Do You Have A (Cost Reduction) Plan?

Today’s guest post is by Bernard Gunther (bgunther <at> lexingtonanalytics <dot> com) of Lexington Analytics.

Financial Services companies buy almost all “indirect” goods and services. This is exactly the type of procurement that every company does. One might imagine that Financial Services companies would be able to leverage the large amount of work done in all these other companies to become best in class. In turns out that they don’t. Purchasing Organizations at most financial institutions do not historically have the best reputation for delivering results. If you are leading the procurement organization, you need to change this general impression. The easiest way to do this is to deliver results. To deliver results, you need to have a plan.

Your plan needs to describe to people where you plan to start, what you are going to do and how everything is going to be done. The easiest way to create this plan is by reviewing your basic spend cube information. The spend cube takes all your AP spending from one or more systems (cash out the door), groups vendors together (when they appear multiple times) and assigns a commodity code to each transaction (based on a series of rules, generally based on GL code or vendor). From this, you can get reports by commodity on the top vendors, the top organizational units and the total volume of activity.

Using the spend cube data, you can develop an accurate and meaningful plan. A way to start the plan is to take each category and assign it to an action group (below). The action could be to source a category, to do a demand review, to do an Invoice Review or any other type of savings activity your team is capable of delivering. The category could be the full spend in a category or could be a sub-segment (e.g. geography / business unit). For each category, you need to tag spending as:

  • Completed.
    This category was recently done and no further work is required at this time
  • In Process.
    There is a project underway
  • Wave I.
    What you plan to start immediately
  • Wave II.
    What you plan to do after the first wave
  • Wave III.
    Other categories that you know need to get done
  • Further research.

Now that you have a “strawman” plan, you need to see if you have the resources to get this done and if key stakeholders agree with your “strawman”. Gaining stakeholder buy-in will help you understand the true situation “in the field” and will likely get you key resources to address the spending.

Having good spend data will enhance your credibility. Without good data, your first meeting with the Retail group could be “We’re from Procurement and we’d like to help. We think there might be an opportunity to save money. Can we do something for you?”

With good data, your first meeting with this key stakeholder could be “We think there is an opportunity for sourcing PCs. You’re spending $2.3 million with 2 VARS. The rest of the bank is spending $4.5 million and using an additional VAR and buying direct from a manufacturer. Looking at your pricing on your most frequently bought laptops, the Technology group is getting 7.3% better pricing. This means you’re looking at over $150,000 in annual savings. We want your help in doing the following [insert plan here – with details on who should be involved and what it means for them].”

Without a plan, the best you can hope for is another meeting. With a plan and good data, you can get a stakeholder fully bought into your idea, they can give you authorization to proceed and many times, they will give you the support and resources you ask for.

For one bank with about $750 million in spending, we created a plan for savings. This plan targeted savings of $85 million in 3 waves across 113 initiatives. For each of the 10 major department heads, we could tell them how much spending was involved in each initiative, which vendors might be impacted and which budget centers we wanted resources from. Over the next 15 months, we conducted the initiatives and generated $94 million in annual savings on 80% of the baseline. As part of the program, we involved finance to sign off on each of the results so the savings could be measured and tracked. The results were incorporated into the spend cube to support ongoing monitoring of the spending.

Is such a plan hard or expensive to create? The short answer is “no”. New tools have made this process faster and much less expensive to do. For an organization with less than $500 million in spending, a good plan (including building the initial spend cube and conducting the initial syndication) can be put together, with a focused effort, from scratch, in 6 to 8 weeks. And some organizations that have done much of the preliminary work can get it done faster.

A good plan, with good execution can lead to significant results. In the world of procurement, the data you need is there for the taking. All you need to do is to use it.

Thanks Bernard!