Strategic Sourcing Can Help to Realign IT Cost Structure After Divestiture

SITUATION OVERVIEW The US arm of a Japanese multinational Consumer Electronics company required Strategic Sourcing support to tailor its centralized IT organization’s Service costs to match its new revenue structure after a key business unit (BU) exited the US market.  Due to the shared nature of the IT organization, initial IT cost reductions accompanying the BU exit were not proportional with the revenue reduction.  The situation caused a ‘stranded cost’ issue that impacted the remaining BUs profitability going-forward.  This issue was made more difficult by an IT expense allocation methodology that was overly complex. The company engaged Tony Raimundo, a member of the OnDemand Professional Network with Strategic Sourcing / IT Category Expertise and an extensive IT Operations background, to participate as a member of a steering committee with the CIO, CFO and representatives from the going forward BUs to address the ‘stranded cost’ issue.  The team was given 90 days to consider all options including outsourcing the IT function. DISCOVERY & EVALUATION After establishing a working team that included the CIO, the Finance team, and representatives from each BU, business requirements were defined and roles & responsibilities were communicated to the project team.  The team agreed that the following deliverables would be required. Articulation of a complete IT Service Catalog illustrating delivery costs for each serviceCommitments from BUs for IT Services & volumeDetailed Sourcing plan (including a detailed RFI document) to solicit proposals from IT Outsource (ITO) providers The team assembled internal & external data and analyzed IT spend for the previous 18 months clearly mapping relationships of costs to existing Services in the existing IT cost allocation...

Tail Spend Focus Can Deliver Significant Savings

Ever since Peter Drucker made his famous statement about procurement being the last frontier of finding corporate efficiency in 1982, companies of all sizes have embarked on implementing procurement enhancements as a way to control and reduce cost.  In nearly 50 years of procurement focus, one portion of vendor cost has gotten very little attention – Tail Spend, broadly speaking 20% of the overall spend that comes from 80% of vendors.  While Tail Spend is something that always will be present in the cost structure of any organization, below are some examples where Tail Spend represents inefficiency: Using local vendors for services when there are existing agreements with national vendors, e.g. housekeeping servicesUsing software services specifically for individual business functions when there are enterprise level services available, e.g. business intelligenceUsing services that are not required or are already provided by existing vendors, e.g. certifications, marketing research, project managementRogue spend, not approved under any budget Because of the relatively small amount of spend associated with any individual vendor, Tail Spend can escape attention from finance and procurement functions for a long time.  Paul Dhaliwal, a member of our OnDemand Professional Network has developed a systematic approach to identify suspect vendors within tail spend that may fit the criteria outlined above. This approach enables rapid identification of these vendors and take appropriate action in collaboration with individual spend owners.  Typical disposition off these vendors includes immediate shut-off of their services, transition of their services to existing vendors, or consolidation with a national vendor.  Tail Spend initiatives can yield cost reduction totaling 2% – 5% of overall total indirect cost and can...

Marketing Agency Sourcing – F100 Global Retailer Case Study

F100 Global Retailer was looking to source Agency of Record (AOR) in their largest division (Latin America). The AOR contracts were expiring, and client wanted to source a new agency for online and offline requirements. They had not replaced their agencies in over 3 years – the annual current spend of $67MM in was divided among 11 incumbent agencies. The current fee structure thought to be high (proven correct with savings of 50%), and the rebates were low (only 5% – the marketing team was convinced this was low given the spend size and knowledge of competition). Procurement and Marketing had never worked together in the past and Marketing viewed Procurement with distrust and lacking in the subject matter expertise needed to support this area. To build a common understanding, an outside consultant, Alan Rice facilitated several workshops to share knowledge between the two departments. Marketing learned how the Strategic Sourcing process worked, along with examples from other internal projects and the consultant’s experience with other external projects. Additionally, one-on-one discussions were held with the Chief Marketing Officer and his direct reports to establish a strong relationship and build a bridge as a trusted advisor. APPROACH After establishing a cross-functional team from Marketing, Finance and Procurement, business requirements were defined, and roles & responsibilities were communicated to the project team. The team assembled internal & external data and analyzed marketing spend over the previous 2 years, and the projected media budgets for the coming year. Agreed upon sourcing strategy included an RFI round, potentially 2 rounds of RFPs and potentially a final Reverse Auction round. RFI Round – RFI...

Building Strategic Procurement Function – National Sporting Goods Retailer

SITUATION OVERVIEW National Sporting Goods Retailer desired to build a highly functioning Strategic Procurement organization. They hired Kas Chupa, a member of the OnDemand Professional Network as the new Chief Procurement Officer to drive this effort. Kas was tasked to build a procurement organization with the capability of sourcing $550M of Indirect Goods & Services, Capital Equipment and some Direct Goods for resale and implement year over year savings programs. DISCOVERY & EVALUATION As the new CPO, Kas interviewed all business unit leaders to introduce himself and to get their perspective on what they expected from Strategic Procurement, to understand their business goals and objectives for the coming year(s) and discover how their respective procurement activities were being executed currently. Part of the evaluation phase was to uncover quick win opportunities, prepare the business for the upcoming organizational changes and the timeline for those changes, as well as the Mission and Vision for Procurement within the company. The interviews and data collection revealed the following: All buying was being executed within the various business units by non-procurement individuals.All contracts we being negotiated and signed by the business units with limited to no legal review.There were multiple payment channels, and close to 100 different payment terms. EXECUTION & BENEFITS The CPO quickly engaged external consulting support while he was building internal procurement capabilities. The key focus of the consultants was to work with the business and build strawman sourcing plans and pipeline of quick wins. While focusing on quick wins to demonstrate the value of strategic sourcing and procurement, the CPO built the procurement team with internal resources, with a...

Marketing Spend Sourcing – Key Learnings From The Field

By David Brown, Vice President, Client Services, OnDemand Resources, LLC We are seeing Marketing spend becoming a key focus area for companies to generate substantial savings.  Yet, organizations often put more analytical rigor and require more business justification for a $1,000 laptop purchase than they do for multi-million-dollar advertising investments. Marketing IS one of the last green sourcing pastures in corporate America and one that is particularly ripe to harvest in the current business environment. I have spent a large part of my career focused on enhancing value and capturing savings in the area of Marketing Spend.  Here are TEN KEY LEARNINGS that might benefit anyone getting ready to make a run at this elusive space. Additionally, you can review our case study on Marketing Spend Sourcing with a F500 B2B Services company here: Procurement fundamentals are no different for Marketing purchases.Savings are captured from de-fragmentation.Savings are captured as suppliers compete for your business.Audits often find recoverable spend.Professional service costs are a function of labor:  the number of resources, the seniority mix, and the market cost for their expertise.Get “C” level executive support and air cover before you dive in.Ideal support comes from the CMO, but the CFO or CEO can make it work, too.If the CMO and his/her lieutenants do not want you there initially, make sure the CFO is willing to stick out his/her neck to keep you there until you can build trust, otherwise, hunt elsewhere.The big efficiencies are where the big dollars are: media. Most companies focus on creative agencies, however the largest spend is working media, both traditional and increasingly digital.Saving ranges in media sourcing are...