Managing your money

Source: Technology Digital

Date :31/05/2007 15:39:04

Taking a closer look at how your company spends could reap significant rewards to the company’s bottom line.

By James Buchanan

Ever wonder if your company should take a closer look at how it manages its spending?

The answer to that question couldn’t be simpler, says Don Rosenfield, a senior lecturer for MIT’s Sloan School of Management, because costs could spiral out of control if a company doesn’t have a handle on its spending.

To that end, there are a bevy of strategies, software products and consultants flying under the monikers of spend management or supplier relationship management, which add up to the means by which companies can improve how they spend money.

They are purchasing systems that take a broad breadth examination of how an individual company makes the initial decision to make a purchase of any kind through to the finalization of a contract and compliance by both sides of the agreement.

As Don MacLennan, director of solutions marketing for SRM at SAP, says, “SRM [supplier relationship management] relates to an end-to-end process for source to pay. The intent is to manage 100 percent of spend, not just for services and materials. Employing such a system will allow a CEO to be more aware of, and able to manage a greater amount of the company’s expenditures.”

MacLennan adds that the process creates a fully documented and auditable workflow, which makes each step and the final financial implications visible to executives and others conducting analysis of procurement objectives.

In this end-to-end process, he says, a demand signal, such as the need to buy ad space for a marketing proposal, initiates the need for procurement of a material or service.

This is followed by a spend analysis, which examines such things as whether the company currently purchases the material or service (i.e. does another department currently have an advertising consultant on staff or retainer), what exactly does the company need (venues and market target for ads), and what would be some value added services the company would like to see (reduced per-ad rate for a multiple buy, enhanced production values, etc.).

Then the company would look into e-sourcing, which MacLennan says is electronically issuing requests for proposals and other notices to suppliers that a procurement process is underway. The company’s procurement department also uses this point to qualify suppliers and develop a list of qualified suppliers. If this is not the first time a particular material or service has been sought, past lists can be used to speed the process.

Developing qualified suppliers also leads to developing a defined framework for decision criteria, which means setting conditions to form the basis for pursuing a contract with a specific supplier, MacLennan says.

Once bids are received and a prospect is selected terms are negotiated and conditions for a contract are set.

While the above represents a general outline for how the process works, Christine Crandell, VP of marketing for Ariba, Inc., a spend management consultant, lays out what she describes as the “journey to spend management.”

“Becoming smart in terms of spend management takes more than just simply downloading some software,” she says. “It takes establishing a process with a variety of steps and metrics at each step.”

Don’t try and eat the elephant all in one bite, she advises, implementation should be a gradual process.

For example, select a pilot category such as sourcing, which could include an assessment of current spend such as what is bought and when; assess the supply market, who offers what; develop a sourcing strategy, where to buy while minimizing risk and costs; and identify suitable suppliers.

Once this one aspect of spend management is in place, see how it works, and examine the company’s successes to ensure they are sustainable. Because each step and process is documented, this auditable trail will allow for increased visibility on this initial aspect of supply.

Then move on to another category

Crandell suggests moving from sourcing to procurement by examining how the company can acquire the goods or services it needs at the best possible total cost of ownership, in the right quantity and quality, at the right time, and in the right place.

MIT’s Rosenfield puts an emphasis on “total cost” saying an examination of cost should include much more than the price per unit or services provided. “A company should look at the total cost of bringing products and materials in, such as inventory needs, duties and handling, transport, and basically all of the costs of the supply chain instead of just the price,” he says.

Crandell adds that the procurement solution could involve a simple relationship, which is nothing more than repeat purchasing, or a more complex one where a company seeks long-term contracts and partners. A procurement solution, she says, could even mean “co-destiny” suppliers that might fundamentally commit one organization to another.

She then says the loop is closed by implementing strategic management of processing payments.

MacLennan adds, “Closing the loop is how procurement is able to demonstrate the captured savings from implementation. This is where and when the systems advantages and impacts become visible to the company’s CEO and CFO because the savings can be seen on the bottom line. This visibility is enhanced by the documentation of each step because it allows an analysis against performance of previous years.”

Change Management

As the company moves forward in the phased in adoption process it is important to map out a course of change where each stage is related to the skills and new processes that will need to be developed and absorbed by the affected employees.

“You can bring software in quickly,” says Crandell, “but you must give time for human change.”

MacLennan agrees saying the main reason for a phased approach is, “It’s hard to turn on the spigot and say that an entire department will adopt this kind of change. This could be too much too fast.”

Therefore, while the systems are being implemented, there needs to be a phased in adoption strategy as well.

MacLennan says the first year of implementation is where the low-hanging fruit is picked, meaning that successes are relatively easy to come by. He suggests during this phase that adoption among procurement and other relevant employees should essentially be voluntary, and early adopters should be rewarded for showing the initiative to actively embrace the system.

The second year is where the company is building on its success and expanding the program. Templates have been developed for a limited number of processes from the first year in order to improve efficiency.

At this time employees should be made aware of the early successes and adoption should be required department-wide. To sweeten adoption incentives should be created based on measures such as use and performance. Peer example can also act as a motivator, says MacLennan.

The second year is also a good time to examine the personnel structure of the procurement department. In a 2006 white paper published by SAP titled “Achieving Sourcing Excellence: A Three Year Plan for Success” MacLennan and co-author Debbie Umbach write that, like at most organizations, there is likely a gap between the skills and vision for the system. It is therefore important to decide which employees to retain, which to invest in (i.e. train), and which to move out of the company.

In the third year, says MacLennan, the processes have become more defined and increasingly automated making SRM more of an aspect of the organization as opposed to a new system in need of acceptance. Adoption and implementation may not be fully completed, but by now managing spending is simply something the company does and, like anything else, hopes to build on.

Benefits and Value Drivers

While there are a number of benefits, MacLennan says one of the most important for a company is to create a highly competitive supplier environment, which he lists as a supplier profit reduction strategy. The means to achieve this is through a reverse auction where suppliers compete for the company’s business.

Such a strategy forces suppliers to compete in price and value added services. It also compels them to compete based on the framework established for decision criteria.

Rather than sticking with one tried-and-true supplier, a competitive environment opens the company to finding new suppliers or leveraging existing suppliers to provide better pricing with additional value.

A second value driver is increased efficiency in how the company spends. For example, says MacLennan, procurement departments are generally stretched fairly thin. Therefore, it is likely they are only touching 25 percent to 50 percent of the company’s spending on an annual basis.

Increasing efficiency will free up capacity to apply frameworks to new or little touched categories of spending.

This also could be described as “spend under management,” says MacLennan, where one category could go from a six week process to three or four weeks. These time savings, and cost savings, can be derived through templatizing the defined best practices.

“Why reinvent the wheel each time a new procurement is undertaken,” he says. “Use what you already know.”

Gaining a better understanding where the company’s resources are used can also bring about better and more efficient use of those resources. For example, a company can identify areas where a highly trained and experienced employee earning a higher wage, is doing work that a more junior employee could do.

Another example, says MacLennan could be replacing copper piping in areas where less expensive PVC piping could be used.

Savings can also be found in more creative and practical ways. MacLennan points to Toyota, which found that placing side doors on supply trucks made unloading them easier. Then there is another company that was receiving supplies of a particular gas via truck when all along there was a nearby pipeline it could have been tapping into.

Further, with enactment of the Sarbanes-Oxley Act, companies must now keep much more detailed records in order to comply with the act. Spend management systems by definition create clear, documented, and auditable documents and databases, which helps with compliance.

At the end of the day, says Crandell, leaders and those who succeed in business are those that take proactive steps to drive change. Adopting or updating the manner and means by which a company manages how it spends is one way to be proactive. “Look at the Fortune 500 list,” she says. “It is primarily composed of those companies that have brought about change rather than waited for it to happen to them.”