Riding the Wave of Services Spending

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

May, 2011
Presented by: Jason Busch

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

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


What is this about riding the wave?

Copyright © 2011 Azul Partners Inc. All rights reserved. Not for distribution. 5

| www.spendmatters.com - spendmatters.co.uk - www.agmetalminer.com 5

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 …
Globalization hiccups
•  Wage inflation, total cost increases
•  CSR, labor, different definitions
of acceptable behaviors

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

… 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


Setting the services procurement stage – why now?

•  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?


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)


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

•  Looking at services/contingent spend as a component
Human of talent/human capital management
Resources •  Concerned over non-price issues (e.g., co-employment)

•  Want to avoid “rocking the relationship boat”
Functional with existing service providers
Spend Owners •  Want their business requirements understood

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

•  Making the effort worthwhile – achieving cost reduction
while improving service levels and reducing business risk
Procurement •  Getting the most from centralized processes, business
empathy, category/benchmark knowledge and technology


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

Contingent labor Marketing / Print Legal
•  10–30%+ initial savings •  10–20%+ total savings with •  10–40%+ reduction in
(inclusive of fees to third- no requirement to change targeted spending areas
parties to manage the creative agencies (e.g., paralegal, patent)
administrative side of •  25–50% savings in without jeopardizing
temporary spend) categories where existing preferred provider
•  Ongoing benchmark service levels not yet relationships
savings reduction of 5-20% established and/or •  Greater firm transparency
(Q1/Q2 of this year) preferred suppliers not and accountability
•  Improved service levels, used on a regular basis •  Increased ability to budget
reduced HR costs (reduced •  Greater transparency in and plan costs (e.g., flat-fee
internal administrative project (e.g., SOW), projects)
headcount required) program, pass-through, •  Greater flexibility to pursue
•  Higher invoice accuracy hourly and other costs different relationship
and compliance levels models (volume discounts,
at-risk or performance-
based fees)


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?

Analytically Informed
•  Broad spend intelligence and
coverage – success on all metrics
(not just savings)
•  Significant organizational support
and enthusiasm
Data-Driven Expansion •  Potential to impact business models
•  Analytics begin to drive secondary •  Analytics and benchmarks key
savings components to overall program
•  Beyond contingent labor management
•  Closer collaboration with business
stakeholders
Compliance and •  Sourcing and lifecycle
First- Wave Savings management
•  Process centralization
•  Outsourcing
•  Technology automation


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

•  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


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


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


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


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

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)

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


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


Agenda



Pulling out the Spend Matters Crystal Ball
1.  Dealing with vast sums of information – and being 5.  New interfaces and technologies drive functional
able to act on it – becomes the defining characteristic interconnectivity and breakthrough collaboration and
of top performing services procurement teams visibility

2.  Finance takes over procurement – literally and 6.  The successful management of complex services
Figuratively categories proves transformative for top performers

3.  After the Web 2.0 comet strikes – new types of 7.  Buying and digesting companies once again becomes
business and social networks quickly separate out a core competency, but this time procurement gets in on
dinosaurs from mammals the act and services becomes key

4.  Politics, philosophy and economics will play an 8.  New talent enters procurement from the bottom – and
unprecedented role in global procurement decisions changes things forever


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

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


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

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


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

29

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
Sources: WSJ, PWC, Spend Matters Group §  Weighing global options, constraints and upside


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: jbusch@azulpartners.com
Phone: 773-525-7406


Riding the Wave of Services Spending

Riding the Wave of Services Spending

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