Welcome to the New Procurement: Scenarios and Strategies to Ride the Services Spending Wave

Copyright © 2011 Azul Partners Inc. All rights reserved. Not for distribution. | www.spendmatters.com - spendmatters.co.uk - www.agmetalminer.com 1

Welcome to the New Procurement: Scenarios and Strategies to Ride the Services Spending Wave Webinar May, 2011 Presented by: Jason Busch


Agenda

• Market backdrop – setting the stage • The latest in services procurement • Scenarios and expectations for tomorrow


Who we are: Spend Matters/MetalMiner

The team… • Former strategy and sourcing consultants • Former traders • Former heads of procurement

The sites… • www.spendmatters.com – First blog in sector, now much more • www.agmetalminer.com – <4 years old, largest metals pub. in N.A. •  spendmatters.co.uk – Raising the PM’s eyebrow… • Coming soon: hcmatters.com (Healthcare Matters)

“A surreal mix of hardcore procurement and cerebral whimsy.”


The premise…

•  Even in manufacturing industries, companies are investing and prioritizing larger-scale services procurement programs to drive savings and compliance across broad-ranging categories, from temporary labor and finance/legal to aftermarket support

•  We’ll examine the current state of services procurement from a broader buying and supply chain context, summarizing a range of topics

•  We’ll also share number of insights and scenarios about where the market will go next and how a range of technologies – from analytics to social networking – will play distinct and important roles in the services procurement organizations of tomorrow

Copyright © 2011 Azul Partners Inc. All rights reserved. Not for distribution. | www.spendmatters.com - spendmatters.co.uk - www.agmetalminer.com 5 5

What is this about riding the wave?


Even when it comes to services, we can’t talk about procurement today without touching on an economic outlook •  Consensus suggests the global economy will

continue to grow (barring the fallout of the Japanese disaster)

–  Both OECD and emerging economies to fuel growth

–  U.S. to grow at a 2.5%+/- for 2011-2013 •  International trade moves to the foreground •  Certain markets will remain volatile

throughout 2011 but will stay on a rising price trajectory due to:

–  Emerging market demand –  Rising raw material costs –  Small upticks in demand, creating

disproportionate price increases •  Services become important not just as critical

business enablers during volatile times, but also a means to lock-in potential savings that we’re losing in other areas and to take advantage of Wave 2 of global sourcing


Despite GDP numbers, it’s a mixed bag on the global trade and economic stage …

Currency & commodity volatility •  Currency madness (Euro, Pound, etc.) •  Commodity/currency inflation

Finances and Regulation •  Credit markets have not returned for

everyone •  EU concerns growing and real

(e.g., Greece) •  New compliance requirements

Globalization hiccups •  Wage inflation, total cost increases •  CSR, labor, different definitions

of acceptable behaviors


… And many risk drivers are nefariously brewing behind the scenes as well •  Larger procurement expectations and

charter, but challenges in adding headcount to support needs

•  Policy workarounds (e.g., SOW and contingent) contributing to less visibility and control, not more

•  Overall supplier performance risk •  Supplier and spend compliance •  Currency risk – for contracts

denominated in local currencies •  Inventory risk – both physical inventories

and even “virtual” goods/services •  Banking/financial risk


•  Why is the interest in services procurement rising so quickly?

•  Why now, why today? •  Companies aren’t hiring full-time workers and contingent workers; third-party firms are

picking up the slack

•  In a booming economy, many executives and shareholders did not look at managing SG&A expenses the same way as COGs – but they certainly do now

•  Procurement was not necessarily ready for all of the challenges of holistically pursuing services spend until now and outside trends are forcing us get more involved

•  Until recently, the great majority of companies defined services procurement in a limited way, focusing only on contingent labor

A number of converging factors are driving rising interest levels in services procurement – we’re clearly in the right place at the right time,

but are we ready for the challenge?

Setting the services procurement stage – why now?


Putting services procurement in the spotlight

Services procurement can have a significant impact on increasing procurement’s overall stature in the business

•  Ability to generate savings in new areas at a time when cost reduction is more needed than ever before (and other categories are increasingly more difficult to get results from)

•  Requires procurement to lead a collaborative effort between functions (anything but a transactional, back-office type of approach)

•  Reinforces the role of procurement as a services provider in and of itself (which exists to generate value to the business in new ways)

•  Provides visibility and contact with influential areas of the business (e.g., finance, legal, IT)


• Looking at services/contingent spend as a component of talent/human capital management

• Concerned over non-price issues (e.g., co-employment) Human

Resources

• Want to avoid “rocking the relationship boat” with existing service providers

• Want their business requirements understood

Functional Spend Owners

• A liability or key to cost reduction? Or both? • Ability to quickly react to changing business conditions • Reducing unnecessary (and often unknown) liabilities

CFO/Legal

• Making the effort worthwhile – achieving cost reduction while improving service levels and reducing business risk

• Getting the most from centralized processes, business empathy, category/benchmark knowledge and technology

Procurement

To truly understand services procurement, you must be empathetic to different influencers/stakeholders in the business


Contingent labor • 10–30%+ initial savings

(inclusive of fees to third-parties to manage the administrative side of temporary spend)

• Ongoing benchmark savings reduction of 5-20% (Q1/Q2 of this year)

•  Improved service levels, reduced HR costs (reduced internal administrative headcount required)

• Higher invoice accuracy and compliance levels

Marketing / Print • 10–20%+ total savings with

no requirement to change creative agencies

• 25–50% savings in categories where existing service levels not yet established and/or preferred suppliers not used on a regular basis

• Greater transparency in project (e.g., SOW), program, pass-through, hourly and other costs

Legal • 10–40%+ reduction in

targeted spending areas (e.g., paralegal, patent) without jeopardizing preferred provider relationships

• Greater firm transparency and accountability

•  Increased ability to budget and plan costs (e.g., flat-fee projects)

• Greater flexibility to pursue different relationship models (volume discounts, at-risk or performance-based fees)

We all know what results are possible from tackling services spend more aggressively (and successfully)


Agenda



What we’re observing…

• Technology enablement on the rise, but a bifurcation with adoption

•  Increasing emphasis on data-driven approaches and models to running programs and making decisions

•  Integration of sourcing and supplier/vendor management programs

• Project-based and SOW talk (and some early action)

• Leaders improving performance (while driving savings) in complex categories

• Driving adoption—selling up (and around, down, forward and backward)


Sizing up services procurement maturity – where is your organization today?

Compliance and First- Wave Savings •  Process centralization •  Outsourcing •  Technology automation

Data-Driven Expansion •  Analytics begin to drive secondary

savings •  Beyond contingent labor •  Closer collaboration with business

stakeholders •  Sourcing and lifecycle

management

Analytically Informed •  Broad spend intelligence and

coverage – success on all metrics (not just savings)

•  Significant organizational support and enthusiasm

•  Potential to impact business models •  Analytics and benchmarks key

components to overall program management


•  Analytical orientation is probably the single most important factor in overall services procurement success

•  Taking ownership of your own data destiny is a prerequisite for success

•  A strong VMS capability can solve part of your technical challenge…

•  …but you need to know how to use it

•  Analytics is more than just BI and canned reports

•  Reporting and management insight

•  Drilling into datasets (and combining datasets together)

•  Contextual reporting and insight

Analytics is proving key…but it’s more than just reporting


•  Services procurement (especially outside of contingent labor) has many touch-points with existing processes (and even technology)…

•  Sourcing – integrating services procurement into a standard strategic sourcing process (e.g., reverse auction, multi-round sealed bid)

•  Supplier management – measuring supplier performance, developing key suppliers and ensuring contract compliance

• …But it is also critical to remember that with services procurement, managing the entire lifecycle is essential

The integration of service procurement with broader sourcing and supplier management programs is also critical


•  “Price is what you pay, value is what you get” – cost is only one factor

•  Make sure technology can support specific enablement needs…

•  Automated invoicing and reconciliation, blanket orders, bulk orders, hybrid orders (i.e., with low or high order mix), SKU and non-SKU based ordering

•  Non-PO-based categories, complex category-specific collaboration capabilities, not-to-exceed terms, discount terms, split line items, and receipt-defined payment, etc.

•  ...As well as rich category-based functionality where required (e.g., cross-channel reporting and collaboration for marketing spend)

Project-based and SOW approaches are gaining favor in top- performing organizations…


•  Many areas of services spend are tightly controlled by key business leaders who already have preferred relationships…

• …But this does not mean that entire categories are necessarily off limits

•  Successfully engaging stakeholders requires: •  Doing homework and knowing the benchmark

•  Using empathy as a tool to win detractors

•  Understanding and segmenting all of the different elements of the “sub” categories within each area

•  Getting creative with both sourcing and supplier management strategies

•  Selling the “afterlife” of category engagement – no need to have the sacred cow eat garbage!

…Even sacred cows sometimes eat garbage – without knowing it!


1.  Engage executives outside of procurement and invite them to help guide and set an overall non-contingent services spending strategy

2.  Educate the broader organization on services procurement -- show them that it is not just about driving to the lowest possible price, but that primary objectives are to maximize value, as defined by category

3.  Consider alternative specialized services procurement solutions in addition to standard VMS platforms designed specifically for contingent spending

4.  Invest in analytics capabilities (beyond those offered by procurement vendors) that can take a highly granular slice of services spending data—including performance and reporting—in key categories

5.  Don’t underestimate the importance of investing in internal marketing, education, and compliance; focus on adoption and usage as much as strategy, tools selection, and deployment

6.  Leverage the IP (e.g., heavily customized category/process templates) and experience of technology partners to help define optimal services category-sourcing and lifecycle-management processes

7.  Don’t be afraid to engage niche category specialists that offer both software and/or combined software/service solutions in services categories (e.g., print) where significant domain knowledge can be critical to savings and value potential

8.  Measure and manage “customer” satisfaction by taking the pulse of spend owners and stakeholders rather than just managing expectations, savings numbers and supplier performance

Eight tips we’ve observed from leaders in complex category and SOW procurement


2.  Out of the box thinking, creativity and a concentrated campaign are required to get lasting change and maximum result

3.  Analytics and data count, but people are multi-dimensional and need more than logic sometimes

Investing in driving adoption is not easy, but it pays dividends

Three quick steps for consideration: 1.  A simple memo or phone

calls is not enough to get deep, long-term buy-in

•  Think like a marketing, not operations executive

•  Content is king (as is executive sponsorship outside of procurement for all marketing initiatives)


Creating a marketing campaign for services procurement (yes, it can work!)


Agenda



Pulling out the Spend Matters Crystal Ball 5.  New interfaces and technologies drive functional

interconnectivity and breakthrough collaboration and visibility

6.  The successful management of complex services categories proves transformative for top performers

7.  Buying and digesting companies once again becomes a core competency, but this time procurement gets in on the act and services becomes key

8.  New talent enters procurement from the bottom – and changes things forever

1.  Dealing with vast sums of information – and being able to act on it – becomes the defining characteristic of top performing services procurement teams

2.  Finance takes over procurement – literally and Figuratively

3.  After the Web 2.0 comet strikes – new types of business and social networks quickly separate out dinosaurs from mammals

4.  Politics, philosophy and economics will play an unprecedented role in global procurement decisions


§ Services procurement as knowledge management? You bet! − Internal information (systems data, qualitative insights)

− Supplier information − Third-party data

§ Analytics becomes a competitive weapon – but we’re only as good as the quality and breadth of information that we have

§ What’s possible? − Understanding ideal labor mix (macro)

− Using analytics as a means to improve performance based on information that vendors don’t even think you have access to (e.g., churn in a project-based systems implementation or custom development initiative)

− Creating forward markets (and forward strategies) for contingent labor and even project-based assignments based on index data

1. Dealing with vast sums of information – and being able to act on it – becomes the defining characteristic of top- performing procurement organizations


2. Finance Takes Over Procurement – Literally and Figuratively

•  Managing volatility (e.g., demand, commodity, currency) is job one for CFOs and treasury

•  Forecasting earnings and mid-term cash flow is more difficult today than sales (only 33% and 22% vs. 49% of companies can do so within 5% accuracy respectively)

•  Credit lines are still very tight and managing banking relationships (and understanding overall supply chain banking exposure) is a top priority for executives and CFOs

•  P2P strikes back – working capital strategies working their way into procurement strategies – and services procurement tactics and technologies as well

•  Cost containment a critical CFO issue – margins, gross profit, EBITDA, OIBDA


§  Think Linked-In and Facebook? Think again

§  New social networking tools and constructs (e.g., relationship mapping) will become an integral part of the procurement toolbox

− Some will rely on new platforms and standards (e.g., Twitter)

− Others will extend existing paradigms into specific business contexts

§  Dinosaurs – yeah you, in the back row – will be starved out of a place on the procurement planet unless they learn to rapidly adopt to the changing landscape

− If you don’t use social networks today, get familiar with them fast

− Try out new things that come along

3. After the Web 2.0 comet strikes – new types of business and social networks quickly separate dinosaurs from mammals


§  Growth, recovery and market volatility

−  A continued “jobless” recovery?

−  Austerity programs?

−  Flexible workforce

§  A superpower smack down

−  Behind-the-scenes battle for raw materials (e.g., rare earth metals)

−  Punitive measures in response to protectionism

§  Blood, sweat and tears

−  Traditional military conflicts (e.g., Iran)

− Non-traditional dangers (e.g., terrorism)

4. Politics, philosophy and economics will play an unprecedented role in global procurement decisions

Copyright © 2011 Azul Partners Inc. All rights reserved. Not for distribution. | www.spendmatters.com - spendmatters.co.uk - www.agmetalminer.com 29 29

5. New interfaces and technologies drive functional interconnectivity and breakthrough collaboration and visibility

§ Interfaces –  iPad/iPhone (i.e., touch) –  Video (phones, PDAs, Flip cameras) –  Voice

§ Enabling technologies –  In memory DB –  VirtualizaDon (i.e., cloud) – MDM/CDI (encompassing structured and unstructured data sets)

§ PotenDal impact –  Supplier monitoring, collaboraDon and development

–  NegoDaDon – Overall presentaDon and internal performance awareness


6. The successful management of complex services categories proves transformative for top performers

§  Results will lead to not just reduced costs but entirely new ways of looking at the business and the role of suppliers

§  Redefining what is core (and for whom) with what is not

–  Marketing –  IT –  Product development/

engineering § Shared services will help blur the

gap between what is managed internally and what is external


7. Buying and digesting companies once again becomes a core competency, but this time procurement gets in on the act

M&A is heating up § Consensus on 2010 volume – 30~35% increase

from 2009 (WSJ, PWC) § Middle-market drives deal volume – return to

its long-term trend § Divestures make their way to the market – planned

divestures that were on hold as well as regulatory mandate

§ Cross-border deal activity increases – inbound activities from Asia and Europe

What’s different for procurement this time? § Management and shareholder cost savings expectations §  Enabling technology to drive rapid due diligence

and opportunity assessment § Risk management emphasis § Weighing global options, constraints and upside Sources: WSJ, PWC, Spend Matters Group


8. New talent enters procurement from the bottom – and changes things forever

§ New blood goes beyond new functional skills (e.g., engineering, lean/Six Sigma, accounting)

§ What we’re talking about here is how the entrance of …

–  Highly analytical thinkers –  Top-tier MBAs –  Those with finance know-how –  Individuals with deep technology appreciation –  Highly ambitious leaders that want

to run companies

§ …into procurement will create a changed talent landscape

–  Formation of new opportunities tangential to procurement (e.g., risk management leading to trading functions/companies)

–  Greater expectations for reward and promotion (i.e., up or out tracks)

–  Talent bifurcation: “Have” and “have not” environments


Contact details

Jason Busch Managing Director, Azul Partners, Inc. Founder and Executive Editor, www.spendmatters.com Email: [email protected] Phone: 773-525-7406