Category Archives: Guest Author

We Don’t Need No Consultants

Today’s guest post is from Patrick J. Horgan of Paladin Associates.

Why Some Companies Don’t Seek Needed Cost-Reduction Help

Cost-reduction is essential in today’s economy, but unfortunately many managers have little experience in these activities. Mistakes in cost-reduction can damage morale, productivity, and can even precipitate a corporate death-spiral. Experts recommend independent cost-reduction consultants, but most companies don’t seek external help. Their reasons sometimes make sense, but they are often emotional and thought through poorly. Here are some common rationalizations which prevent many companies from seeking the help and getting the results they really need:

“We don’t need help.”
“We can do cost-reduction ourselves”. Or, “we should be able to do it ourselves.” “We already have cost-reduction initiatives.” “We will soon have cost-reduction initiatives underway.” “External consultants will probably try to take credit for things we have already identified.”

“We don’t want help.”
“Consultants may find things that are embarrassing or that we probably should have found. We may be blamed for these things.” “We will not be able to personally control what they find or communicate.” “We are currently too disorganized to undertake such an initiative.” “We don’t want a lot of change and turmoil.”

“We can’t afford help.”
“Consultants charge a lot, usually up front.” “We have no budget for this.” “We can do it for less.”

“We don’t believe consultants can actually help.”
“Consultants just feed back what we already know. They don’t actually produce results.” “Consultants won’t understand our business.” “How would we know if we actually saved anything?” “We’ve had bad experiences with consultants and cost-reduction projects in the past.” “External consultants are against company policy, or require high-level approval.”

“We are not the decision makers.”
“We don’t really know who decides this, and we don’t want to ask.” “Someone else is in charge of this; it’s not our job.” “IT/Telecom has sourcing responsibility; not Sourcing.” “IT and Telecom are under different organizations, yet buy off of the same contract.”

“It is not in my personal political interest to support this.”
“Cost-reduction can be risky… might result in reorganization, reassignment, budget cuts, layoffs, new priorities, loss of power, change — could be bad for me personally.” “Our boss doesn’t want to do this.” Or, “Our boss might want to do this, but we don’t.” “If this doesn’t work out, we might be blamed.” (But maybe we should pretend to be interested and slow-roll this.)

“We don’t have or control the resources to support such an effort.”
“We have other priorities.” “We don’t have good data on costs and spending.” “We don’t have the staff for this.” “We have lots of contract leakage as internal components are organizationally fragmented.” “To capitalize on many initiatives may require cross-functional cooperation and coordination which we don’t control, and priorities which we don’t have.”

“We don’t want to disrupt our vendor relationships.”
“We already have great prices.” “We depend on our vendors for things other than price.” “The supplier has a personal relationship with the CXO.” “We really enjoy the annual Vendor Golf Weekend at Pebble Beach.”

The Real Facts
Sometimes these rationales are valid, but most often they are not. Companies may have excellent relationships with their suppliers, but it’s inescapable that continuous competition improves the breed and reduces cost. Cost-reduction falls directly to the bottom line, and should be pursued aggressively despite fuzzy reasons to the contrary.

Even though companies “ought” to be able to run effective cost-reduction programs themselves, in reality they frequently do not. For many reasons — budgets, staffing, expertise, priorities, timing, politics, whatever — the opportunities go unmined… and the potential savings go unrealized. Or they are done in an amateur fashion, often with unintended consequences. Most companies don’t and probably can’t have enough qualified resources to do this thoroughly.

Cost-reduction consultants do this for a living, not just during the occasional recession… they are experts and know all the tricks. External consultants can often help cut through internal politics and conflicts of interest. They can catalyze stalled activities and get them rolling.

Independent consultants can help analyze spending patterns, and specifically focus on and drive results… particularly if they are paid on a percentage of savings realized. This approach eliminates upfront fees, reduces risk, and insures an excellent ROI. The money saved can pay for fees many times over. External resources can accelerate cost-reduction savings. Additional bandwidth leverages employees, and gets more done, faster. Time is money.

External cost-reduction experts jump-start and insure execution of cost-reduction programs that can preserve a business in times like these. Cost-reduction programs should be win-win initiatives, structured and empowered to encourage cross-functional cooperation. They should be supported and regularly reviewed by high-level executives, not just lower-level employees who may fear blame or loss of status.

Thanks, Pat.

Working with Your Users III: (Spend Analysis) Reports keep changing — and that’s a good thing.

Today’s guest post is from Bernard Gunther of Lexington Analytics.
He can be reached at bgunther <at> lexingtonanalytics <dot> com.

Several years ago, I was involved in a data warehouse project. At one point in the design phase, the discussion turned to the creation of the initial reports. We discussed a number of different things we wanted from the system and explained how each report was likely to change once it was populated with data. At this point, the Programmer became frustrated, “Why can’t you guys just figure out what you want? Get those specs right and we can be done with the reports once and for all.” In his mind, Procurement was doing a horrible job because it couldn’t make up its mind about what it really needed.

This story of the frustrated programmer sticks with me as an important lesson because it highlights one of the key challenges facing users of procurement data — there isn’t one perfect report! And, even if there were, it would only be ‘perfect’ for a brief time. One observation leads to another, which leads to another, and so on. A good report should lead to questions — and the need for another report. Reports are forms of communication and they are tools for users to get their jobs done. As such, they should be dynamic not static. Once they become static, chances are good that no one is using them — either because the format doesn’t work for them or it’s no longer relevant to the current situation.

Let’s take the example of the preferred vendor within a category. Let’s pick on temporary labor for this example.

First Report: You produce a report which shows the overall spending for temporary labor by month with two columns, one for preferred vendors and one for non-preferred vendors. This gives the overall status that spending with preferred vendors has gone from 50% in January to 75% in June. Good work!

Second report: The data you provided in the first report needs to be distributed to the business units. The report now has to have the summary and the detail by business unit. Easy change, you’ve already built it into the initial specification.

Third report: The business units want to pass this report down to their managers. The report now needs to be done for each business unit. Again, a change you’ve planned on, so it’s easy.

Fourth report: The business units report that they have existing contracts which can’t be changed, so they need to tag certain vendors as “legacy contracts” so they can show that they are complying with the program and using the preferred vendors. All the reports now need a new category – “Legacy Contracts”

Fifth report: The commodity manager wants to estimate the incremental cost of using the bypass vendors. The report now needs to show this estimate for each business line based on their savings model. This needs to be done at the top level and for each business unit.

Sixth report: One of your business reports that the preferred vendor can’t supply a certain type of specialty services. You need to add a category for “specialty vendors”.

Seventh report: A manager in one division wants to eliminate the “legacy” category for her spending, “All this spending is bypass. I want my team to move more quickly to the vendors with whom we have contracts. Don’t show me any legacy or ‘specialty’ vendors”

Eighth report: The business lines are changing one of the preferred vendors. The report now needs to show the first 6 months with the original vendor, then the following months with the new preferred vendor making the spending with the original vendor as bypass.

Ninth report: The head of processing operations like the reports, but wants to make two sets of changes. He wants to change the categorization of vendors into “Primary”, “Secondary”, “Non-Group Contract” and the tagging needs to be done differently for each major production location. A vendor can be the primary in location 1; the secondary in location 2; and, non-group contract in a third location.

And the sago continues, but you get the picture. Each report was useful as it was created, but needed to be modified as users worked with it. And this is a great news story. People are using the information and acting on it. You company is saving money and the reports are highlighting the savings achieved and the actions necessary to achieve more savings. But the reports keep changing and that’s the reality of procurement information.

Buying Spend Analysis Systems: Test Drive Case Study

Today’s guest post is from Bernard Gunther of Lexington Analytics who recently brought you Buying Spend Analysis Systems: Taking a Test Drive. He can be reached at bgunther <at> lexingtonanalytics <dot> com.

A client who read my recent SI post, “Taking a Test Drive“, thought that relating the experience of their own test drive might help other readers who are investigating spend analysis approaches.

In this case, the company already had a spend analysis system, but the contract was about to expire. The test drive was intended either to provide ammunition for switching to another system that had been identified as a alternative, or justification for renewing the contract for the existing system. The company wanted to evaluate whether there were advantages with the alternative system, and whether or not the alternative system could improve performance for users whose buy-in was essential. A financial case either for making a change or for maintaining the status quo was also a deliverable.

As a result of the test drive, the company ended up changing systems, and believes that user needs are better met because of that decision. Data are cleaner, because vendor groupings and commodity mapping are more accurate, and analysis capability has improved greatly. The company reports spending less time supporting the new system. The company also added external consulting resources to work with their users each month to help extract additional value. Best of all, the monthly expenditure for the system — including the cost of the incremental external resources — dropped by more than 25%.

The Test Drive Process

To perform their test drive, the company focused on how each system would:

  1. Meet the existing user needs: “must haves”
  2. Deliver on known needs that users don’t have today: “wants”
  3. Deliver additional value that may not be understood today: “didn’t know I wanted, but after seeing, can’t live without”

The business case needed to describe how each system would deliver on these three items at either a lower cost or, if the costs were higher, how the selected system would deliver an incremental return on investment.

The test drive for the new system occupied a few days over a three week period. Since the evaluation team understood their current system thoroughly, they focused on learning where additional value might be delivered, as follows:

  1. Understand the current users of the system.
    The team interviewed users to see what they valued and what they were currently doing with the existing system, e.g. did they have features or data that they would like to see in the system, did they understand the value they were currently getting from the system, and did they know what they wanted the system to deliver in the future.
  2. Understand the “non-users” of the system.
    Individuals were identified who were not current users of the system, but who the team felt could or should be users of the system. The team worked to understand what these potential users would need to see, and the value that they would receive.
  3. Provided a sample of current data and reports to the supplier of the new system.
    Since the core data required for the demonstration was already available in the existing system, the supplier was able to produce a working spend cube for review with minimal effort.
  4. Review with the suppliers how they would meet all the “must haves”, “wants”, and “future wants”.
    Evaluate the suppliers’ offerings to determine how each element generates savings and/or adds value. Users were involved with this part of the evaluation, as they were considered to be the best judges of how a new feature compared to an existing capability.
  5. Put together the business case.
    The test drive showed that the new offering would both reduce costs and increase value, so it was not difficult to achieve internal agreement on a decision forward.

Survey Results

  • User Must Haves
    • Users said that they obtained the most value from basic visibility to the spend data. However, other than the advantage of having all the AP spend data in one place, most users felt the existing system was just a “warehouse of data” that didn’t really help them do their job much better than data extracts directly from AP. They were unhappy with the vendor grouping and commodity mapping.
    • Users had the basic ability to filter data via point and click interfaces, but were unhappy with the speed and limited complexity supported.
  • User Wants
    • Users expressed a desire for the ability to create and modify reports inside the system, without external support. The existing system had limited reporting, so in order to create all but basic data extracts, users had to dump raw data to their desktops and build custom reports and models outside the system.
    • Users were unhappy with vendor grouping and commodity mapping in the existing system. Getting changes made to groups and maps was awkward, required committee decisions, and took a long time. Users wanted to make changes to the commodity structure, commodity mapping, or vendor grouping, and immediately see the results.
  • New Features
    • Users wanted the ability to make private and arbitrary changes to a spend dataset, to see if a change in data organization could improve their understanding of the data.
    • Users wanted the ability to build new data sets from scratch, on their own, as well as the ability to analyze many different kinds of data, such as commodity-specific invoice-level data.
    • Users wanted the ability to build complex reports inside the system.

In summary, the client believes that the test drive process was very useful. The value delivered by the spend analysis system has been increased, user satisfaction with the data and the system has gone up, and the cost of the system has gone down. The client also believes that if a decision had been taken to stay with the incumbent vendor, the test drive would have provided significant leverage for renegotiation.

Getting the Most Out of Cost Reduction

Today’s guest post is from Patrick J. Hogan, a Partner at Paladin Associates, Inc..

A recent article in Paladin Associates’ CheckMate Newsletter entitled “Cost Reduction is NOT a No-Brainer”, generated interest and requests for more information. It made the case that cost reduction programs should be carefully thought out so mistakes and inexperience don’t cause harm. What follows are some common ways that cost reduction programs can be mismanaged, go wrong, and cause real headaches. It is NOT a complete list!

Companies with inadequate spend information really don’t know what they are spending, who is doing the spending, and what suppliers they are spending with. Without such fundamental intelligence, chances are high that resources will be misdirected or wasted, and results will be sub optimized.

Many companies simply need to focus on fundamentals. It is surprising how many companies do not consolidate purchases or buying points, do not require system or product specifications, or do not require suppliers to compete on a regular basis. Many firms simply need to get back to basics.

A common oversight is indirect spending. Companies often focus exclusively on strategic direct materials and ignore indirect spending on telecom, facilities, transportation, office supplies, and so forth. Yet big savings are often available in these areas.

A frequent obstacle to efficient cost savings is lack of buy-in by the organization. It is an unfortunate fact that not everyone in a company is cost-sensitive, or sees cost reductions as being in their interest. In fact, many employees, and even managers, are “empire builders” who are actually more interested in maintaining or growing budgets, organizations, and perceived power. They may talk a good game, but really are not committed to cost-reduction. They may even fear cost reduction. Internal politics and power struggles are very often the chief obstacle to more efficient processes and procurement.

Frequently, the cost-reduction “team” lacks the specific functional expertise to effectively cost-reduce certain functions. Finance or Procurement personnel are generally not the best people to effectively cost reduce Marketing & Sales, Human Relations, Customer Service, Telecom, IT, and many other functions requiring specific product, market, contract, technical or professional functional expertise and judgment. This requires balancing both functional skills and cost awareness. Establishing cross-functional teams with both functional and procurement expertise is one solution.

“Right-sizing” or down-sizing is an area of great risk. Downsizing can improve a company’s health dramatically, or destroy morale and precipitate a “death spiral”. Many of the issues are not intuitive. This topic needs a book in itself, and requires experienced hands to get positive results.

Frankly, overly cozy vendor relationships can get in the way of effective cost-reduction. Suppliers’ sales people work to establish personal relationships and “differentiate” their products for reasons other than price. They are often successful in minimizing competition as a result. But this usually costs the buyer money!! Some favorite sacred cows are sales commissions, legal fees, HR benefits, ad agencies, and printing companies.

On the other hand, not understanding a supplier’s full capabilities can result in overlooked opportunities for savings. A supplier might well have the resources to help reduce costs through process or product changes or simple suggestions, or other approaches not defined in a formal specification or RFP.

An ironic mistake that companies can make in tough times like these is locking into a new “low” contract price, only to find that prices actually drop below that level over time…resulting in overpayment during the contract period. Don’t mortgage the future simply to insure short-term savings.

Many companies have a do-it-ourselves mentality. They do not believe they need help, or they don’t want to pay for consulting help. But nonetheless they are just not getting the total job done. “Not-invented-here” and the “we-already-thought-of-that” syndromes are common themes in many companies. The “fear factor” also plays a role… many employees are concerned about getting credit for cost-savings ideas, or of being blamed for ideas someone else may find. In our increasingly “blaming” society, they are not always being unreasonable either. Many companies have inadvertently set up win-lose scenarios on cost reduction that block the free flow of ideas and participation, and inhibit the use of consulting experts whose savings ideas might expose waste. But all companies have waste, and wise companies want to find it and remove it ASAP. Setting up a win-win environment is key, and getting outside help is smart.

A very common problem for procurement organizations is a lack of appropriate resources. Most companies, even those with large procurement staffs, lack all the skills, the manpower, the funding, and the time to turn over all the rocks required to get the total job done. An ROI analysis would frequently justify more resources. Or, temporary use of consulting resources may be appropriate.

Another common phenomenon is excessive focus on identification of cost reduction opportunities and process development, but inadequate attention on execution and results. Many companies have long lists of opportunities, but short lists of what have actually been accomplished or resulted in tangible savings. In a related vein, savings can erode over time if companies don’t monitor results, update specifications, record engineering changes, housekeep their records, etc. Implementation, follow-through, and measurement are essential in driving for results.

Effective cost reduction is not just about common sense. Like so many other things in life, it requires experience to do it right and avoid costly pitfalls. In tough times like these, with so many “new” managers being pushed into cost-reduction exercises, finding experienced hands to guide the process is critical. Professional consulting help must be considered, particularly with a company with a results-driven focus.

Buying Spend Analysis Systems: Taking a Test Drive

Today’s guest post is from Bernard Gunther of Lexington Analytics.
He can be reached at bgunther <at> lexingtonanalytics <dot> com.

During the course of my work, I am always surprised at the large number of procurement organizations who still perform their analyses by dumping AP data into Excel or Access and developing their own reports. An analyst spends days or weeks each month maintaining this information. Even more troubling are those who have purchased an analysis tool, but still dump the transaction data into spreadsheets and spend hours or days creating their reports. The expensive analytics system they purchased is just serving as a repository for data. I suspect they didn’t take their analytic system for a serious test drive before buying. A test drive is a simple way to know exactly how the system is going to do what you need it to do.

To be useful to a procurement organization, a spend analysis system must be able to:

  1. Load the data.
  2. Transform the data. Make changes to hierarchies and create / modify rules to map the data.
  3. Index in other information to further enhance the data; for example, identifying preferred vendors, vendors with contracts.
  4. Create useful output — not just dump data – such as full reports, ready to send to users.
  5. Update the data with the next month / quarter / year of information.

And, it must be able to do all these things without requiring significant support, either from the vendor or from IT, after the initial training. Most Procurement organizations want to be as self supporting as possible.

To get the most out of your test drive, have the vendor show you, step by step, how their tools work with your data. Before the meeting, create a text file with a reasonable sized segment of data, perhaps a year, in a single table with:

  • Vendor name
  • Cost Center
  • GL Code
  • Date
  • Amount
  • Description
  • Other fields that are interesting to you, such as commodity or preferred vendor.

Select a reasonable size block of data so you understand the performance of the system under the load you expect to have. The goal is to have an interesting segment of data to work with. You want to understand how each step of the process works and delivers, not to build the full system.

After you are convinced that the vendor is capable of performing the essential tasks, you can focus on how the process will work on all your data and fully fleshing out your reports. Arrange a meeting with your vendor (in person or remotely) to have them show you how they do each step of their process with your data.

  1. Load the data into their tool. Is it easy to load new data into the system? World class procurement functions build dozens of different cubes on different segments of their spend data, so this needs to be easy.
  2. Look at the raw data. Can you see your top vendors, cost centers, GL codes?
  3. Have them group some vendors and then look at your data. Can you group vendors as you want them?
  4. Have them create a few nodes in a commodity structure and map some spending. Create some vendor rules, some GL rules and then some more complex rules. Modify a rule and see the results
  5. Have them create a report. Print it out. They modify the report and see it again. Start with a simple report and then do something more complicated (for example, with pivot tables).
  6. Perform a refresh. Add some more transactions to the data. See how all the existing vendor grouping and mapping are applied.

You should be able to do all these steps on your sample data in 2 to 4 hours. Once you’ve done this, you will understand how the system will work for you. If it takes hours to make simple changes in the demo, it will take hours in the final system. If six different people are involved in the demo, you’ll likely need this size team in production. If you can’t see your team doing the work shown in the demo, you’re going to need to rely on the vendor or some third party in the future. In the longer term, you may decide you want to leverage external labor to do the work, but to be able to be independent; you need to understand and be able to perform each part of the work yourself. If you can’t be independent, do you want to be dependent on this third party (vendor or IT group) for every single change you to make?

Spending a day or two test driving different spend analysis options is the easiest way to really know if the system the vendor is proposing will work for you.