for more than one savings lever
2Saves not fully additive, e.g., reduce demand first, then reduce cost of remaining volumes

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

Savings Levers 2-4: Improved Governance and Procurement
Strategically sourcing can drive down total cost in many spend related categories. But sustaining and
institutionalizing savings requires a streamlined and efficient governance with clear accountabilities.
Procurement-Savings Realization FactorsGovernance Model To Optimize
Spend Under ManagementSpend Under Management
TCO Assessment Sourcing Suppliers Users
Category TCO Compliance Management
High
• LOB owns
procurement
Illustrative
• Identify, quantify
and assess all cost
drivers
(processes,
• Perform supplier
due diligence and
selection
• Define clear
• Monitor operating
performance
based on key
metrics and SLAs
• Develop clearly
defined metrics
• Monitor user
performance to
LOB
Involvement
process, COE
supports it
• LOB and COE
own different
parts of
procurement
(p ocesses,
headcount, price,
fulfillment,
technology)
• Assess spend
categories from
Define clear
business
requirements,
SLAs
• Negotiate and
enforce rebates
e cs d S s
• Capture non-
compliance data
and variances in
performance
• Develop conflict
performance to
metrics
• Develop
procedures for
policy compliance
and monitor user
Low Procurement COE Involvement
• LOB agrees on
specs, COE
manages
procurement
High
• Focus on business requirements and TCO
• Governance model should be streamlined,
efficient and thin with clear business
accountability
categories from
initiation to
completion
• Identify spend/
usage trends
P i iti
enforce rebates,
discounts,
penalties
• Develop mutually
agreed upon
f
• Develop conflict
resolution
procedures
• Provide supplier
feedback and a
f f
and monitor user
adherence
• Provide user
feedback on
performance and
dh
• Appropriate mix of local and central ‘control’
and accountability should be based on specific
product, group, etc.
• A compliance mechanism that ensures spend
h h ki d
• Prioritize
categories that
impact/drive
external prices
• Identify
performance
reporting
procedures
forum for on-
going process
improvements
• Perform supplier
audits
adherence
• Standardized
savings reports
for management
• Enforce through
5
transparency through measurement, tracking and
reporting must be established
redundancy in
supplier base
budgetary process

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

Spend Reduction – Definition and Key Success Factors
What is it?
• Spend reduction involves reducing operating expense on third party products and
services through demand rationalization, strategic sourcing and minimization of
procurement taxes
O i h d d i i l d K S F• Our six-step approach to spend reduction includes:
−A three-step Diagnostic and Spend Reduction Strategy Development phase:
1.Establish baseline and analyze spend to develop target category list
2.Assess the supply chain to develop qualitative insights and validate
hypothesis from financial analyses
• Executive leadership
commitment
• Early and explicit agreement on
Key Success Factors
How do
you do it?
3.Perform external market analysis to uncover possible leverage points
– A three-step Improvements Implementation phase
4.Rationalize spend through demand management, strategic sourcing and
tax strategies*
5.Recover past overpayments
savings ownership
• Realistic recommendations
supported by fact-based
analyses
• Strong project management and
6.Implement identified improvements
• To ensure sustainability of savings, the right organizational structures and
capabilities need to be established
D i t f i ti ’ lif l h th i ti b li
g p j g
execution discipline
• Robust compliance and tracking
mechanisms
• Capability to continuously
benchmark and improve spend
When do
you do it?
• During any stage of an organization’s lifecycle when the organization believes
that there are opportunities to reduce third party spend
• Should be done on a periodic basis
benchmark and improve spend
efficiency
Who can
do it?
• Any organization looking to reduce spend on third party goods and services
7
* Content on tax related spend reduction/avoidance opportunities may need to be developed further

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:

i. Diagnose and Develop Spend Strategy
Comprehensive assessment of procured spend supply chain practices and external market positioning helps usComprehensive assessment of procured spend, supply chain practices and external market positioning helps us
identify opportunities for expense reduction.
1 E t bli hi B li d A l i S d A ll t t d fi i l b li i t f1. Establishing Baseline and Analyzing Spend. A well constructed financial baseline is a must for any
external spend reduction effort. The spend cube allows for efficient, comprehensive analysis of
external spend along multiple dimensions including but not limited to: spend by category per business
unit/function, spend by supplier, supplier concentration per spend category, etc., p y pp , pp p p g y,
2. Assessing the Supply Chain. Understanding of the existing supply chain complements the insights
developed through spend analysis and helps refine emerging improvement hypotheses. Assessment of
existing contracts, procurement capabilities, practices, policies and procedures provides a context forg p p p p p p
and helps shape organizational and category-level strategies.
3. Performing External Market Analysis. Detailed analysis of the external market can uncover
opportunities to improve efficiency based on existing market power (e.g., bargaining power) and/or
development of new procurement advantage (e.g., redefine the category, redefine the supplier
relationship). It completes the fact base required to develop category-specific strategies.
The three types of analyses can overlap in timing and may need to be performed in an iterative manner. The
rigor with which each of them is performed would depend on the scope of the project, the organization’s recent
expense reduction/sourcing history, and management’s appetite for change.
9

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%

A detailed view of the sourceable expense base highlights the largest impactable categories and provides a sense of
Detailed Baseline View
the potential savings magnitude. When a preliminary diagnostic is required (no access to internal data), 10K
financials and spend profiles from similar clients can be used to estimate the client’s category spend profile.
Sourceable Category Spend Profile
$ Millions
Illustrative
Non-Retirement Benefit
Health Care
58.7
Spend
Human Resources
Bank Supplies
Checks/Check Printing
Plastics
Human
Resources Business
Specific
14%
18%
100% = $1,106
18.0
9.0
1.9
Spend
Business Specific
$ Millions
Disability/WK Comp
Dental
Life
Other
Employee Services
Training
Recruitment
Relocation
19.0
9.8
6.0
3.3
Forms
Bank Services
Credit Reports
Armored Car
Appraisals
Loans & Collections
Professional Services
Consulting
Facilities &
Infrastructure
Information
T h l
Marketing &
Promotion
27%
32%
9% 7.1
39.7
16.1
3.4
19.0
1.1
93.4
42 3
T&E
Airlines
Hotels
Other
Temporary Labor
42.3
14.3
6.8
21.2
36.6
Consulting
Legal
Accounting/Tax/Audit
Data Processing
ATM Expenses
Other
Technology
Total 156.6
Total
42.3
23.9
1.9
25.3
12.8
28.4
192.2
Telecom
Long Distance
Local, Leased Lines
Cellular
Data, Tele Conferencing, Other
97.7
35.8
43.8
6.4
11.7
Spend
Facilities & Infrastructure1
Spend
Advertising Media
Television
Radio/Other
Marketing & Promotion
25.0
Spend
Information Technology2
ata, e e Co e e c g, Ot e
Telecom Equipment
Computing
Cent. Computing
Maintenance
Procurement
Peripherals
Software
.7
7.1
143.1
51.7
13.2
38.7
20.6
18.8
35.7
23.9
7.2
4.7
248.6
6.1
14.5
67.8
Office Equipment
Paper/Supplies
Furniture
Copiers/Faxes
Maintenance
Real Estate
Security
Cleaning
Maint./Repair
Radio/Other
Print
Production
Agency Comp.
Direct Mail
Commercial Print
Forms Printing
Lettershop
Envelopes
Paper
55.0
Contract Programming
Total
105.1
353.0
14.2
117.7
28.2
17.8
p
Utilities
Rent/Lease Payments
Insurance
Logistics
Postage
Express Mail
Courier
302 1Total
Paper
Postage
Lists/Other
Other Marketing
Promotions
Annual Reports
Public Relations
Other
22.1
11
302.1Total
Total 102.1
1 Real Estate category spend could also be addressed through Real Estate Optimization. Refer to Real Estate Optimization project guide
2 IT category spend could also be addressed through IT Rationalization. Refer to Technology Rationalization project guide

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
$Millions
Top 20 suppliers represent 60%
Supplier Concentration By Category
Percent
Supplier %
Banking Example Example
Top 10 suppliers represent 83%$
of the operating expense
71
74
77 80 83
100
Cumulative %
%
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

Category Total Cost of Ownership
To build buyers’ awareness of total category costs and enable accurate benchmarking and evaluation of supplier
offers, total cost of ownership (TCO) should be developed.
Use/Purpose Description
p ( ) p
Total Cost of Ownership Components
25% 175%
Illustrative
To Build Cost
Awareness
• Reveals the true cost of purchasing
decisions to users and buyers
100%
25%
25%
• Comparing total cost of ownership
Awareness
To Identify Potential
Areas for Improvement
for each product/service with
benchmarks from companies of
similar size helps identify and size
improvements
Purchase
Price
Landed
Cost
Carrying
Cost
Administrative
Cost
TCO
To Structure Price
Comparison of Supplier
Offers
• Delineating costs in standard
components facilitates accurate
evaluation/comparison of supplier
offers during RFP evaluationsPrice Cost Cost Cost
• Transportation
• Customs
• Insurance
• Taxes
R i i
• Cost of Capital
• Inspection
• Handling
• Storage
W t
• R&D
• Supplier
Management
• Manufacturing
S t
offers during RFP evaluations
13
• Receiving • Warranty
• Field Failures
• Disposal
Support
• Technology
Access
• Opportunity Cost

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

Qualitative Assessment
Qualitative assessment of the supply chain provides insights that complement the established financial fact base to create a
complete picture of the client’s internal environment.
Description
1. Do you agree with baseline and TCO estimates?
2 What are other costs related to product/service sourcing?
Sample Interview Template Emerging Insights
I. Validation of Financials
Procurement
Organization
• Organizational inefficiencies and opportunities for
improvement may be identified
2. What are other costs related to product/service sourcing?
3. Are there caveats we should be aware of in leveraging the following
sources of internal data?
1. Is the procurement process centralized?
2 Wh k th d i i h t t h f h d l
II. Operational & Organizational Details
Effectiveness
of Operations /
Processes
• Effectiveness of existing demand management,
sourcing, purchasing, vendor and contract
management, and payment processes
2. Who makes the decision what to purchase, from whom and places
purchase orders?
3. What are the decision making procedures?
4. Is the current procurement organizational structure effective?
5. What are the existing procedures/mechanisms for reporting spend?
6. Is there a system to track SLA performance and check billing?
Efficiency of
Information
S t
• Efficiency of financial reporting, purchase order and
performance monitoring systems (may signal
opportunities such as integrating and linking financial
y p g
7. What other operational issues exist related to procurement?
1. Are there standard specifications for each product/service?
2. Are there policies and procedures to monitor and manage demand?
3. How aggressively do you source?
III. Spend Management Practices
Systems reporting system with purchase order system, or
automating manual reporting system, etc.)
3. How aggressively do you source?
4. What is the entry point for a vendor?
5. Is there a procurement-related tax management strategy?
1. What contracts exist and when and how were they negotiated?
2 Do existing contracts meet business needs?
IV. Existing Contracts
Strategy/
Priorities
• Gaps in current sourcing strategy relative to industry
best practices
• Systematically overlooked areas/factors affecting
spend (e.g., lack of spend-related tax strategy)
2. Do existing contracts meet business needs?
3. Does the product/service provided meet SLAs?
4. Can existing contracts be renegotiated to reduce cost?
1 What is your perspective on following initial hypothesis?
V. Initial Hypothesis Testing
15
1. What is your perspective on following initial hypothesis?
2. In your opinion what additional improvement opportunities exist?

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

A t f S li U iAssessment of Supplier Universe
A high-level supplier assessment, in light of market dynamics and client leverage position, helps define viable
cost reduction strategies.
Traditional Suppliers
Existing Suppliers
Total Fee
Spend by Category
Spend
% of Total
Spend
Total
Revenue
Total Fee
from
Client
Market
Share
Supplier 1 $420M $40M 6%
Supplier 2
Market Positioning
Key Findings Leverage
Category 1 $32M 10%
Spend Spend
Category 2
Category 3 $64M 20%
Alternative Suppliers
Total Rating/
E i
Market
Sh
• Multiple traditional
vendors with good
rating and required
capacity exists
• Increase
vendor
competition
Category 10
Total Spend $320M 100%
Revenue Experience Share
Supplier 1 $680M Good/10yr 9.7%
Supplier 2
• Non-Traditional
suppliers exist but
only one supplier
meets the capacity
requirements
• Reconfigure
demand
specifications
Non-Traditional Suppliers
Total
Revenue
Rating/
Experience
Market
Share
• Determine client and supplier
leverage positions and define
opportunities for:
− Exploiting competitiveness in
current environment
• List of categories with identified
savings potential
Revenue p
Supplier 1 $120M NA/1yr 80%
Supplier 2
current environment
− Creating a competitive
environment
• Establish supplier universe comprised
17
Establish supplier universe comprised
of traditional and non-traditional
suppliers
• Develop high-level supplier profiles

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

Comprehensive Category Assessment
Insights developed through spend supply chain and market analyses help develop a comprehensive view of each
Professional Services - Category Example
Disguised Client Example
Improvement Opportunities
High Complexity
Insights developed through spend, supply chain and market analyses help develop a comprehensive view of each
sourceable category.
Spend Profile and Supplier Concentration by Function
80% Spend
20% Spend
I Organizational
Implementation
Complexity
Time to
Implement
SavingsPotential IssuesImpactOpportunity
Description
201316
27
214 22
g p y
Low Complexity
16-20 wksTBD*• Requires
executive mandate
to drive business
adherence to one
set of approved
suppliers
• Reduces current
supplier
fragmentation
creating
economies of scale
1) Select preferred
suppliers
I. Organizational
29 5 14
90
153 80 19 10 215
27
Temporary Audit Bank
Collection
Invest-
ment
Consulting Market
Data
Outsourcing Records
Management
Other
Spend: $22M 23 14 91 51 25 20 14 50
% of Total: 7% 8 5 28 16 8 7 5 16
16-20 wksTBD*• Requires an SLA
measurement and
tracking
mechanism to
monitor
• Ties performance
to results
2) Standardize
contracts and
execute best-in-
class service
level agreements
suppliers
Supply Chain and Market Assessment
Key Findings
Procurement
Organization
• Minimal centralized management exists for
sourcing services (e.g. business units have the
flexibility to source their needs with multiple
II. Operational and Process Related
12 wksTBD*• Requires• Realization of1) Implement
compliance
g
to guarantee
performance
Organization
Procurement
flexibility to source their needs with multiple
providers)
• High degree of supplier fragmentation and
multiple supplier entry points
• Unclear supplier relationship management
process
q
executive level
mandate
• Limits autonomy
of businesses
benefits will be
specifically tied to
the ability to
adhere to
contracted rates
and terms
) p
policies to
control and
manage usage
with preferred
suppliers
Processes
External
Market
p
• Lack of policies to standardize specifications
• Fragmented market with high degree of
competition among providers
• New offshore providers entering the market
• Performance and contingency related pricing
TBDTBD*
5-15%
• Requires
executive
commitment
Total
• Sustain long-term
supplier
relationship
2) Develop
centralized
supplier
management
process
19
• Performance and contingency-related pricing
are becoming more common
*Sources of savings may vary based on rigor with which selected levers are applied

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

Spend Reduction Strategy Development
A spend reduction strategy spanning all identified improvement opportunities is developed.
Spend Reduction Strategy Development
Areas For Improvement
Description
Comprehensive Spend Reduction ProgramIn Scope For Spend Reduction
Reduce Category Spend $
• Reduce spend by increasing leverage with
suppliers
• Optimize specifications and consumption
through demand management
• Minimize procurement related taxes1
Savings Impact
Recover Spend
“Qui
ck-
Cost
Cost Management
Time
• Minimize procurement-related taxes1
• Recover overpayments due to invoicing and
billing errors (and/or fraud)
Rationalize Procurement
Organization
Diagnostic
ck-
Hits
”
Reduction
Initiatives
Cost Management
Initiatives
• Streamline the procurement organization and
reduce staffing costs2
• A comprehensive spend reduction program enables
reduction of total cost of ownership with an impact far
Optimize Procurement
Processes
• Optimize procurement processes through
redesign and outsourcing3
reduction of total cost of ownership with an impact far
exceeding purchase price reductions
• A phased implementation approach is usually
recommended as it allows for early victories and builds
momentum
Rationalize
Technologies/Systems
• Streamline technology/systems supporting
procurement processes4
• May require extensive procurement transformation efforts
leveraging other saving levers: organizational
simplification, business process optimization and
technology rationalization
21
1 Content on tax related spend reduction/avoidance opportunities may need to be developed further
2 Refer to Organizational Simplification project guide
3 Refer to Process Redesign and Outsourcing project guides
4 Refer to Technology Rationalization project guide

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

4. Rationalize Category Spend
Reconfiguring specifications and optimizing usage help eliminate unnecessary spend from a demand perspective.
a. Demand Rationalization
Key Questions Drivers of Excess Cost Rationalization AlternativesAreas of Assessment
What do you
buy?/ What are
the
specifications?
• Variances in specifications
• Unnecessary complexities
• Add-on features
• Standardize and simplify
specifications
• Substitute incumbent services
for cheaper alternatives
• Specifications:
− Current and future
requirements
− Assessment ofspecifications?
• Features met by one (few)
supplier(s) only
o c eape a te at ves
• Eliminate unnecessary features
• Adjust entitlements to each user
profile to minimize purchase of
unneeded and unused services
Assessment of
needs, wants and
“nice to haves”
How much do
you buy?/ What
• Purchase volume (total,
average order size)
• Usage rates
• Over/under purchasing
• Low reuse rates
• Optimize orders based on inventory
costs vs. purchase volume discounts
and rush order chargesy y
is the usage?
• Usage rates
• Inventory - minimum
required and excess
• Frequency of
replenishment
• High inventory volumes
and rush order charges
• Reuse owned assets - optimize usage
across silos to reduce spend for the
organization as a whole
replenishment
23

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

Optimizing Usage
Comparing usage of products and services across businesses helps identify categories and businesses with excess
demand that can be optimized.
Disguised Client ExampleDisguised Client Example
LOB IT Indirect Expense Base
$ Millions
Workstation Usage Getting to target
Savings Impact
Key Considerations22.4$131.4 Total/Subtotal
As of July 2001
# per FTE
0.8
1.0
0.4
1.31.31.4
Target
1.05 1.2
Target
Demand:
1.05 – 1.2
Getting to target
demand will save
$1.5 – 3.0MM
• It is important to recognize
business specifics which may
explain major fluctuations in
usage across businesses (e.g.
businesses with partially
59.0109.0
BU 1 BU 2 BU 3 BU 4 BU 5 BU 6
Phone Usage
As of July 2001
# per FTE
3 5
Getting to target demand
will save $1.0 – 1.5MM
Quick
Wins
businesses with partially
automated customer service
might have lighter phone
usage)
50.0
2.6
3.5
0.91.1
2.1
1.3 Target
1.1 1.5
Target
Demand:
1.1 – 1.5
Total Charges
from
Other
LOBs
Charges
from
Central
IT
Other
Infra-
structure
Products
Workstations,
Phones,
Data
Ware house
Data Warehouse Usage
As of July 2001
Gigabytes of Storage
34,000
17,000
Storage can be rationalized through:
• Streamlining development and test environments
• Reducing data retention period (e.g., 3 years to 1 year)
• Using cheaper media (e.g., managed or dedicated tape
instead of DASD or SAN)
• Save potential: $2.0 – $4.0MM
Medium-
Term
LOBs IT Products Ware-house
N/AN/AN/AN/A
17,000
• Timing: Quick Hit / Medium Term Total
25
• Risk: Medium/ High
• Cost: $0.5 – 1.0 MM
Potential Save
$7.5 – 13.5 MM

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

Conduct high level assessment of supplier capabilities and select suppliers to be included in RFP process
Select Suppliers for RFP Process
Conduct high-level assessment of supplier capabilities and select suppliers to be included in RFP process.
Supplier Assessment
Capabilities and Location
Supplier Assessment
Existing
Suppliers
Role of the RFP
• Provides a formal vehicle for
collecting price, service and
other competitive data
Pre-Selected
Suppliers
Capacity and Utilization
Product/Service
Ch t i ti
pp
Alternative
Suppliers
other competitive data
• Establishes a common basis for
comparison of supplier offerings
• Ensures legality of supplier
selection process
• Supplier 1
• Supplier 2
Pricing/ Relationship
Alternatives
CharacteristicsNon-Traditional
Suppliers
selection process
• Begins the formal vendor
communication/negotiation
process – clarifying information,
verifying supplier objectives,
•List all potential
suppliers (including
Revenue/Financial Health
• List of potential
suppliers for RFP
• Perform preliminary
assessment of supplier
etc.
current suppliers) for
each sourceable
category under
review
processcapabilities to pre-select
suppliers from the supplier
universe
•Leverage RFIs as needed
27

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

Supplier Evaluation Criteria
Establishing clear evaluation criteria results in unbiased selection of supplier(s) best-suited to meet client
procurement needs.
Criteria Components Sub-Components
Price
• Discounts • Quantity discounts
• Item discounts
• Promotions Key Considerations
• Purchase price shipping cost usage• Price
Coverage
• Sub-categories
• Locations
• Ability to address/bid on all sub-
categories across locations
• Ability to meet volume
• Specific objectives will determine not
only the group of suppliers to which
the RFP is sent out, but also the
criteria along which they are
evaluated
• Purchase price, shipping cost, usage
and other cost
• Price
• Payment terms
• Volume
• Ability to meet volume
requirements
evaluated
• Competitive supplier selection is an
iterative process; using the selection
criteria to structure a most desired
outcome, least acceptable outcome
Quality
• Quality assurance procedures
• References
• Quality control procedures to
meet client needs
Product/Service
Specifications
• Technical specifications
• Product/Service specifications
• Performance specifications
, p
and best alternative to negotiated
agreement (BATNA), helps guide the
negotiation process
• Technology and processes
employed
• Metrics
Delivery
• Delivery procedures
• Rush order procedures
• Delivery lead time
• Frequency of delivery
• Minimum quantity delivered
• Type of transportation
29

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

Negotiation Strategy Development
RFP response analysis, previous relationship information, and understanding of supplier objectives can help
d l i i f h li h li d f i idevelop negotiation strategy for each supplier short-listed for negotiation.
Summary of Previous Transactions with Supplier
Supplier Name: Supplier X Supplier Representative: Date:
Company Overview:
Headquarters Location: Size ($): Size (employees):New York NY 3 2 B in sales 1997 13 000
IllustrativeHeadquarters Location:
Do they have a presence in Indianapolis?:
Have we used them before?
If yes, for what:
Size ($):
Previous Year’s
Income:
Size (employees):
Previous Year’s
Gross Profit:
New York, NY
Y
N
3.2 B in sales 1997
N/AN/A
13,000
What purchased? When? Amount ($) Were we satisfied? If not, why? Other Notes
1) N/A
2)
3)
4)
Negotiation StrategyRanking on RFP survey:
In which categories are they competitive?
Who are their primary competitors?
Other information (pertinent financials, RFP results, etc.)
Why? High scores across the board
Envelopes
Supplier 1, Supplier 3
• The only envelope supplier with savings
• Do not cover 35% of category
• No bid on A and selected B jobs
3
S li A l i Al RFP C it i
Key Findings Leveraging Opportunity
Leverage Position Strengths/Weaknesses
Strengths Weaknesses
Si ifi t C lid t llSupplier Analysis Along RFP Criteria
Tactic
Likely
Supplier Our
R
Negotiation Positioning
High savings
Service
Lack of total coverage
Slower turn-around timeSupplier Name: Supplier X Supplier Representative: Date:
Supplier Position/Goal
RFP ISSUE CATEGORY PRESENT STATE RFP BEST DESIRED STATE BOTTOM LINE
Cost Envelopes Best in RFP
($91,497)
($91,497) n Drop another
10% with volume
n Supplier 2 was
the only
• Significant
savings but lacks
complete
coverage
• Only bid on
envelop category
• Consolidate all
envelop purchases
to single supplier
in Supplier X can
supply the 35%
they are missing
Tactic Supplier
Response Responseguarantees envelope
supplier with
savings
n Try to improve
on current mark
Coverage Envelopes Only 65% of PO’s but
97% of dollars
100% 100% n We must have
100% coverage
Quality X Supplier 4 n Printing must be
approved
n Improve overall
quality score
5th on RFP
n Low press check
• Possible
combinations with
other categories
• Single
supplier for
envelop
category
• It will
decrease
savings
• The volume
and business
we offer
should more
than offset
this cost
• If the supplier is critical, focus on achieving joint cost reduction and future
improvement efforts
5th on RFP
n Needs to improve
cycle time
ppq y
Service X 3rd on RFP Supplier 7 n Already near the
top here
n Improve service
score
Timing/
Delivery
X Supplier 3 n Cycle time
needs to be
addressed
n Improve score
p
ranking
this cost
Negotiation Parameters improvement efforts
• When the supplier market is fragmented or client is a critical buyer use
buyer’s power to achieve price reduction and volume concessions
Negotiation Parameters
Current
State*
Extremely
Competitive
Outcome*
Client’s
Most Desirable
Supplier’s
Least Acceptable
Client’s
Least Acceptable
Supplier’s
Most Desirable
Range of
Acceptability
31
OutcomeOutcomeOutcomeOutcome
Client’s
BATNA
Supplier’s
BATNA
* As defined by Price, Coverage, Quality, Specifications and Delivery

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?

Negotiation Sessions Overview
Supplier negotiation is an iterative process and requires systematic approach to ensure all issues and concerns
are addressed and goals are achieved.
A h
Key Considerations
• It is very critical to establish trust
Round 1
Round
• Clarify RFP responses
• Develop understanding of suppliers’ objectives
E l l i i li ’ bj i
Approach
(May Vary by Supplier)
y
and mutual rapport with the
supplier’s negotiating team
• Address supplier’s needs not wants
• Document all facts, issues and
• Explore alternatives meeting client’s objectives
Round 2 • Redefine your most desirable outcome, least
acceptable outcome, and best alternative to a
negotiated agreement (BATNA)
Id tif th l “ l ” d l t th k h
,
agreements during the negotiation
sessions to avoid any future
confusions and facilitate
preparation for next round
Aft t i h d
• Identify the real “players” and let them know where
they stand
Round 3 • Drive toward your most desirable outcome
– Extract concessions with uncompetitive suppliers
by sharing best alternative and desired outcomes • After agreement is reached,
develop schedule for management
approval and legal review
by sharing best alternative and desired outcomes
• Explore bundling opportunities
Subsequent Rounds • Make orderly concessions to reach agreement, always
being cognizant of your least acceptable outcome and
best alternative to a negotiated agreementbest alternative to a negotiated agreement
• Form the basis for long-term relationship, if
applicable
33

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.

Tax Reduction Opportunities (continued)
Sales Tax Reduction
Criteria
• A minimum of $1 million
i ft h
Description
• Reduce or eliminate sales tax on software packages
( C O Cl i A ib ) b
Required Information
• Location and costs of
h d l d ftSales Tax Reduction
on Software
Purchases
in software purchases (e.g. Commerce One, Claris, or Ariba) by:
−Electronically transferring the software
−Loading the software on the systems (by the
vendor) and subsequently removing all
t ibl d t h CD’
scheduled software
implementations
tangible products, such as CD’s
−Delivering the software to a location in a tax
exempt state and subsequently copying to the
desired location
S ti th t i ti d
A i i f $10
−Segregating the customization and
maintenance service charges (which are
often non-taxable)
L i i id d b d l l L i d f• A minimum of $10
million of asset or other
purchases in designated
geographic location
• Leverage tax incentives provided by state and local
jurisdictions to reduce upfront costs (tax
exemptions) or obtain post purchase refunds (tax
credits)
• Location and amount of
annual asset expenditures
• Legal structure
• Description of planned
business activities
Credit and
Exemption
Optimization
business activities
• Shared Services profit of
at least $50 million
• A SS spend of about $1
• Provide cash tax savings and effective tax rate
dilution to affiliated organizations that rely on
intra-company employees to deliver common
• Spend details by shared
services category
• Legal structure
Tax Optimization byTax Optimization by
Procurement &
Shared Services • A SS spend of about $1
billion assuming a 5%
markup
purchasing, distribution and other services
g
• Description of intercompany
transactions
• Profit and tax liabilities by
business entity
S ed Se v ces
Strategies
35

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

Typical Spend Recovery Opportunities
Recovery Opportunities
Sales/Use/VAT Tax
Description
• Overpaid taxes due to incorrect
allocation of sales tax based on user
Key Steps
• Map product/service to user location/cost center
Sales/Use/VAT Tax allocation of sales tax based on user
location and/or incorrect self-assessment
of use tax
• Overpayment/duplicate payments made
• Analyze supplier invoices, purchase and tax data
based on user location to determine potential
overpayment and error rates
• Assess the payments made, invoices received and
Overpayment/
Double Payment
Overpayment/duplicate payments made
possibly because of duplicate entry of
invoice in the system or duplicate
invoices received
ssess t e pay e ts ade, vo ces ece ved a d
services/products sourced to determine
overpayments or duplicate payments
Invoice/Contract
Management
• Incorrect billing:
−Same products/services billed at
different rates
−Un-agreed price increase
• Determine contracted price and compare with
charged price
• Communicate identified mis-charges to supplier
−Non-compliance with service level
agreements
• Inappropriate payments made (e.g. • Identify and assess any anomalies such as invoices
Other (e.g. Fraud)
pp p p y ( g
payments made to multiple suppliers for
the same invoice)
y y
to different suppliers for the same amount and
determine if fraud has occurred
• Take appropriate actions to resolve each instance
• Institute legal recovery option
37
g y p

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

High Level Implementation Plang p
Illustrative
A number of constituents execute against plan and ensure success of spend reduction effort.
Responsible
Entity Key Activities and Responsibilities
Organization Senior
Review implementation progress with core team on periodic basis
Organization Senior
Executive Team
Finance Track, report and book savings
Functional
Executives/
Change
Champions
Communicate change
Implementation
Team
Transition to new supplier
Trainingg
Implement operational change
39
Today Month 1 Month 2 Month 4

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

S li R l i hi M
Supplier relationships must be actively managed to ensure seamless transition, adherence to terms and
continuous improvement.
Supplier Relationship Management
Typical Capabilities
Typical Supplier Management Functions
• Prepare annual budget and track variance
from plan
• Reconcile monthly invoices and issue timely
t
Typical Capabilities
Financial
Management
payments
• Define internal transfer payment
arrangements
• Ensure compliance with contract terms • Ability to capture and leverage financial and
Cross-Functional
Drivers of Success
• Negotiate amendments and terms as required
• Assess penalties in accordance with SLAs
Contract
Management
Ability to capture and leverage financial and
performance data to drive further
improvements
• Continuous monitoring of demand and
supply side data to prevent spend creep-up
• Interface with user community to gather
requirements and identify improvements
• Manage day-to-day operations and resolve
issues
Operations
Management
• Periodic benchmarking with external market
to monetize on emerging capabilities and
trends
• Design reporting templates and modify as
required
• Prepare analyze and distribute reports to
Performance
M t
41
Prepare, analyze, and distribute reports to
user community
• Prepare senior management updates
Management

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

IV. Developing A Procurement Organization
In designing ‘the right solution,’ leading companies take an holistic approach to procurement that encompasses
strategy, structure, technology and key processes.
Procurement Strategy
Organization Processes Systems
Change Management
Vision, Direction Setting, Policies & Procedures
Organization/
Knowledge Management, Training, e-Learning
Technology &
Governance
Structure
Roles
Accountabilities
Strategic
Procurement
Operational
Procurement
Performance
Management
Procurement
Support Systems
g
Operating Model
Regions Procurement
Audit PerformanceA/P
Distribution
Asset Mgmt
Order
Entry
Audit PerformanceA/P
Distribution
Asset Mgmt
Order
Entry
Call Center
Pricing
Dbase
Operations
gy
Systems
Accountabilities
Skills
Knowledge
Demand
Management
Vendor/Contract
Management
ATP Payment
Reconciliation
e-Procurement
Systems
Integration
g
Frequent migration to Shared Services
Systems Support
• e-Procurement, internet/intranet
• ERP backbone
• MIS systems
• EDI/e-mail/fax user/vendor interfaces
p
Reconciliation
Tax Management
Procurement
Processes
Strategic Procurement Operational Procurement
Demand Management
Baseline Implementation PaymentReceivingOrder PlacementRequisitionVendor Selection Negotiation
43
Demand Management
Vendor Management/Contract Administration
Cost Awareness Standardization
Rigorous Approvals Substitution Relationship
Management
ProcessStrategy Organization
Information
Management

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

Selecting the right procurement model requires consideration of desired outcomes, current/developing capabilities
Selecting a Procurement Model
High “Manage”
Hi h t l
“High Value
C di ti ”
Selecting the Category Span of Control
Decision Matrix
and fit with corporate culture.
K O ti M d l D i i P i t
Opportunity for
Enterprise-wide
Efficiency (Increases
With)
g
• High control
• Minimum user
involvement
Coordination”
• Complex markets
• Cross-business unit
coordination
• Strong user
involvement
• What categories should be centrally managed
vs. coordinated vs. business-led?
Key Operating Model Decision Points
Category Span
of Control With)
• Standardized or commodity
item
• Homogeneous user/need
profile
• Low technology product
“Support”
• User-led processes
• Standardized
framework methods
and tools
“Facilitate”
• One-off, non-
strategic, highly
customized requests
• Strong user
• What organizational structure/operating model
will enable quality service to internal clients at
optimal cost?
of Control
Organizational
Structure
Low
Low
High
and tools
Need for Local Responsiveness
(Increases With)
• Specialized or one-time buys
g
involvement
• Which processes are centrally owned vs. pushed
to the end-user?
• Are there low value add/commodity activities
that could be outsourced, e.g. PO processing?Processes
Key
Management
Processes
Specialized or one time buys
• Heterogeneous user/need profile
• Business-critical items• Do the requisite skill sets exist in the
organization to execute the procurement
strategy?
D th i ti t h l i f t t
Skill Sets
Delegated
Centralized
Business Controlled
Category Management Example
Centralizing Procurement• Does the existing technology infrastructure
enable seamless, automated process support and
key analytics?
• What key metrics and performance management
process should be instituted to track and
Technology
Infrastructure
M t i
Business Controlled
Coordinated
AfterBefore
Centralizing Procurement
process should be instituted to track and
monitor supplier performance as well as assess
procurement effectiveness and efficiency?
Metrics
66%
83%
8%
9%
27%7%
45

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

Optimal Procurement Capabilitiesp p
A well executed procurement transformation effort builds capabilities critical for efficient and sustainable spend
management.
Procurement Organization Features Benefits
Standard
• Standard performance reporting and tracking
d
• Enables accurate and consistent analysis of supplier
f
Measurement
and Tracking
Procedures
procedures performance
Integrated
Procurement
Information
System
• Information system linking buying and fulfillment
processes
• Integrated fully into financial reporting and PO system
• Integrated with budgetary cycle and accounting system
• Links purchases, inventory and spend, facilitating better
control of demand and usage
System • Integrated with budgetary cycle and accounting system
Systematic
• Uniform processes for core purchases and fulfillment
policies across geographies and business units
• Reduces off-specification purchases, redundant tasks
F ilit t b dl d hBuying and
Fulfillment
Process
policies across geographies and business units • Facilitates bundled purchases
Uniform
Procurement
Strategy
• Single sourcing strategy • Enables bundled purchasing, systematic processes,
integrated performance, demand and supplier
management programs
47

A diAppendix
1. Sourcing and Procurement Tools
2. A Spend Recovery Tool
3. Qualifications
4. Case Studies:
a. Cash Services
b. Market Data

1. Sourcing and Procurement Tools
CONSULTANT leverages a proprietary set of spend management cost reduction tools that help us streamline
engagements and expedite benefit capture.

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

2. ABC – A Spend Recovery Tool
ABC, has been used successfully on a variety of client engagements to perform transaction data analysis and
identify opportunities for spend recovery.
Overview
ABC is a pro-active investigation service that allows us to identify irregularities and anomalies in transactional data by performing 300+ tests
ABC integrates computer-based cross matching, non-obvious relationship identification and analytical tests to identify anomalies in transactions in
th t th t hi ti t d i t l dit d d tways that even the most sophisticated internal audit and recovery procedures cannot
Selected tests are executed against client-supplied accounts payable and employee data which result in a series of profiles that are scored and ranked
according to client specific risk measurements. Higher rankings indicate potential errors or possible financial abuse has occurred
Focus of the ABC Tests1
Billing Errors
Duplicate Transactions
Sample Payable and Procurement Tests
Receipt vouchers without matching payments
Invoices without matching orders
Unusual Relationships
Ghost Suppliers
Reasonableness of Data - Benford’s Law
Data Quality
Payments without matching invoices
Duplicate order numbers
Invoices with the same: supplier, amount, date
Invoices with different supplier, but same amount
Differentiators
Comprehensive testing (not sampling)
Checks/EFT with the same: supplier, amount, date
Benford’s Law: Payment amounts – First two digits
Missing purchase order numbers
Supplier volume increased >25% from Q1 to Q4p g ( p g)
Integrates third party data
Customized test algorithms targeted to individual client needs
Unique scoring methodology to summarize high risk scenarios
Duplicate PO #s between different suppliers
Invoices from different suppliers linked to same PO
Supplier is paid >1 payment on the same date
Price per order differs from price per the invoice
51
1ABC also has tests to review employee payroll and expense data including comparing information between the supplier data and the employee data.

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

Expertise Across Savings Levers
Our client experience demonstrates expertise across savings levers.
Examples of Procurement InitiativesSelect Clients Typical Savings Levers
Select Examples OnlyApplying “The Equation”
p Typical Savings Levers
a
Top-10 U.S.
Financial Services
Institution
aa
• Engaged to assist the client in reducing total operating expenses for one of its two
major business units
• Led a multi-wave strategic sourcing effort of both direct and indirect spend
categories (10), executed a demand management program to further reduce
expenses and realize efficiencies and supported the business in rolling out this
a
expenses and realize efficiencies, and supported the business in rolling out this
initiative to the entire organization
• Delivered over $50 MM in run-rate savings with total term savings, including
bonuses and other incentives, in excess of $220 MM and per category savings
ranging between 20% and 45% (average of 28%)
• Engaged to assist the CFO in the development of a comprehensive procurement
Top-10 U.S.
Insurance Company
• Engaged to assist the CFO in the development of a comprehensive procurement
strategy, organization, strategic sourcing effort, and new processes and systems
• Led a multi-wave strategic sourcing effort across both loss and expense categories
(>15 categories), redesigned purchasing and claims processes, structured and
established a new procurement governance organizational model, integrated
measurement and tracking processes with existing financial systems, and executed
aa aa
g p g y ,
an extensive knowledge training program
• Results have led to a new procurement group that employs more than 250
professionals and has achieved more than $750 million in cumulative new savings
since launch with per category savings ranging from 10%-30%
Top-10 US Retail
Bank a
• Engaged to assist the Retail Institution in (among others) reducing external,
marketing related spend through a strategic sourcing/demand management
program; also engaged on tax-related expenditure
• Led a cross-LOB sourcing/demand management initiative focusing on $164
million in spend; also led two initiatives to identify and capture overpayments in
taxes
aaa
53
taxes.
• Realized $25 million in sourcing/demand management saves; $40 million of
historical sales/use tax saves and an additional $7 million in prospective tax saves
based on Bank’s New York IDA agreement

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%)
• Agency (2-15%)
IT
>50 projects
• Computers (10-30%)
Telecom
>50 projects
Prof. Services
>25 projects
• Consulting (5-15%)
• 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
• Waste Mgmt (15-20%)
• Insurance (5-10%)
• Benefits (3-14%)
• Printed Material (8-31%)
Ad & M di (8 12%)
• Utilities (2-8%)
• 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.

Financial Services Experience
We have a strong track record of achieving savings results in the Financial Services Industry.
Financial Services Clients
• Abbey National • Liberty Mutual
Select Examples
Client Name
Spend
Addressed
(millions)
Annual
Savings
(millions)
Save %
Abbey National
Bank
• ABN AMRO
• AEGON
• Aetna
• Major Bank
Liberty Mutual
Insurance
• Marsh McLennan
• MBNA
• Merrill Lynch
• Met Life
Major Bank $280 $60 21%
ABN AMRO $108 $13 12%
AEGON $325 $30 9%
• Allianz
• Allstate
• Bank of America
• Bank of Tokyo-
Mitsubishi
• Bear Stearns
• The Money Store
• Morgan Stanley
• Mutual Insurance
• Mutual of New York
• Mutual of Omaha
NAB
Aetna* $1,400 $40 3%
AllState $1,000 $100 10%
ING Group $210 $60 28%
• Bear Stearns
• BNP Paribas
• Capital One
• Comerica Bank
• Commericial Fed
Bank
• NAB
• National Bank of
Canada
• Old Mutual
• PNC Bank
• Procuron
JP Morgan Chase $164 $25 15%
Prudential - UK* $500 $30 6%
Wells Fargo $500 $85 17%
• Credit Suisse First
Boston
• Deutsche Bank
• Dresdner Kleinwort
Wasserstein
E*T d
Procuron
• Progressive Insurance
• Providian
• Prudential - UK
• Transamerica
• UBS Warburg
West Coast Energy $490 $109 22%
• E*Trade
• The Equitable
• Fleet Bank
• Goldman Sachs
• ING Group
• JP Morgan Chase
g
• Union Bank of
California
• US Bank
• Visa
• Wachovia
hi l
*For these clients, Spend Addressed column gives total spend not just spend for categories sourced.
55
• JP Morgan Chase
• Latin Nexus
• Washington Mutual
• Wells Fargo

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

Cash Services (Continued)
Final recommendations included procurement process enhancements and vendor modifications that drove
Process Enhancements Vendor Modifications
i i d l i h f i i i d d i
qualitative and quantitative benefits.
Armored
Transportation
(for branches,
vaults, and ATMs)
• Optimized replenishment frequencies
• Eliminated vendor meets by requiring shared liability
• Decreased branch cash pickups by authorizing vendors
to prepare ATM cash orders at vault
• Optimized vendor mix
– Evaluated insourcing and outsourcing options
– Created multi-vendor environment to foster ongoing
vendor comparisons, increase negotiating power, and
improve contingency planning
l d d bl f idi b d hi– Selected vendors capable of providing broad geographic
coverage for national expansion
– Consolidated vendor base
– Retained preferred vendors and expanded the scope of their
services
Cash Vault
Processing
(Bank and
merchant volumes)
• Centralized cash ordering for branches and ATMs
• Identified best practices and standardized processes and
policies
• Eliminated redundant cash processing
• Minimized residual processing by using a mix of cash – Replaced underperforming vendors
– Enhanced responsiveness, service levels, and pricing
through direct management of cash replenishers
– Minimized vendor transitions and maintained high level of
service
• Minimized residual processing by using a mix of cash
adds and cash swaps
• Reduced cross-shipping, fitness, and denominational
issues
• Supplied automated cash forecasts to vendor
• Reduced administrative burden
– Established electronic submission of data
– Simplified and standardized invoices
– Eliminated nuisance charges
– Virtually eliminated billed work
Equipment
Acquisition &
Maintenance
• Selected alternative equipment that met SLAs and
reduced branch redesign costs
Cash Management • Negotiated immediate credit on deposits and waived the
• Negotiated robust agreements
– Negotiated financial penalties/incentives to reinforce SLAs
– Strengthened contacts by standardizing and clearly
defining service levels, terms, and conditions
Cash Management
need for cash inventories
• Established process to monitor branch, ATM, and cash
vault inventories
• Automated data submission and report generation
57

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

Corporate Cost Reduction

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