Category Archives: Cost Reduction

Lavante Recovery – A Risk-Free Way to Segue Into SIM

Yesterday, I was the first to get a sneak peak into the live-beta of Lavante’s new Recovery Audit solution that is being built on top of the brand-spanking-new Supplier Information Management solution that they released earlier this year (as showcased in this February post). Given it’s unique foundation, and the decade of recovery audit experience that has been baked into it, it is no surprise that Lavante is finding ten (10) times the savings of an average recovery audit, and up to fifty (50) times for select clients — even though the product is still in Private Beta and full (seamless) integration (with SIM) won’t be available until next year.

The great thing about the solution is that the first thing it does is identify omissions, errors, and inconsistencies in your supplier data. Using phone number, fax, address, web site, e-mail, and TIN checks, the software is able to find duplicate, erroneous, or incomplete records that need attention. Once these are fixed — either through automated import of up-to-date data from it’s network of over 2 Million companies, or from a multi-channel reach-out that seamlessly integrates telephone, fax, and snail-mail reach-out as well as e-mail reach-out — the software automatically applies a suite of rules and checks to find duplicate payments, overpayments, and potentially fraudulent payments that you have not yet identified. And once these are verified as accurate, provided you have a decent agreement/contract in place, you can go after the vendor for credits.

The benefits of good supplier data and multi-channel reach-out cannot be underestimated where recovery audits are concerned. For the latter, they have average reach-out response rates of over 50% (and as high as 80% for some customers), which are eight (8) to ten (10) times the response rates of providers who just do e-mail / web-based reach-outs. With respect to the former, cleaner supplier data makes for more complete transaction data, which not only increases the chance of finding a duplicate, incorrect, or fraudulent transaction — but improves your follow-on spend analysis efforts (and results). As a result of its supplier data cleansing effort, Lavante is typically able to process at least 95% of spend through its recovery audit solution, which maximizes the chances that it will find the majority of your recovery opportunities.

The SaaS solution is quite simple to use — consisting of four main components: the dashboard, claims management, invoice management, and reporting. The claims management section allows you to review each claim found by the system, which includes complete information about the claim — type, reason, organization, supplier, status, supporting documentation, etc, and take appropriate actions, which can include additional review, processing, or reassignment. The invoice section lets you manage your invoices from Lavante for recovery services. If you choose the fixed fee option, you will get one invoice on the agreed upon invoicing cycle for access to the software. If you choose the risk-free contingency model, then you will get an invoice for each valid claim made to a supplier that results in a credit or repayment. The reporting section consists of a suite of audit, cash-flow, claims, invoice, non-compliance, OFAC-SDN, and Vendor reports that give you pretty much any piece of information correlated with any other piece of information any way you want to look at it. The dashboard allows you to see your claim and invoice summary data at a glance, and to select the four most important reports to you — which can be viewed in (multiple) chart form(s) or in tabular form, and exported to csv or pdf. And while it’s a basic solution at this point, the only obvious weakness, given that the one goal of the platform at this point is to find all payments eligible for recovery, is that they do not yet have a custom report builder.

I’m sure they’ll get there. They shared with me their 2012+ roadmap for the solution, and it’s quite impressive. They have a vision to build on the solution to extend it first to a contract compliance solution, then to a fraud prevention solution, and finally to a risk management platform that will also integrate with their supplier management platform which will include compliance management. They understand that, done right, recovery is a one-trick pony (because, if you do it right, you also identify the source problem and fix it) and that the real value is not in recovery, but duplicate, overpayment, and fraud prevention — and monitoring transactions in such a way that they can be used to judge supplier, and supply chain, risk. I expect it will take them a few years to get there, but it will also take an average company one to two years to identify the majority of reasons for duplicate and over-payments and fix their processes, so Lavante should be able to grow in lock-step with their customer base. Regardless, Lavante is a company to watch and a solution to investigate for any Fortune 500/Global 3000 (want-to-be) that has never done a recovery audit. At the very least the included supplier data analysis service will add value. And when your data is in order, you can take your transaction analysis to the next level. And given that good data enables good spend analysis, and that a spend analysis will typically uncover 10% savings opportunities, what have you got to lose?

Recovery Audits – Are They Worth It?

According to one vendor:

AP departments face daily challenges, including fraud, data decay, product returns, and errors — resulting in transactional errors and [lost] credits with suppliers. An ongoing, comprehensive review of your suppliers’ AR records, known as a statement audit, recovers these dollars for your company. If you’re not performing a statement audit, you’re leaving money with your suppliers.

And this is true, but is there enough money being lost to make a recovery audit worth it? Some statistics state that, for an average Fortune 500/Global 3000, a traditional average recovery audit will only uncover 50,000 to 100,000 in vendor credits for every 1,000,000,000. That’s a best case savings of only 0.01%. I can march into an office supply vendor and demand 10% off the top (before I take my business across the street), get it, and probably save you that much from 10 minutes of negotiation. Considering that the average company will spend well over 1,000,000 on office supplies, taking 10% off of that is well over 100,000 dollars, and quicker than a traditional recovery audit (where a team of “analysts” pour through transactions hoping to find duplicates you don’t know about).

However, using technology and analysis, some companies are able to recover an average of 600,000 to 1,000,000 in vendor credits for every 1,000,000,000 in a recovery audit, and even though this is still only 0.1%, that’s enough money to make it worth while if it doesn’t cost you very much. And in some cases, the leaders are able to recover 5,000,000 for every 1,000,000,000, and that’s always worth it no matter how big you are. Especially if you can get a good contingency-based arrangement.

And it’s even better if, in the process, the vendor, using SIM-powered technology, can identify problems with your supplier records that you need to fix to prevent such errors from happening again in the future. So where do you look for such a vendor? Stay tuned!

Want to Beat Commoditization? Follow Dow Corning’s Example and Embrace It!

A recent article over on Chief Executive on “how Dow Corning beat commoditization by embracing it” tells a great story about how the onset of commoditization might actually provide an advantage to your company and your supply chain and how a careful study and segmentation of the market can be productive and profitable.

About ten years ago, when Dow Corning realized that silicone was about to become a commodity as the markets matured, it did a strategic customer segmentation exercise that revealed that not only did its customers exist within four segments, but that there were still opportunities for success in each segment through better service and appropriate strategies. In particular, Dow Corning realized that it could be much more profitable if it could find a better way to serve the “price seeker” segment which knew what products it needed, and how to use them, but also knew that it didn’t need high value services bundled into the price of the product. This segment simply wanted standard silicones at the lowest possible price point.

However, as CFO Don Sheets realized, you can’t win the price seeker segment merely by cutting prices, as that inevitably results in unacceptably, and sometimes dangerously, low margins. The only way to win is to define and implement an appropriate business model specialized to that customer segment that provides value to the customer (low cost) and the business (reasonable margins).

Sometimes merely cutting value added services (that the price seekers don’t want) is enough, but sometimes it isn’t. If the organization was focussed on high-value, chances are the processes don’t support the price points necessary to win the “price seeker” segment as low-cost was never the primary goal, as in Dow Corning’s case. In order to support the target price points that were identified as necessary to win in the space, production and distribution had to be optimized and, in Dow Corning’s case, minimum order quantities and order lead times were required to create the necessary efficiencies in the supply chain to lower production, logistic, and storage costs sufficiently to support a lower price point. This ensured that all prices could be minimized with proper planning. In addition, Dow Corning created the new product line as a web-enabled business to allow the customer to place orders with no human interaction to minimize resource overheads. This allowed for the creation of a low-cost brand that allowed Dow Corning to tackle the price-seeker market, earn back their investment in three (3) months, and drive a majority of business from new customers.

You Don’t Need to Fish to Identify Savings Opportunities in Indirect Procurement

A recent article in the SIG Newsletter on “How to Identify Savings Opportunities in Indirect Procurement” gave a fisherman’s perspective on how to identify savings. It wasn’t bad, and went something like this:

  • The “big catch” comes from understanding the entomology
    Just as an angler must understand the feeding opportunities created by a trout’s main source of food – bugs – a Procurement Professional must understand the current business climate and the opportunities provided that, when intersected with the right plan at the right time, will create success.
  • Match the Hatch
    Trout opportunistically feed at the time of the hatch (when fly larva emerge and float to the water’s surface to dry their wings). A skilled angler will know when a bug hatch is occurring and match the fly to the hatching bugs to increase the catch. Similarly, a skilled procurement professional will identify which business trends are hatching and what elements need to be considered to create a category “catching” opportunity. She will start by prioritizing categories by ROI, developing a change management strategy, and focussing on internal and external adoption requirements.
  • Fish With a Guide
    There’s a big difference between traditional spincasting rods and fly rods and moving from one to another can be intimidating even for an experienced angler. The best way to move from one to the other is through a guide — an expert who already made the transition, learned from past mistakes, and who can help you overcome your fears and take you forward. In Procurement, a good guide will help your company create a strong indirect program through:

    • Analysis (Opportunity Evaluation)
    • Strategy (Best Practices)
    • Implementation (Adoption)
    • Management (Sustainability)
  • Approaching Indirect Procurement Services is Just About “Getting it Done”
    Intimidation and uncertainty can create a paralytic environment. Be empowered. If fish are analogous to categories, then plan where you want to fish and what kind of fish you want to catch. Determine where the fish are and if you can access them. Then, set out with clear goals and enlist the help of a good guide. The results can be that “big catch” or a series of smaller fish that add up to a great day or quarter.

And it overviewed some of the more common reasons why companies are not taking a more aggressive approach to indirect services expenditures, which include:

  • Fragmented buyer base
  • Difficult to transactionally manage (no comprehensive systems — too many point/niche solutions)
  • No detailed, real time visibility
  • Big change management issues
  • Not properly staffed to ensure adoption & sustainability post sourcing
  • Focused on direct materials & services
  • No internal expertise
  • No executive sponsorship

And it even indicated the most common indirect categories organizations were going after.

So it wasn’t bad. But it wasn’t that good either. It didn’t dive into how to detect a business climate that was prime for “a big catch”, how to detect “hatching” trends early in the game to be ready for an opportunity that is about to become prime, how to identify the right “guide” for your business, or the best way to “Get it Done”. As we indicated in a recent post, this will require stakeholder involvement across the board — and this is where the fly fishing analogy breaks down. You fly fish alone. You need to source indirect categories in a team. Furthermore, the right “guide” might be category dependent (as IT [targeted by 76% of businesses surveyed] and Travel [targeted by 84% of business surveyed] require very different knowledge bases and skill sets), trends are often very dependent on a sector, and a “big catch” will vary depending on business spend patterns, industry, and the overall economic climate (and the supply / demand [im]balance). And while these answers may be organization specific, they need to be answered to insure success.

Cost Control – Hwong Style

Those who know Henry, who, before taking on a VP role at Rearden Commerce, held senior roles at Ariba, Provade, Elance, PeopleSoft, and Moai, know that he’s on the ball when it comes to Sourcing and Procurement. Thus, I was very interested to see what his prescription for Cost Control was as he was relatively quiet during his time at Ariba where he took on a more internally focussed role.

But, as per this recent article over on CPO Agenda on “How to Control Costs”, he’s back in the spotlight and eager to share his wisdom with the world.

According to Henry, the secret to cost reduction is not to put more spend under procurement’s control (which is hailed as the holy grail by at least one analyst firm), not to enable enterprise-wide visibility (which is hailed as the holy grail by providers of spend visibility software), and not to put an end to off-contract purchasing (which is hailed as the holy grail by consulting firms a-plenty). While each can reduce costs, the real sercet is to moving towards a more holistic approach to managing the entire lifecycle of a purchase. This is because a platform model that supports the entire procure-to-pay process (and as many categories as possible), gives procurement chiefs the one common driver behind all of the strategies reflected in the survey responses: control.

What a CPO really needs to reduce costs is control over those costs, and, more specifically, control over the processes that drive those costs. Some categories should be purchased centrally, others should be decentralized. Some should be purchased on multi-year contracts. Others should be purchased on a spot-buy every day, week, quarter, or month. Some categories should only be bought on contract. Some should never be bought on contract. The CPO needs the control to ensure that the right policy is followed for every buy. That is the ultimate key to cost control.

In addition, if you really want to control cost, instead of consolidating the supply base, which is the first instinct in 3 out of 5 procurement professionals, you instead expand the supply base. As Henry says, while consolidation presents you with fewer throats to choke, it also increases your exposure to disruption if one of those suppliers fails or has a quality / delivery issue. Plus, when you give users fewer choices, the immediate impact will be an increase in off-contract buying. Thus, if you want to make an impact, you expand the supply base since working with more suppliers can actually increase compliance and interestingly enough reduce costs, as the procurement team has more leverage to work with when negotiating terms.

Finally, if you’re really serious about cost control, you tackle the biggest obstacle of them all — the cultural obstacle. Procurement teams are often not involved in strategic planning decisions and are brought in after major decisions are made and after much of the costs have been locked in. Even having the information that procurement can provide about supplier choices and costs … could play an important role in keeping costs low in the long-run.

It’s a great article that provides great insight into the real drivers of cost — cultural, control, and consternation (about having too many throats to choke). It also provides some great advice on strategies an organization can use to combat wild price changes in dynamic commodities and some insights on where Henry thinks the challenges in Procurement lie. Check it out.