© 2013 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. IMPROVING

© 2013 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.

IMPROVING FINANCE AND PROCUREMENT COLLABORATION

The Hackett Group

March 21, 2013

Patty Miller and Bryan DeGraw


Statement of Confidentiality and Usage Restrictions

This document contains trade secrets and other information that is company sensitive, proprietary, and confidential, the disclosure of which would provide a competitive advantage to others. As a result, the reproduction, copying, or redistribution of this document or the contents contained herein, in whole or in part, for any purpose is strictly prohibited without the prior written consent of The Hackett Group.

Copyright © 2013 The Hackett Group, Inc. All rights reserved. World-Class Defined and Enabled.

Agenda

• Key issues alignment

• The Problem

• The Solution

• Recommendations

• Q&A

Agenda

Key Issues Alignment


Value Proposition of Procurement Services

Role of Procurement

Right goods /services at the right time & place

Right goods and services AND at the right price

Shift from lowest price to Total Cost of Ownership

Reduce demand activity, complexity and variability

Increase business value derived from spend

Supply Assurance Buyer / Planner

Negotiator

Supply expert (SCM, SPM, etc.), team leader, project manager

Spend/ budget consultant & relationship manager

Trusted business advisor and change agent

Price

Total Cost of Ownership

DemandManagement

Value Mgmt.

Procurement is trying to evolve from a buyer to a spend manager and trusted business advisor.

VA

LUE

+ Role of Supply Base

Innovative / Flexible

Aligned / Loyal

Operationally Excellent

Priced Fairly

Reliable, Solvent

Every Major Service you Perform has a Value Evolution!


Value Proposition of Finance

Role of Finance

Financial Statement Control Controller

Finance Operator

Finance Expert

Finance Consultant

Crucial Business Partner

Finance Efficiency

Finance Effectiveness

Business Risk & Return

Value Mgmt.

Finance is moving beyond control and efficiency to provide more strategic enablement as a business partner

VA

LUE

+Role of Information

Integrated EPM, Scenario Modelling, Commercial Finance, Aligned Measures

Working Capital, Taxable Income, Integrated Planning

Unit cost of Finance Activity

Accurate, Reliable Financials

RAROC, Predictive Business Drivers, Broad Info Access

Bullet proof balance sheet, zero restatements,

zero compliance issues

Transactional Finance at lowest cost – standardization,

centralization, automation

AR, AP, Inventory, Tax and Treasury Optimized for Value, FP&A provides

faster and better historical insight

Finance Business Analysts assist with risk weighted investment decisions, provides

more value through business drivers

Event based predictive modelling, accelerated decision making, local commercial finance

expertise/global tools, broad value orientation


Procurement focus is on Spend Savings/Influence (again), but then comes Innovation, Risk, and Working Capital Improvements

ENVIRONMENTAL SUSTAINABILITY or SUPPLIER DIVERSITY initiatives

REDUCE COST OF PROCUREMENT operating expense - via improved process efficiencies

GROWTH ENABLEMENT BEYOND INNOVATION via M&A support, JVs, new market entry, demand generation programs, capacity expansion, etc.

P2P IMPROVEMENT. Driving more value out of the transactional P2P process

FREE UP CASH (e.g., working capital improvements, fixed cost variabilization, etc.)

REDUCE SUPPLY RISK (e.g., supplier risk, regulatory compliance, CSR / ERM support, etc.

INNOVATION and Product/Service support (e.g., tap supplier innovation, early procurement phase-gate involvement)

DEEPEN INFLUENCE ON COMPLEX INDIRECT SPEND categories, drive value beyond sourcing

EXPAND PURCHASING'S SCOPE/INFLUENCE - support new catagories, new value drivers, etc.

REDUCE AND AVOID PURCHASED COSTS to take out costs and mitigate price inflation

0% 10% 20% 30% 40% 50% 60% 70% 80%

20%

25%

32%

39%

40%

42%

44%

51%

53%

72%

Procurement 2012 – Key Issues (Performance)(% of respondents citing the issue as ‘major’ or ‘critical’)

Q: “What is the strategic priority of the following performance-related key issues on the Procurement agenda for 2012? “

Source: The Hackett Group 2012 Key Issues Study

Notable increase from 2011 study ranking

Finance alignment


Cost is #1 priority for Finance, but clear need to support enterprise growth and drive more value from existing resources

Managing complexity of finance SDM

Identifying and analyzing acquisition targets

Keeping the finance organization connected to customer needs

Taking advantage of new finance technologies

Supporting process management across organizational boundaries

Improving/maximizing return on existing investment in technology

Improving finance's analytical, modeling and forecasting capability

Supporting the enterprise with competitive cost structure

42%

42%

47%

47%

53%

53%

57%

63%

% of companies ranking as Critical or Major priority

Enabling growth/greater value

Reducing cost/complexity

Finance Key Issues

The Problem


So, what’s the problem?

The misalignment and sub-optimization of Procurement and Finance is destroying

value across the value chain and the source-to-pay processes.

Consider the following questions…..


The Finance-Procurement Problem

Lack of Spend Visibility (past spend and future spend) Lack of Savings Visibility, Value Contribution Visibility, and Trust/Credibility Lack of clear operating model and process ownership

Purchase-to-Pay Cash vs. Cost Risk vs. Cost of Controls Commercial Risk Management

Lack of Awareness, Resources, and Leadership Lack of Agreement on what Procurement’s and Finance’s roles SHOULD be


First, there must be a level of trust and transparency

Disagree strongly

Disagree somewhat

Neutral

Agree somewhat

Agree strongly

0% 20% 40%

3%

16%

13%

38%

30%

“Finance and procurement share information about opportunities and concerns openly and readily at my company.”

Source: CFO Research, 2011 CFOs on finance- and procurement-process improvement


Finance would like to see a more efficient procurement process, and also better support for working capital and risk management

Expand scope of responsibilities

Improve enterprise information systems or technology

Improve analytical skills

Strengthen its working relationship with operations

Strengthen its working relationship with the finance function

Detect and mitigate supply risk

Increase automation in the procurement process

Improve discount and rebate capture with suppliers

Improve collaboration with supplier network

Improve process efficiencies

0% 20% 40% 60%

13%

20%

29%

36%

36%

37%

39%

40%

40%

52%

What are the most important improvements that procurement can make in order to contribute more to the company’s success?

Source: CFO Research, 2011

“Get more efficient”

“Stay in the box”

The Solution

Collaboration!

Beyond Process Efficiency


Move beyond efficiency: Every process can be squeezed for more Value (e.g., P2P)

Complexity Reduction• Transactional Purchasing Process Cost Reductions• Accounts Payable Process Cost Reductions

Strategic Business Enablement • Improved/protected customer service, revenue, profit• Brand protection: compliance risk; supply/supplier risk• Opportunity cost of management time

Value Drivers

Opportunity(For a $10B CPG Company)

Opportunity$4.4M

Opportunity$52.2M

Total*: $56.6 millionCurrent process baseline cost

~$26 million

Operating Excellence• Maverick Spending Reduction• Supplier Non-Compliance to contract• Demand Mgmt (Consumption Reduction)• Demand Mgmt (Spend Influence)• Sourcing Savings via better spend viz from P2P• Cost of Capital from DPO improvement• Early Payment Discounts• Rebates from Purchasing Cards• Reduced Cost of P2P Errors for Purchased

Finished Goods• Reduced Cost of P2P Errors for Raw Materials• Reduced Supplier Late Payments Penalties

14x difference!


Since Earlier Procurement Influence leads to Greater Savings…

Design / Specification (Demand Mgmt.)

Supplier Identification Negotiation & Contracting

3.78%3.26% 3.23%

5.913%

4.983% 4.932%

Total Indirect Spend Savings as a % of [Total or Influenced] Indirect Spend

Total Spend Linear (Total Spend)Influenced Spend Linear (Influenced Spend)

Stage when Procurement is first involved:

Source: The Hackett Group Procurement Benchmark, 2011


Level of Procurement's participation in the company's planning and budgeting process

The Hackett Group Procurement Benchmark-2012

Low Medium High

36%40%

24%

33%

25%

42%

Peer Group World Class

Finance and Procurement must work together to help improve “Spend Management”

A Better Measurement System


Procurement has many Value Streams beyond delivering favorable Purchase Price Variance (PPV)

Source: The Hackett Group, 2011

Page 21- Hackett 2010 Procurement Value Measurement Study Findings – May 2010

Other than cost reduction & avoidance, Procurement value measurement is a work in progress. Before just attacking spend visibility, focus on “Value Visibility”

Avoided profit impact through supply risk management

Revenue uplift from supplier collaboration

Net savings versus a Supply Market Index

Preventing/mitigating supplier attempted price increases

Costs avoided by receiving 'No charge' items and services

Benefits due to currency hedging, inflation hedging, options/derivatives, etc

Reduced cost-of-quality

Savings from initial/average RFP bid

Discount negotiated from a list price

Internal Procurement process cost savings are found from process re-engineering

Reduced tax expense through tax avoidance strategies

Demand/Consumption Reduction - i.e., non-cost-based spend reduction

Non-cost related cash flow benefits (e.g., working capital reductions)

Labor savings (e.g., outsourcing processes, improved efficiencies, etc.)

Carrying costs reduced from raw material reductions or asset rationalization

Early payment discounts, P-card rebates, or other supply chain finance benefits

Requirements/specifications are simplified to support cheaper supplier solution

Purchase price reduction (e.g., year-on-year, new cost vs. previous baseline)

0%

7%

12%

12%

12%

15%

18%

21%

24%

24%

25%

27%

27%

44%

45%

45%

54%

79%

29%

27%

37%

34%

41%

3%

25%

24%

7%

32%

10%

20%

24%

27%

23%

23%

17%

7%

17%

15%

27%

34%

22%

10%

5%

31%

26%

10%

13%

15%

17%

7%

5%

20%

7%

10%

32%

29%

24%

17%

12%

28%

15%

17%

24%

17%

20%

22%

15%

15%

3%

10%

7%

2%

22%

22%

0%

2%

12%

45%

38%

7%

19%

17%

33%

17%

17%

7%

25%

3%

15%

2%

Hard Savings / Cost Reduction Soft Savings / Cost Avoidance No Finance Credit, but tracked by procurement No Credit - but applicable Not applicable to us

“No Credit Zone”

$$

$

$$

$

$$

$$$

$Savings Source: 2010 Hackett Study on Procurement Value Measurement and Spend/Savings Visibility


Part of this is a credibility gap even regarding cost savings….

‘The savings claimed by Procurement related to Indirect Purchases are falling to the bottom line and can be proven’ (% of

Responses)

PerceptionGap

Source: The Hackett Group Spend/Savings Visibility Study, 2010


Top Performers VERIFY Savings

Top Performers Non-Top-Performers

80%

5%

7%

21%

13%

74% ...No further measurement/tracking is done

...Finance removes/reallocated the savings from the budget

…Savings are verified as dollars are spent

‘Savings are considered booked/achieved when they are negotiated and agreed to by the supplier and …’

16x Difference!

Those who adopt this model save 6.3% on indirect spend (vs. 3.8%

for other two models)

Reduced budgets, but

not necessarily reduced

purchased costs

“Hope is not a strategy”

Source: The Hackett Group Spend/Savings Visibility Study, 2010


You also need Spend Visibility to see opportunities and verify savings

World-Class Peer Group

18%

42%

82%

50%

8%

Ability to view spend data by supplier across the enter-

prise…

No company level data available

Limited amount of information available company-wide

Significant amount of information available company-wide

Significant None/Limited

Spend Cost Reduction as a Percent of Spend

Significant None/Limited

Suppliers per Billion of spend

…helps increase sourcing effectiveness, supply base rationalization and hard dollar spend savings

Significant

Limited

None

1.8%

1.0% ≈5K

≈8K

Ability to view spend data by supplier on a global basis

End-to-End View of P2P and Beyond


Finance and Procurement must help align Purchasing Operations and Payables – and also tie back to broader Source-to-Pay process


P2P Alignment is not typically delivered by either Purchasing or AP owning the end-to-end P2P process

Non-Top

Perform

er

Top Perf

ormer

59% 64%

5%

21%20%

7%16%7%

Purchasing and AP are both aligned thru Shared Service Cen-ter

Purchasing and AP are both aligned thru Finance

Purchasing and AP are both aligned thru Procurement

Purchasing is aligned thru Procurement/BU while AP is aligned thru Finance/SSC

Making it Happen


Recommendations to increase Finance and Procurement Collaboration

Procurement - “Make Finance your Friend”

Finance – “Make Procurement your Friend” Establish end-to-end cross functional process alignment

– P2P – and establish a single process owner or at least 2 joint owners

Use Risk Management to bypass the ROI death march Adopt an Internal cross-functional Audit buddy. Try for a “finding” Review the CapEx approval workflow for cross team involvement Get better clarity on the measurement system that each team is using. Agree on

some common and complimentary metrics Unite Finance (AP and Treasury) and Procurement for DPO optimization aligned with

an overall Working Capital Strategy Tap one another’s experience in shared services, outsourcing, analytics, etc. – or

vice versa


Lessons learned / takeaways

Spend Management is a closed loop process that Procurement and Finance MUST design and operate together

Both functions need to not only serve each other better as internal buyer/suppliers, but also jointly serve the budget owners and external stakeholders (shareholders, external customers, suppliers, regulators)

World-class organizations optimize spend management through– Enterprise process ownership– Holistic metrics– Self-funded journeys to elevate their services, performance, and capabilities– Aspiring to having best the talent and tools available

Many have already done it. And Hackett has been right there with them.


Questions?

THANKS!


Contact InformationThe Hackett GroupSuite N5001117 Perimeter Center WestAtlanta, GA 30338Phone: +1 770 225 3600

Martin House5 Martin LaneLondon EC4R 0DPPhone: +44 207 398 9100

Torhaus WesthafenSpeicherstrasse 5960327 Frankfurt am Main, GermanyPhone: +49 69 900217 0

8, rue de Port Mahon75002 Paris, FrancePhone: +33 1 53 43 0400

Strawinskylaan 3051G, 1077 ZXAmsterdam, The NetherlandsPhone: +31 20 301 2210

Bryan DeGrawSenior Director, The Hackett GroupPhone: + 1 [email protected]

Patty MillerSenior Director, The Hackett GroupPhone: + 1 724.263.2658 [email protected]

[email protected]

www.thehackettgroup.com

mailto:[email protected]








www.thehackettgroup.com

Statement of Confidentiality and Usage Restrictions

This document contains trade secrets and other information that is company sensitive, proprietary, and confidential, the disclosure of which would provide a competitive advantage to others. As a result, the reproduction, copying, or redistribution of this document or the contents contained herein, in whole or in part, for any purpose is strictly

prohibited without the prior written consent of The Hackett Group.

Copyright © 2013 The Hackett Group, Inc. All rights reserved. World Class Defined and Enabled.

Documents

© 2013 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited. IMPROVING