Winter 2011 Advisory Services. Building a business case for your global sourcing strategy Benefits of a data-driven approach

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1 Winter 2011 Advisory Services Building a business case for your global sourcing strategy Benefits of a data-driven approach

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3 Table of contents The heart of the matter 2 Building your business case on fact, not speculation An in-depth discussion 4 Developing the business case what does it take? What this means for your business 10 Achieving the estimated benefits of your global sourcing strategy or not! WInter 2011

4 The heart of the matter Building your business case on fact, not speculation

5 In the last decade, many companies have engaged in global sourcing strategies to achieve greater process efficiencies and higher financial returns. For the most part, those organizations that committed the time up front to build a detailed, fact-based business case to support those strategies were successful in realizing expected returns. Similar to other transformational initiatives, it isn t prudent to rush ahead and adopt a given strategy simply because you assume you will achieve similar results as others that have gone before you. Before moving forward into the design and implementation of an effective sourcing strategy, you must first prove that it will create value for your organization. That means constructing a robust business case one that incorporates company-specific information, leading practices, as well as unique, industry-specific factors. So where do you begin? Despite any time constraints or fears around a missed opportunity, there are no short cuts to developing a global sourcing business case. It is critical to do your homework asking yourselves the right questions, doing comprehensive data collection and performing rigorous scenario analysis. Only then will you be ready to move on to design and implementation without stumbling into the pitfalls that go hand-in-hand with a risky back-of-the-envelope business case approach. Given the organizational challenges that typically accompany gaining support for and executing a transformation of this nature, you do not want to have to reverse course mid-stream. As we see it, slow and steady wins the race. Those companies that establish a solid business case, carefully monitor it throughout design and implementation, and then continue to manage all the key components of the business case over time are the ones best positioned to realize expected paybacks within the typical timeframe most frequently two to three years. To help you shape the right business case for your company, this paper provides a look at both the benefits of a solid, fact-based business case and the risks inherent in taking shortcuts with a focus on the key components that will drive your sourcing investment decision. The heart of the matter 3

6 An in-depth discussion Developing the business case what does it take?

7 Given that global sourcing is a transformational vehicle to drive long-term structural cost reduction, it is vital that companies invest the time and effort up front to perform a comprehensive, fact-based evaluation of the current-state organization and perform rigorous due diligence on the global sourcing alternatives available to them. This will provide a real-world view of your sourcing options so that you can determine the right course of action for your company. What s more, building a robust, defensible business case will empower you to comprehensively evaluate your sourcing decision and progress prior to, during, and after implementation, build consensus within the organization, and monitor the key components of your business case over time. By contrast, some firms, fearful of missing a fleeting opportunity, make the mistake of taking a shortcut. They jump right into design and implementation after having performed a quick, back-of-the-envelope analysis only to find a year or two later that the benefits they expected are going unrealized. The value they rushed to seize has leaked away. We have seen too many organizations fall victim to this approach. So, what does a proper business case look like? What should you be doing to avoid the pitfalls? And, where do you begin? Signs of trouble that can arise when taking a back-of-the-envelope approach Be alert for these symptoms that signal potential problems down the road: The assumptions used in the business case are based on your gut or market averages, and not necessarily based on facts that may be unique to your organization. The business case does not consider at least three materially different alternative global sourcing approaches. The business case does not adequately address the one-time costs associated with global sourcing. As we see it, getting caught in these traps often results in a ripple effect that your organization will feel for several years. An in-depth discussion 5

8 Starting at square one Getting a handle on your objectives Before setting out to build a business case to support a sourcing strategy, you must first consider, and reach agreement on, the objective(s) driving the business decision. This might be cost savings, enhanced controls and compliance, process efficiency, business agility, or it could be some combination of these. In short, ask yourselves these questions: What does our organization want to achieve? Why? And when do we need to see results? These become your guideposts for the next several years. Understanding the components of a solid, datadriven business case The global sourcing business case should evaluate the opportunity based on the acceptable return the company has set forth; e.g., NPV or payback period. The payback should be expected to be achieved after a specific timeframe typically two to three years down the road, and then continue to deliver ongoing benefits to the business. With your business objectives top of mind, it s time to begin evaluating your options to gain clarity around which alternative is the best fit with your unique requirements and business objectives. Evaluating all your options Starting with a blank canvas Time and again, we have seen companies go astray by developing a business case grounded in unsubstantiated assumptions and what other companies have achieved without delving into the rigorous analysis associated with their unique circumstances. To avoid this trap, it is important to take a holistic view, considering all available global sourcing options with an open mind. These alternatives include shared services (on shore and off), outsourcing, joint ventures, and hybrid approaches. As we see it, it is essential that you carefully weigh all of these options, evaluating each of them independently, before moving ahead with any sourcing implementation. 6 Building a business case for your global sourcing strategy

9 There are no shortcuts! In our experience, when a global sourcing strategy does not yield expected results, it is usually due to: Basing your sourcing decision on data-driven variables and assumptions In order for a sourcing strategy to yield expected results, it must be built on a solid foundation of fact-based variables and assumptions such as labor arbitrage, one-time restructuring costs, ongoing governance costs, performance improvement, among others which you will have calculated and woven into your business case. Failing to weigh all the options making up your mind before starting the business case rather than starting with a blank canvas and populating the data as you go Overlooking key costs and benefits Not performing due diligence to validate the assumptions before proceeding with design and implementation Navigating through the complexities Building a solid business case is a complicated undertaking. As if this were not enough, the dynamic nature of global market conditions adds yet another level of complexity. The case study on page 11 tells a cautionary tale. If errors are not caught early on, companies may be forced to re-evaluate their options to recover from their missteps. Unfortunately, in most of these cases, by the time the problems come to light, the expected benefits will have already fallen by the wayside. As we see it, it is less costly to fully develop your business case initially than to change direction midway through implementation. Remaining vigilant Monitoring costs, performance and the transition timeline While creating a robust business case will mitigate many of the common pitfalls that go hand-in-hand with a back-of-the-envelope approach, your work is not done when the business case has received corporate approval. Understanding what is most important to the company and keeping a close eye on those objectives will help you to navigate through an implementation, with payback typically coming in year two or year three. However, an inability to identify and mitigate inadequate performance, and/or to stay within the cost guidelines and the transition framework set out in the business case, will prevent you from fully realizing your investment potential after the implementation. An in-depth discussion 7

10 Avoiding the erosion of expected returns There are many ways that you can erode global sourcing benefits, but here is a bird s-eye view of the most common errors that can have a dramatic impact on overall future returns: Cause Underestimated transition costs Underestimated future labor costs Inability to achieve process efficiencies Impact Increase in costs related to the transition (e.g., expanding timelines, redundant staff costs, bulging travel costs, overruns in program management costs, etc.) is one of the primary culprits in failures to achieve expected benefits. Higher-than forecasted labor costs due to underestimating employee benefits, overheads, local regulatory requirements, supervisory requirements, etc. can mean that the future state costs are not as dramatically different as initially expected. Process efficiencies often are estimated to reduce costs by 10 20% but a pure lift and shift approach can mean that very little process benefit is actually achieved. This is not to say that lift and shift is a suboptimal approach. Frequently, it makes the most sense since process redesign can be much more effective when headcount has been physically consolidated. That said, be realistic about when the process efficiencies will be achieved. To fully reap the potential benefits within the anticipated timeframe, it is essential to establish an effective methodology for evaluating and proactively managing the success of global sourcing over its entire life cycle. 8 Building a business case for your global sourcing strategy Monitoring the overall transition timeline Let s say that your business case stipulates a three-month transition timeframe, during which both the existing and new organizations will have redundant operations in order to minimize disruption to your business during the transition. Exceeding the established timeline will result in incremental costs being incurred, including costs to keep your existing staff as well as the newly established shared services or outsourcing environment operational. Managing with the business case in mind Another common pitfall occurs when the implementation of the strategy loses sight of the overall objectives. If the project is not managed with the objectives and assumptions of the business case in mind, the original assumptions are frequently forgotten. Keeping an eye on shifting market conditions. A lot can happen in two or three years. Since the implementation of a sourcing strategy is not an overnight process, shifts in global market conditions are very likely during the implementation process. Updating and tracking your business case on an ongoing basis will provide an accurate view of the success of the transformation. It is essential to capture these changes, and to adjust the business case should the market shift dramatically.

11 Monitoring a business case to realize results It takes ongoing governance Typically, the people who were responsible for determining assumptions and creating the global sourcing business case up front are no longer associated with it two years or three years later when the payback is expected. This lack of continuity is a common, but unavoidable, challenge that can sabotage your global sourcing benefits unless the hand-offs are carefully managed. Given that monitoring and managing all the elements of the business case over the transition period is what translates to realized results, care must be taken to ensure that there is no loss of visibility as staff move in and out of key roles associated with the global sourcing initiative. So how should these hand-offs be managed? It all comes down to governance. Leading-practice organizations establish a global sourcing office an entity that is responsible for fulllife-cycle management of global sourcing, including managing the development of the business case. Beginning with the assessment, this vigilance should extend all the way through design, implementation and ongoing monitoring of the existing sourcing, whether the route chosen is outsourcing, shared services or a hybrid model. Leveraging this governance framework ensures that regardless of changing personnel there will always be an eye on the ball. Over time, all the components of the business case will continue to be monitored over the long term, making it less likely that anything will fall through the cracks and ensuring that the business continues to adhere to the objectives and assumptions established in the business case. Long story short When faced with making a sourcing decision, whether new or expanded, it is vital to start with a blank canvas rather than bringing ungrounded assumptions into the process. Once you have populated your business case you will have a solid foundation on which to build a global sourcing strategy. But recognize that simply developing a solid business case is not the end game. Success means monitoring all the key components of the business case cost, performance, and transition timeline across the lifecyle. Only then will your organization be positioned to reap the benefits across the board not only fully realizing the returns you expect, but realizing them when you expect them. An in-depth discussion 9

12 What this means for your business Achieving the estimated benefits of your global sourcing strategy or not!

13 Investing the time and effort up front to do your homework before jumping into design and implementation will pay off in the long term. You may not be as quick off the mark as your brethren who bypass this all-important factfinding phase, but as we have seen time and again slow and steady wins the race. All too often, even small oversights can add up to big trouble. The case study below illustrates what can go wrong when a company opts to save time with a back-of-the-envelope approach. How taking a shortcut delayed and diluted a multinational organization s ROI When a global sourcing opportunity arose that required a quick investment decision, a multinational organization decided to take a shortcut. Rather than taking the time to build a strong, detailed, fact-based business case to support the sourcing strategy, they opted for a backof-the-envelope approach, constructed of unsubstantiated assumptions around benefits and costs. Based on the size of the business, the corporate culture and the functions that the organization was considering for consolidation into a shared service center, they estimated that their annual savings would be $27 million by the end of year two, and would then increase over time. Problems came to light when the organization embarked on the implementation of the strategy. It became evident that some of the critical assumptions used in the business case had never been validated, while some of the not-soobvious costs had been overlooked. When these assumptions were examined in a detailed manner, the business case was rebuilt to show a savings of approximately $15 million annually. The organization had overestimated the savings by more than $120 million over a 10-year period! To make matters worse, once the revised business case was accepted, the company still decided to move forward with the transition but without aligning that initiative with the revised assumptions. Just a few months after receiving approval to move forward with the implementation of the sourcing strategy, the organization began hiring the first wave of employees to staff the newly established captive shared services center. Then, rather than adhering to the assumed labor costs from the business case the organization hired employees at salaries well above the market rate assumed in the business case. This increase in costs was not recognized immediately; it surfaced only when one of the company executives asked how the financial benefits compared to the original business case estimates. By that time, it was all too evident that the higher salaries would result in a significant reduction in future benefits. What this means for your business 11

14 In our view, that says it all As you set out to execute an effective global sourcing strategy one designed to fit your company s unique needs and circumstances and to succeed in delivering expected returns within the expected timeframe you must first build a solid, fact-based business case to support that strategy. It is vital that you do not bypass any of these important steps on the path to success: Make sure you understand and document all of your key objectives. Start your business case with a blank canvas, not some preconceived notions based on your gut. Take a holistic view, evaluating all of your realistic global sourcing options. Identify detailed costs and benefits for each alternative not just the obvious ones to determine which will favor and which will hinder a particular global sourcing alternative Build your business case expecting to be challenged internally. It will form the foundation for building organizational consensus and oversight. All of these action steps add up to form a real-world picture of your payback period. There is, of course, no such thing as a guaranteed investment, but doing a proper evaluation based on comprehensive data stemming from rigorous due diligence and market intelligence, will provide a clear and accurate picture of what your return will likely be and when you can expect it. Mission accomplished! What now? Once you ve done your homework and successfully completed your business case, it s time to begin designing and implementing the strategy, but it s not time to file away the business case under Job Well Done. We have seen too many organizations shelve the business case and forget about it as they move forward, only to begin seeing value leakage in terms of the cost, performance and transition timeline. Failing to stick to the assumptions in the business case can take a dramatic toll, quickly adding up to delayed and diluted benefits. Following these recommendations will help you to avoid the erosion of expected returns: Always manage with the global sourcing objectives in mind monitor the business case throughout the implementation. Monitor the transition timeline on an ongoing basis to avoid redundant costs that extend beyond the timeframe stipulated in the business case. Establish a methodology for tracking, managing and modifying the business case going forward. Keep an eye on shifting market conditions to avoid surprises and adjust the business case as necessary. The bottom line: Those companies that establish a solid business case and carefully manage it before, during and after strategy development monitoring cost, performance and transition timeline over time are the ones best positioned to reap the benefits, fully realizing expected returns within the designated time period. 12 Building a business case for your global sourcing strategy

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16 For a deeper conversation around building a fact-based business case, please contact: Philip Garland PricewaterhouseCoopers philip.a.garland@us.pwc.com Charles Aird PricewaterhouseCoopers charles.l.aird@us.pwc.com Derek Sappenfield PricewaterhouseCoopers derek.sappenfield@us.pwc.com Bejoy Devasia PricewaterhouseCoopers bejoy.devasia@us.pwc.com 2011 PwC. All rights reserved. PwC and PwC US refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. NY