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