Sunday, February 5, 2012

These Are Not The Fees You're Looking For

by Mark Usher, Partner, Treya Partners

There's been a joke going around for a while now that some of you may have heard already. It goes:

Question: "When are consultants not consultants?"
Answer: "When they're hired by Thames Water."

Referring to the outsourcing deal won by Efficio last year to manage $500M of the British water utility's procurement spend the joke is at the expense of Thames procurement head Simon Rutter. Rutter's detractors - and there's been a few of them - criticize him for not knowing the difference between outsourcing and a 5-year consulting engagement. Hmm, now I don't know the specifics of the Efficio agreement but neither does anyone except Thames and Efficio (Thames Water is a private sector company so doesn't have to make it's vendor contracts public) and that's why I think Rutter's critics are at best presumptuous and at worst disrespectful to assume he's been Jedi mind-tricked into gifting the procurement consultancy with a multi-year time and materials goldmine. Having structured some (admittedly smaller scale!) projects in the last few years existing in that neutral zone between outsourcing and consulting I and the customers in question have come to realize that several approaches are available to ensure such arrangements are genuinely mutually beneficial. For example it clearly doesn't make sense to pay a consultant $200/hour for 40 hours a week for five years to do the job a company employee would have done for $100K/year no matter how skilled the consultant. It doesn't compute. What you have to do is pay the consultant a significantly lower rate but top it up with bonus compensation tied to some form of created value that can be measured, like perhaps contract price reduction through sourcing. Smart customers will also cap the bonus pay at levels that provide incentive but don't end up paying the consultant five times what you would have paid them under a fixed cost structure.

And what about the seemingly interminable length of some of these deals? From the press release soundbites it would seem an Alpha Centauri round-trip could be completed before Efficio and others relinquished their sweaty grips on the procurement throttle of those who would outsource it all. Well even here there's a route to sanity. It comes by way of a telling little term spilled by Simon Rutter but ignored by those who assume the man with responsibility for leading the procurement function of the UK's largest water utility knows only how to throw a heavy set of keys over a high wall. In Supply Management this week Rutter spoke of having consultancy capability on tap. What he probably meant was that one condition of the deal with Efficio was that he have the flexibility to turn that tap off if and when the situation warranted. This is another lesson I've learned working with companies looking to augment their organizations with external resources, that is that they want to take advantage of the variable cost feature of outsourcing. What's the point of having experts on tap if you can't turn the tap off? I'm flooded with consultants here people! Of course you should give the provider a fair notice period that you intend to downsize (or even terminate) the support - say at least 90 days if the services firm has to restaff 15-20 consultants - but at the end of the day the customer must have the flexibility to offload cost structure in response to the market.

So, again, I know no details of the deal in question other than what has been released into the public domain but I would be most surprised had Mr. Rutter not built some common sense language into his outsourcing contract to prevent it becoming the gift that keeps on giving for Efficio. If not then I suspect the time may come at some point in the future when it'll be all hands on deck trying to turn off those taps at Clearwater Court.

Sunday, January 15, 2012

Calling Time on Freight Pass-Through Profits: How to Unlock Savings from Inbound Shipping Costs

by Barnali Dasverma, Director, Treya Partners

“Express Mail…Small Parcel…LTL...”  What immediately comes to mind when you hear these words?  If you’re a Chief Procurement Officer, you probably think of services that meet your organization’s outbound transportation needs. There’s likely a member of your procurement staff responsible for negotiating and managing contracts for these services, and getting the very best rates on outbound shipping is probably a priority for you.  If you’re at all similar to some of the organizations I consult to, however, you may not be paying as much attention to your inbound transportation costs. If this is the case then the chances are you are leaving significant dollars on the table. How much, you ask?  Well, on a recent engagement for a manufacturing client my team helped to deliver over 16% savings on the inbound shipping costs of materials and supplies procured from the company's vendors.

How much visibility do
you have into your inbound shipping costs? Do you have a good understanding of the freight costs you’re incurring for the items your organization is purchasing?  In many instances transportation charges are passed through by suppliers to their customers as an invoice line item. The truth is that these pass-through costs are not always as pass-though as you might think and in fact can represent a not insignificant source of profit for many suppliers. A somewhat startling but fairly common practice employed by some vendors is to charge retail shipping rates (or at best minimally discounted retail rates) in an effort to offset profits lost through the price discounts and volume rebates that their customers' procurement staff have negotiated. In some cases the absurdly high outbound rates will only be applied to expedited shipping. At first glance this may seem understandable but a recent benchmarking of our customers' transportation practices revealed that expedited shipping often takes place much more frequently than assumed. The bottom line?  Pass through shipping costs may very well be an area where your company is overpaying and if you haven't yet done so it would be a smart move to find out if this is the case.

Where to start? In my experience many organizations do a poor job of tracking inbound transportation expenditures and shipment-level transparency into freight patterns is often non-existent. Job number one is to obtain the data you need to close this information gap. A good first move is to collect inbound freight expenditure data from your accounts payable system. Use this data to identify those suppliers with the highest inbound freight pass through costs. Next, request shipping data from these suppliers. Ask for total annual inbound transportation charges, and compare the total charges reported by the suppliers against your internal accounts payable data. One of your first learnings might be that you are spending considerably more than you previously thought on inbound freight!

Be sure to also ask the suppliers for spend data by shipment type (e.g. ground, overnight, etc.) in order to understand if an excessive number of shipments are being expedited. This can help uncover poor internal planning processes and identify opportunities to develop internal purchasing practices for transportation that more optimally balance customer requirements and cost.

Most importantly, ask your top suppliers for the shipping rates your company is charged when costs are passed through. Request the detailed fee schedules that the supplier used to calculate your freight charges and conduct shipment-level comparisons between the supplier's pass-through rates and your company's own contracted rates for your outbound shipping. Ensure that your rate comparison takes into account your actual usage patterns, and compare each supplier's pass-though transportation charge with what you would have paid had your purchased products been shipped at your own negotiated rates. It is at this point that some companies learn they are paying FedEx or UPS list prices!

Finally, armed with the results of your data analysis, ask your highest freight cost suppliers to utilize your company’s own negotiated shipping rates when they are more competitive than the supplier's rates (this recommendation of course assumes that you’ve already negotiated best-in-class outbound shipping rates – if you haven’t yet done this, do it now!). Although some suppliers will be amenable to using your freight contracts others may not be, particularly if your company represents a substantial portion of their total shipping volume. In these cases your fallback position should be to negotiate deep discounts off the shipping rates you’re currently being charged. Be sure to demand savings in the 15-25% range or even more if your rate comparisons indicate you have been significantly overcharged in the past.

My experience helping my customers in this area has shown time and again that it pays to be proactive and data-driven when it comes to inbound transportation costs. Do the due diligence, track the freight spend and mine the shipment-level data to keep your suppliers honest. By successfully addressing this often overlooked spend area you'll unlock surprisingly significant savings that will meaningfully impact your company’s bottom line. So stay on top of your inbound transportation costs - your CFO will thank you for it.