Spend Management Transformation Through Ariba Category Strategy. May 2005

Transcription

1 Spend Management Transformation Through Ariba Category Strategy May 2005

2 Table of Contents Executive Summary Business Challenges Establishing Spend Management Transformation Goals Main Challenge to Spend Management is the Functional Approach Category Strategy to Spend Management Achieving Combined Benefits of Process Efficiency & Effectiveness Organizational Impact of Category Strategy Spend Management Transformation Savings Opportunity and Levers Diagnostic Methodology & Process How Ariba Addresses These Challenges How Customers Have Benefited

3 Executive Summary The Ariba Category Strategy methodology provides the framework to enable a marketing leading approach to developing and executing a spend management transformation program. It enables the creation, implementation, and best-in-class execution to end-to-end spend management processes across the desired amount of spend while minimizing the amount of internal disruption. The spend management marketplace has evolved over time from a simple reverse auction and transactional procurement paradigm to an end-to-end, closed-loop spend management paradigm. However, a "onesize-fits-all" approach to this process works well only for very simple categories and can limit achievable savings, manageable spend, and business unit adoption. Ariba's Category Strategy approach groups categories along common market and process characteristics to drive maximum realized savings and stakeholder adoption through increased speed, sustainability and coverage. Ariba's Category Strategy approach allows companies to go beyond software and services to develop an integrated and phased category approach to sourcing and procure-to-pay process enablement of their strategic spend categories. The category strategy approach combines together historical experience, savings benchmarks and spend management best practices to deliver both quantitative and qualitative results. Business Challenges Today, most companies understand the need to fully manage all of their spend, but they face significant challenges in trying to do so. First among these is the recognition that effective spend management requires a comprehensive process to identify savings opportunities across all categories of spend. Once these opportunities are identified the next step requires their conversion into contract-level savings through strategic sourcing, procure-to-pay (P2P) processes through contract compliance, and invoice capture and reconciliation. The key challenge for any procurement organization is to implement spend management across all of their unique spend categories while at the same time leveraging common tools and processes to achieve economies of scale. The figure below shows the process steps involved in the spend management process and the typical functions involved in each process step. Identify Opportunity This step involves analyzing spend within each category, across business units and suppliers and identifying the areas that offer the best opportunity to realize savings. Opportunity assessment may be triggered by contract expiration, changes in business or legislation, client needs, supplier relationships, market price, and similar factors. Copyright 2005 Ariba, Inc. All rights reserved. 3

4 Develop Strategy This step involves determining the most effective way to handle supplier engagement and negotiation for each spend category by evaluating various criteria. These criteria are primarily related to the value of the item being purchased to the business usually measured by dollar volume or similar metrics as well as the item's sourcing complexity due to its uniqueness, supply-chain dependencies, price volatility, or other considerations. Source and Negotiate The sourcing negotiation step comprises all the activities required to plan and negotiate agreements with suppliers who can provide the goods and services companies must utilize. This includes analyzing relevant information and effectively engaging and managing internal stakeholders before, during, and after sourcing events. Contract and Procure This step involves all the processes needed to procure goods and services, negotiate and create contracts, and ensure contract compliance. This includes taking the negotiated contract and establishing it in a form that can be searched, managed, and leveraged in actual procurement with the ability to measure and sometimes mandate compliance (i.e., permitting certain goods and services to be bought only through an established contract). Invoice and Pay The invoice and pay phase involves all the processes and communication required between the buyer's accounts payable team, the supplier's accounts receivable team, and the banking institution for fund transfer. This includes receiving and validating electronic invoices from suppliers based on the buyer's invoice acceptance rules. Each invoice is then matched to the original purchase order and compared against receivables as well as contract pricing and terms. Finally, invoices are reviewed and approved for payment. Monitor and Manage The monitor phase of the process involves using both quantitative and qualitative measures to discern whether all spend and performance goals are being met and negotiated savings realized. Companies must consistently and accurately track their spend, processes, and resources to measure the effectiveness of their efforts and discern whether negotiated savings are actually being realized. Spend management is a journey rather than a single event. It requires an ongoing process to effectively manage all of a company's unique spend categories and to increase realized savings by continuing to increase the rate and breadth of spend enabled across the business processes. 4 Copyright 2005 Ariba, Inc. All rights reserved.

5 Establishing Spend Management Transformation Goals The role of procurement within a company continues to become more strategic than ever before. A recent survey reported that 70 percent of procurement directors now report to a company's management committee. This is up 20 percent over Companies are increasingly mandating that procurement lead in bringing spend under control. In order to reach their spend management goals, these new procurement leaders must go beyond simply managing sourcing and procurement functions in a traditional sense. They must also take on a holistic and comprehensive management of their company's external cost and supplier base. A company's successful spend management transformation requires the transformation of the traditional company operational paradigm into one that focuses on spend management. Successful spend management leaders understand that such a transformation cannot occur solely through use of the latest software or through process reengineering and change management. Spend management transformation goals are strengthened when they are linked to corporate goals to retain a strategic focus and visibility within the company. The figure below shows the linkage between corporate goals and transformation goals: Main Challenge to Spend Management is the Functional Approach Companies can be successful in measuring the effectiveness of their spend management efforts by two primary metrics; 1) scope of spend under management, and 2) the savings and benefits achieved. Company procurement organizations typically adopt a functional strategy towards their spend management activities. They solve each spend category process step in a silo and adopt a fragmented solution set for each process step. As an example, it is quite common for companies to use a reverse auction solution for sourcing, a separate solution for procurement, use an ERP system for invoicing and payment and use back-end controls for enforcing policies for every spend category. Copyright 2005 Ariba, Inc. All rights reserved. 5

6 The functional strategy approach to spend management results in a number of problems. First, the functional silos are not linked together either from a process perspective or from an organization perspective. For example a reverse auctions approach to sourcing only effectively supports a small portion of spend, possibly 20 to 30 percent in a typical company and is not suited for complex categories of spend that necessitate strategic sourcing, knowledge sharing and process standardization. Company procurement organizations typically adopt a one-size-fits-all catalog-based approach to their purchasing process. Yet for most companies this meets the needs of only about four to five percent of their spend. The remaining ~95 percent of spend within a typical company is complex and does not lend itself to the catalog approach. As a result, many companies procurement organizations continue to manage very little of their spend using automated catalog-enabled processes. Most ERP-like invoicing and payment solutions execute invoice-po reconciliation at the aggregate invoice level and very rarely enforce contracts which are at the line item level. Further, this allows collecting data only at Level 1 (aggregate invoice level) and not at Level 3 (i.e. line item level). Back-end controls are usually not effective in enforcing best-practice purchasing policies, especially if data is collected at Level 1 as described above. The figure below illustrates the example of the standard functional approach that companies typically practice in their spend management. Each process step in managing each of their strategic spend categories is in a silo and a one-size-fits-all approach is utilized. The problems described above typically result in very little spend being managed by procurement organizations from sourcing to procurement through put. As a result most companies obtained very little in savings from their functional approach to spend management. The savings can be as low as three to four percent of the total spend amount being managed. 6 Copyright 2005 Ariba, Inc. All rights reserved.

7 In conclusion, the typical functional approach to spend management is easy for companies to introduce and is seemingly efficient, given that procurement organizations adopt one process independent of spend category, but it is not effective in achieving Spend Management transformation goals as exemplified in the figure below. Category Strategy to Spend Management The Ariba Category Strategy approach takes an end-to-end category approach to spend management. This methodology specifically focuses on establishing strong links between each process step in procuring all of a company's strategic spend categories. The Ariba Category Strategy implements a best-practices approach to a spend management process step by step and category by category. This includes the following: Identify Opportunity Benchmark and continuously improve contracts using insights culled from Level 3 data line item level data specific to each category. Develop Strategy Develop an effective way to handle supplier engagement and negotiation for each spend category by evaluating various criteria. Source and Negotiate Implement a strategic sourcing process that encompasses all categories of spend, and facilitates knowledge sharing and process standardization across the company. Implement Contract and Execute For every purchasing transaction, enforce contracts and purchasing policies, collaborate with suppliers in specification and price definition if need be. Invoice and Pay Reconcile invoices with POs and contracts at the line item level rather than just as the aggregate level. Copyright 2005 Ariba, Inc. All rights reserved. 7

8 Monitor and Manage Collect Level 3 data and measure qualitative and quantitative supplier performance. The Ariba Category Strategy approach facilitates the effective management of ~100% of spend from sourcing to procurement through put and also provides much higher savings ~12-15%, as shown below. The approach analysis significantly enhances spend management effectiveness. The successful implementation includes the development of strong links between each process step, i.e. a common tool set or complex integrations between disparate tool sets as well as the incorporation of category-specific requirements at each process step as depicted below: The typical company functional approach to spend management uses a one-size-fits-all process to spend management across all spend categories. This is simple and easy, but it only works for three to four percent savings on a small portion of spend; i.e. it is efficient but not effective. On the other hand, the category strategy approach can effectively manage a company's strategic spend, but it seems to render spend management too complex; especially given that a typical enterprise has categories; i.e. it is effective but not efficient as exemplified below: This dilemma generates a significant question of how to adopt the category strategy approach to spend management and make it efficient, simple and scalable, as well as effective at the same time. 8 Copyright 2005 Ariba, Inc. All rights reserved.

9 Achieving Combined Benefits of Process Efficiency and Effectiveness The resolution to achieving the combined benefits of process efficiency and effectiveness through the category strategy approach to spend management is to group categories along common characteristics. This is enabled through finding the middle ground between a one-size-fits-all functional and fragmented process on the one hand, and the unique end-to-end processes as a result of the ideal category strategy approach on the other. This middle ground enable companies to adopt category-specific best practices that are effective while at the same time reducing the number of unique processes to be scaleable for each category in order to be efficient. In order to reach to middle ground, categories need to align along three main dimensions: Category Market Groups Category market groups are comprised of Electronics, IT, Metals, Paper & Packaging, Plastics, Raw Materials, Services and Transportation; with sub-groups under each of these main groups. All categories within a given market group could be accommodated with a common strategic sourcing/reverse auction strategy with minor variations at a category level. Salient characteristics that drive market groups are common supply bases, supply bases, business impacts, benchmarks and savings history, sourcing experience and spend characteristics. Category P2P Process Groups Category P2P process groups, on the other hand, are comprised of SKU-based categories, Travel, Labor-Based categories, Customized/Complex Specs, Logistics and 3rd Party Services; with sub-groups under each of these main groups. All categories within a given P2P process group could be accommodated with a single common P2P process with minor variations at a category level. Stakeholders These groups within a procurement organization need to be aligned along the stakeholders (business units, category owners) they serve to facilitate best-in-class customer service and gather non-procurement related business requirements imposed by the stakeholders. However, these groups do not facilitate operational scale since they do not look for common process characteristics across stakeholder groups to facilitate efficiency and effectiveness. This is the reason why typically procurement organizations have the right intent, but struggle in execution. The alignment of these three groups facilitates the following as illustrated below: Copyright 2005 Ariba, Inc. All rights reserved. 9

10 Organizational Impact of Category Strategy A company's procurement organization is typically set up for day-to-day operations and not for spend management transformation. Best-in-class procurement organizations focus on shifting resources from tactical operational types to those more suited for spend management transformation, including the following main groups: Sourcing Operations: Responsible for sourcing categories and negotiating contracts P2P Process Operations: Responsible for managing the procure-to-pay process for all categories to ensure compliance with contracts and purchasing policies Stakeholder Relationship Management: Responsible for providing customer care to spend owners Technical Operations: Responsible for tool development and implementation, customer support and supplier relationship management Strategic Consulting: Responsible for strategic planning and change management (which is key for promoting stakeholder adoption) Organizational efficiency and effectiveness necessitate alignment of sourcing operations, P2P process operations and stakeholder relationship management groups along common market dynamics, P2P processes and stakeholders respectively. The category strategy approach to spend management will have a big positive impact on organizational design. The figure below shows the key skill sets needed in sourcing operations, P2P process operations, stakeholder relationship management, technical operations and strategic consulting groups. Spend managers are critical to bringing all the three groups together. They would be responsible for pushing specific categories through various operational groups to ensure continuous throughput. 10 Copyright 2005 Ariba, Inc. All rights reserved.

11 Spend Management Transformation Savings Opportunity and Levers A spend management transformation initiative leveraging Ariba's Category Strategy methodology capabilities can provide 12 to 15 percent spend-related savings and 30 to 40 percent procurement costrelated savings across entire spend and cost bases respectively; the actual value varying by category and state of current customer performance. These savings are achievable and also need to be measured at the "realized" transaction level that hits the bottom line, and not savings identified during a sourcing initiative. Savings can be achieved through the following main components: Better Contract Pricing An eight to ten percent reduction can be achieved on contracted unit prices through more effective sourcing through category-specific sourcing strategies along category market groups, (i.e. sourcing strategies, price and spec schema, benchmarks and market knowledge (pre-qualified supplier bases), proven online reverse auction technology to increase market liquidity, a standardized strategic sourcing process encompassing RFP document collaboration, reverse auctions, competitive bid analysis, knowledge sharing and savings tracking. This can be deployed across all category negotiations managers both at the CPO and business unit levels. Sustainable Contract Savings Companies have difficulty capturing all their contracted savings throughout the purchasing transaction due to contract non-compliance, with typical erosion levels at 20 to 40 percent of sourced savings. But, close to 100 percent contract compliance can be achieved (i.e. 4-6% savings at the transactional level) through the implementation of an end-to-end procure-to-pay platform to handle each step of the P2P process: budgeting, requisitioning, supplier-buyer collaboration, contract enforcement, invoicing and invoice-po-fulfillment reconciliation. The deployment of P2P processes aligned along category P2P process groups that promote contract term enforcement and reconciliation to minimize rate non-compliance, enforce spec-related business rules and facilitation of supplier-buyer collaboration on scope definition, and minimize spec non-compliance and user adoption through tailored processes, to minimize vendor non-compliance all help to enable contract savings. Improvement on Contract Savings Contracted savings can be improved by around four to five percent at the purchasing transaction level through the deployment of P2P processes aligned along category P2P process groups that facilitate automated spot buying wherever feasible (e.g. bulk buys, spot buy for every consulting purchase, oneoffs). The implementation of category-specific business rules for demand management (e.g. travel, PCs) and the availability of superior information to ensure better management of customer demand and identifying opportunities to optimize purchasing patterns. Reduction in Procurement Costs Operational costs can be reduced by 30 to 40 percent through the automation of P2P processes across all categories to facilitate reduction of personnel involved in buying, requisitioning and disbursement; and also reduce intangible "non-people" related paper transaction costs. The setting a standardized strategic sourcing process can also reduce staffing levels needed in category negotiations operations resulting in reduction in procurement costs. Copyright 2005 Ariba, Inc. All rights reserved. 11

12 Continuous Improved Savings One to two percent savings could be achieved in the "out" years on an annual basis by continuously re-sourcing categories to exploit dynamic markets and match contracts with changing internal purchasing patterns. The monitoring of category-specific Level 3 transaction data (price and quantities), the development of an information backbone to drive sourcing decisions, and the ongoing measurement of supplier performance can all be used as levers for further sourcing negotiations. Extend Savings to Wider Spend Base Given the vast number of categories that make up a typical spend base, companies have difficulty in extending the savings methodologies and processes to all categories. This can be accomplished as described above by grouping categories along common spend management methodologies and processes, having dedicated resources on staff for each category group, and building tools and processes aligned along these category P2P process groups. Diagnostic Methodology & Process Ariba's Category Strategy methodology enables companies to develop a strategic plan around category strategies and guide the ensuing delivery cycle. The category strategy contains the following primary steps as illustrated below. Ariba has developed a proprietary diagnostic methodology and associated Excel-based model to help clients develop a strategic plan around. The model leverages and incorporates our sourcing and procurementrelated benchmarks, spend management best practices around category strategy, and our past client experience. The diagnostics and associated model is executed around a combination and quantitative and qualitative assessments. It has the following main steps as illustrated in the diagram below: 12 Copyright 2005 Ariba, Inc. All rights reserved.

13 How Ariba Addresses These Challenges The Ariba Category Strategy diagnostic methodology helps identify process and organizational gaps needed to execute a spend management transformation. Ariba can help fill these gaps through; 1) Enterprise and integrated services; 2) Strategic consulting services; and 3) Best-in-class software tools. Enterprise and Integrated Services Our enterprise and integrated services across all skill sets fill a company's gaps both in terms of resources and competencies. This forms our ability for execute spend management transformation for all any company. Strategic Consulting Services Our strategic consulting organization can provide consulting services for developing a detailed strategic/operations plan continuing from where the diagnostics leaves off and effectuating change management in your organization. Best-in-Class Software Tools Our software tools provide best-in-class functionalities that accommodate requirements of all market groups and P2P process groups (i.e. ~100% of your spend) on a single end-to-end integrated platform. These software tools fill the process gaps identified by our diagnostics and help your organization to achieve self-sufficiency over time through process automation Copyright 2005 Ariba, Inc. All rights reserved. 13

14 How Customers Have Benefited Ariba's Category Strategy methodology to spend management is unique in the marketplace, providing opportunities for companies to successfully begin the journey for Spend Management transformation. This approach has had increasing success over the last 12 months. It has been successfully applied in full range of companies from large multinationals, major airlines, oil and gas, and retailers. Providing customer care for companies who have had limited success with a traditional "onesize-fits-all" approach to spend management Structuring creative savings-based strategic partnerships with customers that extend into a spend management lifecycle Developing plans for successfully executing spend management transformation programs Helping customers plan for a major spend management initiative through strategic planning, process design and change management Developing a bottom-up business case to facilitate internal customer funding, especially when it is predicated on demonstration of a strong ROI 14 Copyright 2005 Ariba, Inc. All rights reserved.