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.

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.

Four years between friends?

Former British Prime Minister Harold Wilson once famously said "a week is a long time in politics". That may be true but when it comes to spend analysis it seems that four years is, well, nothing. Back in 2008 this blogger had a little more hair and a few less wrinkles but a bucketful of optimism about the likelihood that business enterprises and public sector organizations alike would embrace spend analysis as a "must-do" cost management capability. Based upon the results of a recent Supply Management survey however it appears that the majority of procurement professionals  - some 68% in fact -must still clamber over the prehistoric landscape of disparate legacy systems, throwing their best-guess bones of fragmented spend data high into the air in the hope that they spin and fall miraculously into some understandable pattern of sourcing decision support. Read Supply Management's survey findings and weep - weep hard, mind - here. 


In the hope that perhaps the majority of the planet did not read the first publishing of my 2008 blog post "Can spend analysis have an ROI" - the only happening that would feasibly explain the unforgivable findings of the the SM survey - I am re-publishing said post below. Earth take heed - if I have to return in another four years to berate your refusal to understand and act upon the value of spend visibility I may not be so understanding....

Can a Spend Analysis Have an ROI?

(originally published in 1Procurement Place on August 25, 2008)

Would a private equity firm ever think about investing in a company without conducting a comprehensive analysis of its ability to generate an attractive future return? Of course not! A friend of mine in private equity once told me that for every one hundred million dollars a PE firm invests it has spent a million dollars in internal salaries and due diligence consulting fees analyzing the deal prior to pulling the trigger.

In a somewhat similar vein, would you ever think about buying a new or used car without carrying out at least a rudimentary analysis of the comparative reliability and performance of the various models? I didn’t think so. If you’re like me, in addition to burying yourself in Consumer Reports you also spend all the weekends between February and July test driving every vehicle under the sun until your significant other finally explodes “enough already – make up your mind!”

What about hiring someone for your company? You wouldn’t make an offer to a person without a rigorous evaluation of their capability to perform the job would you? You pick apart resumes, fly candidates in for interviews, give them case studies, call their references, and conduct drug screens and background checks before extending an offer.

What’s the common theme in each of the above examples? It’s that in each case someone is making an investment of money (the due diligence consulting fees, the job candidate travel expenses) or time (lost family time at weekends doing test drives, lost work time interviewing candidates) to gather information critical to a particular decision making process. The return on the investment is an increased probability of a favorable outcome from the decision – a higher profit when the PE firm sells the company three years later, a pleasurable ownership experience for the car buyer, and a high performing employee for the hiring company.

So Mark, I hear you all saying exasperatingly, what the Sam Hill does all this have to do with spend analysis? Quite simply, numerous companies of all sizes across many industries are making high dollar resource deployment decisions in procurement while having little or no access to a piece of information that is critical to the procurement decision making process. That piece of information would be about SPEND. Information providing answers to massively important questions such as: What is total spend? What is spend by commodity, supplier, and department? How much spend is currently under contract, in total and within each commodity? How many suppliers account for the top 80% of spend in each commodity? With how many different departments are your highest spend suppliers doing business? How much spend in each commodity is with non-approved suppliers? Which departments are responsible for the non-approved spend? Only by having answers to these type of questions will an organization be able to identify those commodities, suppliers and departments where the application of scarce procurement resources will yield the highest return.

How does an organization get these answers? By conducting aSPEND ANALYSIS, a process for producing a consolidated and accurate view of an organization’s purchasing expenditures by commodity, supplier and department. I won’t go into the intricate details of the spend analysis process here or the various tools available in the market to conduct one but, yes, to perform a spend analysis you will need to….make an investment! Depending on the approach you take the investment will take the form of people cost to conduct an internal analysis, software license fees for a tool, consultant fees, or a combination of all of these. The key is to perform an effective spend analysis that allows your procurement organization to focus its people, processes and technologies in the areas that will yield the greatest benefits. Examples of such areas are commodities with the highest total spend across the enterprise, commodities with too many suppliers, suppliers doing high volumes of business with different departments, and departments spending large amounts with non-approved vendors.

One of my clients with $500M of total spend recently conducted a spend analysis that identified just over $100M of spend with opportunities for sourcing, incumbent renegotiation and maverick spend reduction. Following the spend analysis this company focused its best and brightest commodity managers exclusively on this $100M and realized $28M of annualized cost savings. Without the spend analysis the same talent would have been wandering blind amongst the $500M and would have been very lucky to have found half of the $28M. Let’s say they were very lucky and found over half, say $18M. That would still mean that conducting the spend analysis had led to an additional $10M of savings. And what did the spend analysis cost? Less than $100K in software and services. Guess what, there’s a spend analysis ROI. And an attractive one at that.

You would be surprised (unless you get to see as many procurement departments as I do) just how many companies today are not able to identify the opportunity areas described above, and by inference are not able to prioritize the deployment of their procurement resources. Many of these companies will tell you they know where the cost savings are. They’ll tell you they know their business and that they know where to look. But they don’t really. They guess where to focus their people. They roll the dice on where to conduct a reverse auction. And they come up with dry holes again and again. Why? Because they haven’t invested. They haven’t done the due diligence. They haven’t test driven the commodities. They haven’t fully evaluated the candidates. They haven’t done a spend analysis.

The Magic of BBP

Interesting piece in the Pharma Times this week about how the UK's National Health Service (NHS) recently discovered it was paying widely varying prices for the same equipment and supplies. In NHS procurement waste “costs £1 billion a year” John Neilson of NHS Shared Business Services (NHS SBS), an alliance between the NHS and IT services firm Steria, reveals that a new NHS SBS database identified up to 19 different prices for the same pacemaker, and 22 different prices for a surgical tool. The article goes on to suggest that one of the biggest barriers to the NHS achieving significant cost savings in medical equipment & supplies procurement is that physicians are reluctant to participate in initiatives such as strategic sourcing because they fear they will have to compromise on quality and performance.

What jumped out at me from this article was the basic question: did anyone even know the NHS was paying all these different prices for the same product? To be fair, the article does not make it 100% clear whether the different prices being paid are for products with identical manufacturer brand names and specifications or only equivalent specifications from different OEMs. I read it as the former, for example the cardiology department in an NHS hospital in London might be buying a Boston Scientific Altrua Model # S404 Pacemaker for one price while another NHS hospital in Manchester could be buying the same S404 pacemaker for 10% less. This would be a totally believable situation with all the hundreds of NHS locations in the UK that could be buying this and other products with no coordination or communication between them.

If it is indeed the case that the new NHS SBS database has unearthed the previously unknown fact of multiple NHS buyers purchasing identical products at widely varying prices (and often I'd bet from the same supplier) then questioning the willingness of physicians to embrace the principles of strategic sourcing best practices is premature. What has been stumbled upon is actually one of Procurement 101's most basic but also most productive source of quick win cost savings - find out who in your organization is buying this product at the lowest price today and get everyone buying at that price, or "Buying at BBP (Best Buyer's Price)" as some purchasing veterans call the practice.

Buying at BBP is completely non-strategic but in some cases can deliver levels of early savings sufficient to fund the truly strategic investments required to create and sustain value over time such as strategic sourcing, supply chain optimization and demand management. In my opinion it's overlooked in many cases because it's so simple and, well, because let's face it we didn't go to business school to create value for our customers with such trivial solutions.

In the case of the NHS (and the same could apply to any mid or large-sized organization with multiple decentralized buying locations) I would be concerned that nobody is considering the Buy at BBP approach. Someone should be getting hold of those new database reports and identifying the name, rank and serial numbers of the buyers that secured the lowest pricing for those items with the highest annual combined usage across all NHS locations. Two things should then happen. First, these buyers should all be sent generous denomination Marks & Spencers Gift Cards. Second, someone should be assigned responsibility and authority to negotiate with the BBP suppliers to have the lowest price extended to all other NHS buying locations that are buying these same items. Suddenly, simply, almost magically a windfall of hard savings will have showered down upon the NHS without a single physician being asked to consider another brand or back down on a specification.

And one last thing. A new enterprise-wide database is not necessary to identify BBP opportunities. The same outcome can be achieved by pulling accounts payable vendor disbursement data from different locations and consolidating the data into one file. Look for those vendors being used by the most locations within your organization - these will likely be the vendors selling the same products to different buyers at different prices. You can then go the locations those vendors are selling to and pull item level usage and pricing data to identify specific pricing discrepancies and the savings available from buying at your organization's BBP. Sure, this approach requires a bit more manual effort and legwork but do you really want to wait around for one of those enterprise data warehouses to be built before you can create the cost savings? Besides, to quote Booker T. Washington: "Nothing ever comes to one, that is worth having, except as a result of hard work."

Except BBP.

Early to Bed, Early to Rise, Work Like Hell and....Customize?

An invigorating article on Reuters.com Tuesday about Honda's decision to NOT STANDARDIZE components across global auto models. In a strategy guaranteed to drive procurement puritans to drink, Japan's No.2 automaker will develop unique specifications for each of the seven countries where the next generation of the Fit sub-compact will be built and sold. Honda's purchasing head Masaya Yamashita reveals the primary drivers of the bold new sourcing strategy to be country-specific requirements and new design ideas from local suppliers.

The concept of customizing product specifications to the requirements of unique market segments is not new. The issue has always been how to manage purchasing, manufacturing and supply chain costs while doing so. The argument is that unchecked growth in specification variation works against all the traditional drivers of supply chain cost reduction such as purchasing leverage, inventory investment and set-up cost. So is Honda out to lunch with its sourcing approach for the new Fit? No, the company is just adopting the broader view of total cost of ownership to include the benefits of better tailoring the product to end consumer requirements and also down-specifying certain requirements based on country-specific usage environments.

In addition to just making sense I find the Honda article extraordinarily refreshing. Having been around the supply chain block for a few years now I know only too well how easy it is to regard certain strategies and practices as a perpetually and universally applicable best practice. A paradigm. Like any paradigm it makes you feel safe and comfortable, like you'll always have the answer. Thank you Honda for reminding us that paradigms are there for one reason - to break.

Lessons from the Public Sector

I'd like to welcome back to 1 Procurement Place guest blogger Barnali Dasverma. Barnali is a Manager at Treya Partners and has an interesting point of view about where the private sector can look to learn some lessons about improving the effectiveness and efficiency of procurement processes. Some of you may be surprised by Barnali's viewpoint, but then others may not....

Structure & Discipline in Procurement: What the Private Sector Can Learn from the Public Sector

By Barnali Dasverma
Manager, Treya Partners

“Yikes, what a haphazard sourcing process! You would never see this in the public sector!” Believe it or not, this was an observation I made after beginning my first private sector consulting engagement following a series of public sector clients. I was startled to come to the realization that there’s quite a bit the private sector can learn from the public sector. I’ve subsequently had the opportunity to serve more private sector firms and additional state governments and have had this conclusion reaffirmed. Specifically, my experience suggests there is a remarkable amount of structure and discipline in public sector procurement that many mid-market firms can greatly benefit from.


Bureaucracy Has Its Benefits: Processes

Bureaucracy has its benefits (as a consultant frequently engaged to tackle bureaucratic inefficiency, am I even allowed to say that?) and process standardization is one of them. One key public sector procurement practice the private sector can benefit from is a standardized RFP process. Many mid-market firms with unsophisticated procurement departments have an inconsistent approach to RFPs – each procurement staff member has his or her own RFP style and each procurement is run differently based on who leads it. In contrast, state governments typically have a well-defined multi-step process that everyone must follow, newbies and old-timers alike. If you’re a mid-market CPO working to optimize your procurement operations, begin with putting in place a consistent, best-in-class RFP process. Conduct vendor and industry analysis as a critical first step, call for requirements gathering that includes the alignment of specs with needs, require that all high profile procurements have a pre-proposal conference to obtain supplier feedback early on, have cost and non-cost proposals be scored by different evaluators to facilitate unbiased decision-making, and require that the procurement lead serve as single point of contact to limit the flow of information to suppliers. By formally requiring that all RFPs include best-in-class steps like these, you will ensure that your procurements are consistently exceptional.

This Is How We’ve Always Done It: Templates

While “this is how we’ve always done it” is a frequent refrain in state government and rarely music to a consultant’s ears, there is something to be said for not always reinventing the proverbial wheel. Far too often, we come across fledgling procurement departments in the private sector that whip up a new RFP whenever a procurement need arises, patching together portions of old RFPs to the extent possible, with the end result being a messy, incoherent solicitation document. Significantly, state government procurement departments are quite different in this regard and typically have contract and RFP templates (“boilerplates,” as they are often called) that all contracting officers must use. A powerful way to increase the efficiency and consistency of an unseasoned procurement team is to invest the time and effort in developing best-in-class templates for RFPs, RFIs, contracts (including standard terms and conditions that have been approved by your legal department), negotiation materials, and the like. Design the templates with usability in mind, carefully noting which portions must be tailored for each new procurement and which ones can be leveraged with little to no tweaks.

You Can’t Break the Rules Without Having Any: Policies

While procurement rules and regulations are sometimes followed blindly in government when they should in fact be challenged, they serve a valuable purpose and many private sector entities can benefit from them. Specifically, well-defined, and clearly communicated (and needless to say, best-in-class) procurement policies help minimize the gap between the CFO/CPO-level vision and the operational reality. For example, procurement policies defining delegation thresholds ensure that procurement staff members’ limited time is not spent on low-dollar value procurements, while requirements that procurement be involved in all RFPs of a certain contract value make sure that an organization reaps the benefits of having a high level of spend under management (e.g. application of strategic sourcing techniques to a broad range of spend categories, monitoring of supplier performance and internal contract utilization, etc.)

Who Knew? The Public Sector Can Teach the Private Sector A Thing Or Two

Having served as a consultant to six different state governments, I can tell you there are numerous ways in which the public sector can learn from the private sector – but that said, my experiences as a procurement consultant have taught me that it’s a two way street. Without a doubt, the structure and discipline we find in state government procurement is most certainly something that many of our mid-market clients can use.

Trial by Tabloid in Motor City

The Detroit News reported recently how the city's Chief Procurement Officer Andre DuPerry is looking to shake up Motown purchasing by re-examining the preferences Detroit businesses are given during the contract process. DuPerry, appointed by Mayor Dave Bing in December 2009, believes the city could save $22M a year by addressing Detroit's dependence on local third-party companies that charge inflated rates. Two small distributors, T&N Services and Hercules, receive particularly harsh treatment in the article for selling the city everything from office supplies to toilet paper to cleaning services at apparently outrageous markups. T&N CEO Tyrone Talifer understandably defends his company's position, citing as an example the taxes paid by his employees that flow back into the city's coffers.

I have to admit my very first take on reading this article was "go get 'em Andre!" but on reflection I would say T&N and Hercules get shabby treatment in the piece. Can they really be blamed for selling products and services at prices that the market will bear? Is it their fault they've been given the opportunity to operate in an industry structure with weaker competitive forces than those faced by my daughter's lemonade stand? Of course not. The primary driver of the margin extracted by both companies is the local vendor preference policy set in the city's purchasing ordinances. The "felon caught in the flashbulb glare" picture of Hercules President Belinda Jefferson is tawdry journalism, disrespectful of all small business owners who navigate the unpredictably contoured landscape of the monthly cash flow statement.

Now, do I have any problem with DuPerry seeking to drop strategic sourcing depth charges into the still, glassy waters of Detroit's overprotected contracting environment? Heck no! Go for it Andre! The sky high prices paid by Motor City's government typify public sector contracting policies where the protectionism dial's needle has swung way into the red. By all means, get some contracting best practices in place to make the government's scarce budget dollars go further. Leverage the total city spend with national suppliers, negotiate aggressive volume-based discounts & rebates, and implement compliance management measures to ensure government departments use the new agreements. Oh and guess what? It will actually be possible to maintain a targeted level of spend with your city's local suppliers by either setting aside a (sensible) portion of annual requirements for SWMBE vendors and/or requiring that the national providers subcontract a minimum percentage of annual requirements to SWMBE (I'd recommend a combination of both). And with the improved reporting available from today's electronic procurement and contract management systems it will be easy to validate that the big guys are actually fulfilling their contractually committed obligations to Detroit area businesses.

So to repeat, I have no beef with CPO DuPerry setting about his business as city procurement tsar and mending broken public sourcing practices. My only beef is with those who place blame at the feet of the benefactors of these broken sourcing practices.

So Motown, go get the savings dollars and squeeze those markups! Protect local area businesses through best practice strategies such as minimum SWMBE quotas and setting and enforcement of SWMBE subcontracting targets with national suppliers. And T&N and Hercules - get ready for real competition that will initially hit your bottom line but in the long run will transform the efficiency of your operations and create real value for you going forward. And to those media commentators looking for the easy sound bite, show a little respect for those industry participants making hay while the sun shines. As far as the economy is concerned it's like living in New England - enjoy the weather now but wait around another 15 minutes and you'll be scrambling for your coat and umbrella.