2010 AN EVEREST RESEARCH INSTITUTE WHITEPAPER Get More From Your Non-Core Spend Realizing Value from Procurement Outsourcing (PO) Katrina Menzigian, Vice President, BPO Research Saurabh Gupta, Research Director, FAO and PO Copyright 2010, Everest Global, Inc. All rights reserved. E v e r e s t R e s e a r c h I n s t i t u t e w w w. e v e r e s t r e s e a r c h i n s t i t u t e. c o m ERI-2010-1-W-0397
Introduction In the current economic climate where achieving top-line growth is challenging, organizations are increasingly thinking about creating bottomline impact by optimizing the procurement function. While most organizations have developed in-house expertise in managing the core procurement spend, the non-core spend management continues to be sub-optimal. According to Everest estimates, even a 5-10% reduction on this non-core spend can translate into a 1-3% bottom-line impact significant under any situation, let alone the current economic challenges that organizations across the globe are facing. According to Everest analysis, spending on PO services has been growing at 20%+ annually. and today PO service providers are managing more than US$140 billion of spend on behalf of their clients Yet, effective management of non-core procurement spend is a vastly underutilized optimization lever, primarily because of two reasons: 1. Limited access to deep expertise across a breadth of categories and lack of supply market intelligence make it difficult to source effectively 2. Lack of integrated infrastructure and operational discipline makes it difficult to sustain or realize sourcing savings Procurement Outsourcing (PO) emerged as a solution to help companies improve management of non-core spend and capture significant savings which has generated increased interest and exploration. According to Everest analysis, spending on PO services has been growing at 20%+ annually. Today PO service providers manage more than US$140 billion of spend on behalf of their clients. The business case for PO is attractive 5X to 10X ROI with a payback of around 12 months. But to ensure that a company realizes the targeted PO savings, it is important that all stakeholders understand what is required in making a PO initiative successful. The purpose of this whitepaper is to educate stakeholders and help them ensure that they realize the full value from their PO initiative.the paper discusses: The power of non-core procurement spend in creating bottom-line impact Challenges companies face in effectively managing non-core spend Leveraging PO as a business optimization lever to improve management of non-core spend Key considerations for a PO sourcing initiative E v e r e s t R e s e a r c h I n s t i t u t e w w w. e v e r e s t r e s e a r c h i n s t i t u t e. c o m 2
Why Do Organizations Need to Optimize Non-Core Spend? Spending on external goods and services can equal 40-55% of a company s total revenues In the current economic climate where achieving top-line growth is challenging, organizations are increasingly thinking about creating bottomline impact. One of the significant levers to achieve this impact is optimization of how and what a company buys or a company s spend management practices. Spending on external goods and services can equal 40-55% of the total revenues for a company and improving control of this cost base can create a significant savings opportunity. We define spend management across two dimensions: Process dimension. This includes the entire Source-to-Pay (S2P) process as described in Exhibit 1 E X H I B I T 1 The Source-to-Pay (S2P) process Source-to-Contract (S2C) Source-to-Pay (S2P) Procure-to-Pay (P2P) Source: Everest Research Institute Vendor management Performance/compliance management Spend data management Strategic sourcing Day-to-day purchasing Accounts Payable Spend category dimension. We can further classify this into core and noncore spend, as follows: Core spend categories refer to the goods and services required to manufacture/deliver the final product/service (e.g., raw materials, employee salaries, etc.) Non-core spend categories are the non-production goods and services that are NOT required to manufacture/deliver the final product/service but ARE required to operate the organization (e.g., facilities, office supplies, travel and logistics, contract labor, marketing/sales-related spend, IT/telecom, MRO, etc.) A 5-10% reduction on non-core spend can translate into a 1-3% bottom-line impact Most organizations have developed in-house expertise in managing their core spend. However, non-core spend management continues to be sub-optimal. According to Everest estimates, non-core spend represents nearly 40% of the overall spend and is therefore a significant cost base. Even a 5-10% reduction can translate into a 1-3% bottom-line impact significant under any situation, let alone the current economic challenges that organizations across the globe are facing. Yet, effective management of non-core spend is a vastly under-utilized optimization lever, primarily because of two reasons: E v e r e s t R e s e a r c h I n s t i t u t e w w w. e v e r e s t r e s e a r c h i n s t i t u t e. c o m 3
1. Limited access to deep expertise across a breadth of categories and lack of supply market intelligence make it difficult to effectively source. Non-core spend is often fragmented and decentralized. Moreover, a large part of the spend is also not directly under procurement control. So finding, developing, and retaining talent with the necessary category expertise across all the different categories of non-core spend is challenging and costly. 2. Lack of integrated infrastructure and operational discipline makes it difficult to sustain or realize sourcing savings. The procurement function continues to be an under-invested area when it comes to process standardization and technology, resulting in less-than-optimal business outcomes and functionality gaps. Even if an organization makes technology investments and successfully conducts sourcing events for noncore categories (through staff augmentation, leveraging sourcing consultants, etc.), realizing the savings to the bottom-line is a huge challenge. Let us try and understand why. Minimizing Savings Leakage A small leak can sink a great ship. Benjamin Franklin One of the biggest challenges in effective spend management is minimizing savings leakage ensuring that savings flow to the bottom line and/or ensuring better utilization of funds for more projects to be completed (refer to Exhibit 2). E X H I B I T 2 ILLUSTRATIVE Savings leakage Source: Everest Research Institute Indexed annualized spend Actual savings Spend baseline Potential savings Actual savings lesser than the potential due to leakage Savings leakage. Spend creep occurs because of inability to track vendor performance and user compliance Strategic sourcing Procurement operations Time E v e r e s t R e s e a r c h I n s t i t u t e w w w. e v e r e s t r e s e a r c h i n s t i t u t e. c o m 4
The key reasons behind the savings leakage include: One of the biggest challenges is managing the savings leakage due to maverick spending, budgetary & demand issues, lack of vendor compliance and operational issues Maverick spending. Non-core spend is typically fragmented and decentralized with large numbers of individual buyers increasing the opportunity for leakage. Well-intentioned individuals may not know a company s buying policies or the preferred vendor. Other individuals may make conscious decisions to circumvent corporate policy and preferred vendors. Without the ability to track and quantify the impact of noncompliance, companies struggle to change individual buying behavior. Budgetary and demand issues. Within an individual department budget, savings from one category may be spent on another category as long as the overall budget is managed. Moreover, the demand over time can also fluctuate. Lack of vendor 1 compliance. Process issues as well as lack of vendor enablement with a buyer s procurement systems can result in low levels of external compliance (i.e., vendors providing goods or services that do not adhere to contracted prices, specifications and/or quality). Operational issues. Duplicate payments, invoice errors, incorrect data entry, failure to take appropriate discounts, credits, pricing errors, rebates, and allowances, among other issues result in savings leakage. What options does an organization have to optimize this non-core spend and realize the bottom-line impact that it promises? There are two traditional options: Staff augmentation and/or sourcing consulting. Hiring expertise on a contractual/temporary basis can yield sourcing savings but does not guarantee sustainability of savings and bottom-line impact. Technology transformation. Effective implementation of technology can help process optimization but is often cost-prohibitive and effort-intensive. Plus, technology is an enabler and not the driver of savings. A third option is now gaining traction Procurement Outsourcing (PO). Let us understand and evaluate this option of leveraging PO to optimize non-core spend in further detail. 1 Vendor of goods and services E v e r e s t R e s e a r c h I n s t i t u t e w w w. e v e r e s t r e s e a r c h i n s t i t u t e. c o m 5
PO as a Business-Optimization Lever Outsourcing procurement has generated a lot of interest in recent times. According to Everest analysis, spending on PO services has been growing at 20%+ annually and today PO service providers manage more than US$140 billion of spend on behalf of their clients. What exactly is PO? Everest defines PO as the transfer of ownership of some or all procurement processes or functions to a supplier. Beyond the process scope, the category scope plays an important role in defining PO. It is typically restricted to non-core procurement spend for the sourcing-related process. However, a company can also outsource procurement spend on several core categories when the process scope focuses on the more transactional aspect of procurement or the Procure-to-Pay (P2P) process. Everest benchmarking of PO contracts reveals that, on average, organizations that have outsourced procurement realized 5-8% savings on their outsourced procurement spend. This translates into a 5X to 10X ROI with a payback of around 12 months making PO an attractive business case. PO Case Study: Funding market growth and expansion Buyer details: Industry: Services Size: US$8 billion Operations: Global Situation: Bought by private equity and taken public Significant opportunity to penetrate online and leisure markets New CEO tasked with redesigning company to enter new product markets Aggressively pursued solutions to lower cost structure across all business units to compete in new markets Business dramatically contracted during 2008/2009 recession Response: Launched global strategic initiative to reengineer processes, reorganize into cross functional, centers of expertise and outsource non-core processes Outsourced US$1.4 billion of non-core spend to deliver US$385 million in recurring realized savings Expanded outsourcing relationship to address strategic goods and services and drive additional cost reductions Contract details: Selected ICG Commerce December 2007 Process scope: Source to Pay Category scope: Marketing, professional services, IT, telecom, logistics, MRO, Direct Materials Geographic scope: North America, Europe and Asia Delivery locations: North America, Europe and Asia Technology: Existing technologies and provider proprietary solutions Results and program highlights: Deployed centralized procurement centers of expertise in Europe and North America Redesigned preventative maintenance solution for 2500 locations reducing downtime and costs Worked with AP to reengineer source-topay process optimizing cash and reducing discretionary spending Tailored program scope to meet urgent cost reduction goals On target to meet savings goals despite significant change in economic environment Procurement outsourcing enables us to drive material savings across our non-core spend over the next five years while increasing our focus on our direct expenses and other key supply chain opportunities. Executive Vice President, Global Supply Chain E v e r e s t R e s e a r c h I n s t i t u t e w w w. e v e r e s t r e s e a r c h i n s t i t u t e. c o m 6
But before building the business case for PO, it is extremely important to understand that PO is different from other BPO initiatives, as the same rules often do not apply here. The most basic yet critical difference is the cost base that PO addresses. The primary cost base in PO is the dollar value of the spend itself and not the operational cost of the function that most other BPO initiatives address. The cost of running procurement operations is miniscule when compared to the addressable procurement spend (as illustrated in Exhibit 3). In fact, the operational/functional cost for procurement is significantly lower than other BPO initiatives, given that procurement is not a resource-intensive function and the extent of offshoring is also lower. E X H I B I T 3 PO-addressable cost-base as a percentage of revenues 100% HIGH-LEVEL ESTIMATES Source: Everest Research Institute 45-60% 1-20% Purchasing expense as a percentage of revenue (0.15-0.55%) 20-30% 4-6% 5-15% Total revenue Total spend Spend not under procurement control Core procurement spend Nonoutsourcable non-core spend Outsourceaddressable non-core spend Includes non-core spend categories that are not outsourced due to perceived strategic nature (e.g., HR benefits, media, real estate leases). Varies by buyer organization Includes outsourced addressable non-core spend categories such as mail and supplies, advertising and promotion, IT, telecom, facilities, professional services, MRO, and HR services The different and unique cost baseline for PO has several key implications for the business case, as follows: Overall spend reduction, unit-cost reduction, and compliance are the biggest sources of value creation; arbitrage is not a key driver of savings. The large cost impact implies high savings potential but also renders the process challenging. By reducing enterprise-wide procurement spend as opposed to just the process cost, PO impacts a large number of stakeholders both internal (includes finance, procurement, and individual departments) and external (vendors for procured goods and services). Moreover, it is difficult for buyers and suppliers to baseline costs, as preoutsourcing spend visibility is often elusive because lack of standardized cost baselines, savings methodologies, clean data, and analytical tools. The range of savings is highly dependent on several organizational factors. The volume of outsourced spend, nature of outsourced categories, existing maturity of systems, process complexity, and appetite for change, among others. E v e r e s t R e s e a r c h I n s t i t u t e w w w. e v e r e s t r e s e a r c h i n s t i t u t e. c o m 7
The business case for PO is clearly strong and attractive. But does it address the key issue of sustainability and realization of savings? Peel the onion and there are several unanswered questions including: What costs do you baseline category level or component level, absolute spend, or indexed spend? What do you mean by savings identified, contracted, or realized? Who is responsible for what? How do you measure actual savings versus targeted savings? These questions are important, and the buyer should tackle them as early as possible to ensure that the PO initiative realizes the promises in the business case. Realizing Savings Starts with Defining Savings We can easily define savings on materials and goods, but it becomes complex for services like marketing, advertising, and unique purchases like software. The first issue in defining savings is identifying what to measure. For example, in 2009 the airlines aggressively reduced capacity to compensate for high fuel costs. While advanced ticket prices dropped, the reduced capacity increased costs for business travelers who often book on short notice. In one market, same-week coach travel was up to US$726 more expensive if the only availability was business or first class. Companies that only measured costs by class of travel would not have seen true impact in total costs - in some markets as much as a 26% increase. Adding to the complexity of defining savings, different stakeholders have different objectives, which further complicate the business dynamics of defining savings. Not having an agreed-upon savings definition between the buyer and supplier can lead to unrealistic expectations and can become a major point of discord between the two parties. The second major issue in defining savings is when to take credit for savings. Let us try to understand the different ways in which one can define savings (see Exhibit 4), when savings are credited, and how the supplier accountability and process coverage will differ based on how they are defined. E X H I B I T 4 Variants of PO savings definition Source-to-Pay (S2P) Source-to-Contract (S2C) Procure-to-Pay (P2P) Vendor management Performance/compliance management Source: Everest Research Institute Spend data management Strategic sourcing Day-to-day purchasing Accounts Payable Scope variant 1 Identified savings Scope variant 2 Contracted savings Scope variant 3 Realized savings E v e r e s t R e s e a r c h I n s t i t u t e w w w. e v e r e s t r e s e a r c h i n s t i t u t e. c o m 8
Identified savings. This is the savings potential based on analysis of the existing spend base leveraging the supplier s benchmarks, industry best practices, market intelligence, and category experience. Typified by consulting-type sourcing engagements, the supplier would identify possible category savings and recommend actions that the parties should take to realize those savings. However, the supplier is not responsible for actually delivering those savings. The typical pricing structure for such contracts is effort based or project based pricing such as time and materials. Contracted savings. Post the spend analysis; the supplier also undertakes strategic-sourcing initiatives to negotiate better contracts. This model measures savings as price differential between new or renegotiated contracts and the old sourcing contracts over the volume of the category purchased. This is a method that is light on system-driven analysis and is easy to measure but not very accurate; actual purchases may not always be against contracted terms or with contracted suppliers, for there are many sources of savings leakage like the ones highlighted above. Remunerating the supplier for such savings becomes tricky, as it is important to incent the supplier to deliver savings, but it becomes hard to part with savings that have not hit the bottom-line. Realized savings. In this model, savings are not considered valid until spending occurs. Realized savings are measured as the difference between the original (i.e., pre-sourcing cost, and the actual price paid based on an analysis of invoices and/or payables). After the transaction is complete, this model measures inputs from multiple sources including company financials, ERP, P-card and vendor data feeds. Buyers hold suppliers accountable for achieving contracted savings including driving the necessary underlying levels of compliance. Typically, the parties employ a hybrid pricing structure to remunerate the supplier (i.e., a fixed managedservices fee along with some incentives to provide for skin-in-the-game for the supplier). The realized savings model is the most holistic and accurate approach towards defining PO savings but also means that one needs the ability to track the savings. This involves: Capturing category specific cost baselines original price paid Defining the most appropriate savings calculation method for each category. For example, one would measure a reduction in mark-ups for temporary labor differently than an increased volume discount applied to laptop purchases Tracking compliance to preferred agreements, policies, and pricing Measuring actual spending (invoice or payables) at the line-item level to validate the right goods and service were purchased from the right vendor at the right price Recognizing that few companies have existing systems and processes to track and measure savings, suppliers frequently include technology and processes E v e r e s t R e s e a r c h I n s t i t u t e w w w. e v e r e s t r e s e a r c h i n s t i t u t e. c o m 9
in their PO offering that capture and integrate multiple data sources internal, external, and vendor to provide the necessary visibility and measurement. Now that we understand the different types of savings, let us look at how PO suppliers can help buyers maximize contracted savings potential and drive down savings leakage to produce the most realized savings. Leveraging Suppliers to Drive the Most Realized PO Savings As discussed earlier, reducing overall spend and unit costs and improving compliance are the largest sources of value creation in PO. To maximize and then realize the value from PO, suppliers need to help companies manage as much spend as possible, maximize sourcing results, drive down saving leakage, and continuously improve costs. Increase spend managed. Many stakeholders in categories such as IT, marketing and professional services typically do not engage or involve procurement in the process of selecting and negotiating with their vendors. In order to break down these barriers, it is critical that suppliers bring experienced category experts who will quickly gain credibility and execute a highly collaborative process. Once spend is accessible, suppliers should use multiple sourcing mechanisms to address all spend types large recurring and non-recurring purchases and low-value purchases. Without these mechanisms such as spot buy or sourcing desks to capture non-recurring or smaller purchases, many stakeholders may self-source to meet project deadlines and forgo savings. IT and capital equipment are examples of categories that frequently have significant non-recurring, project-driven purchases. Maximize sourcing results. Suppliers need to have dedicated, experienced category teams that use real-time market intelligence and the resulting negotiating power that comes from sourcing across multiple companies. Market intelligence can include standard labor rates, innovative contract and pricing structures, critical contract terms, and market-leading service levels. Driving down savings leakage. To address the multi-faceted problem of savings leakage, suppliers should employ a comprehensive multi-pronged approach that begins well before sourcing and purchasing activities and is incorporated into every step of the source-to-pay process. Pre-purchase. In addition to a corporate-level implementation and change-management program, suppliers should execute thorough category implementation programs that include activities such as hardwiring new vendors into the buyer s systems, policies, and procedures. E v e r e s t R e s e a r c h I n s t i t u t e w w w. e v e r e s t r e s e a r c h i n s t i t u t e. c o m 1 0
Point of purchase and payment. Suppliers often provide or help buyers better leverage procurement technology solutions that can systematize corporate and category policies and simplify buying from preferred vendors. Combining technology with real-time purchasing support to validate pricing and payment terms, redirect non-compliant purchases, and capture causes for non-compliance further reduces leakage. Post-purchase. Resources dedicated to conducting root-cause analysis of remaining non-compliant spend and drive corrective actions can further reduce leakage. Suppliers should address valid reasons for noncompliance, which may include lack of product availability through the preferred vendor, excessive lead times, quality or delivery concerns, through ongoing vendor management and as-needed resourcing. Continuously improve costs. Markets and company strategies change frequently. To make sure that solutions designed 18 months earlier still provide maximum value, suppliers should provide dedicated category teams that leverage spending forecasts and market intelligence to drive continuous improvements throughout the length of the relationship. Now that we have covered the supplier capabilities required, let us look at some of the key buyer considerations to create the right solution to enable full realization of the value of PO. Key Considerations to Realize the Full Value from a PO Initiative There are five key considerations in the journey of outsourcing from strategy formulation to implementation to ensure that the parties realize the targeted PO savings, (refer to Exhibit 5). E X H I B I T 5 Key considerations to realize the full value from PO Source: Everest Research Institute 1. Scope of PO Determine process scope that allows the supplier to deliver tangible savings 2. Savings goals/targets Define measurable savings such that hold the supplier accountable for business impact 3. Selection of supplier Understand the underlying capabilities and experience of the PO supplier landscape to deliver bottomline savings 4. Design of contract Align and balance the economic and behavioral models of both parties with outcomedriven incentives 5. Measurement of savings Implement systems and policies that create realtime end-to-end process visibility Strategy Implementation E v e r e s t R e s e a r c h I n s t i t u t e w w w. e v e r e s t r e s e a r c h i n s t i t u t e. c o m 1 1
1. Scope. The PO value proposition centers around two key tenets: Spend unit reduction or effective sourcing. This strategy utilizes a PO supplier s deep expertise across a breadth of categories and supply market intelligence Procurement compliance or realization of sourcing savings and operational effectiveness. This strategy leverages a PO supplier s integrated people, process, and technology infrastructure along with operational discipline To achieve realized savings as a business outcome and to hold the supplier accountable, an end-to-end S2P process scope should be considered. Also, in PO one should not consider the scope on the basis of processes in isolation but in tandem with the spend category dimension. 2. Savings goals/targets. The procurement spend represents a much greater cost base and potentially far greater savings than traditional outsourcing. In order to realize the potential savings, a buyer should underpin its PO business case by realized savings as opposed to identified or contracted savings. During solution development, the parties should appropriately document these savings definitions and targets into contractual terms. 3. Selection of supplier. The supplier mix in the PO market today is changing rapidly in terms of market success, type of offerings, and delivery capabilities. It is important that buyers select a supplier that can deliver the outsourcing scope (both process and category) and that has the capabilities as described above to drive the desired business outcomes. 4. Design of contract. As suppliers begin to have more accountability for the end-to-end process, pricing and KPIs should focus on achieving business outcomes. Pricing structures vary, based on underlying resource units from input (FTE-based) to output (managed-spend basis) to incentive based with several hybrid models. While there is no nirvana to pricing strategy, the parties should incorporate some component of outcome-related incentives to ensure skin in the game for the supplier. Overall, the outsourcing contract must align and balance the economic and behavioral models of both parties. 5. Measurement of savings. You cannot measure or improve what you cannot see. Program- and category-level savings tracking, analytics and management are critical for program success. A buyer and supplier need to work together to provide the necessary information, tools, and processes to measure, monitor, and manage savings. PO can help companies tap the opportunity hidden in their non-core spend. But to fully realize the potential savings, it is important to hold the supplier accountable for delivering on those realized savings and ensure the environment is conducive for the supplier to be able to perform. The focus on REAL as opposed to POSSIBLE savings often makes the difference between a successful and an unsuccessful PO initiative. E v e r e s t R e s e a r c h I n s t i t u t e w w w. e v e r e s t r e s e a r c h i n s t i t u t e. c o m 1 2
Greif ICG Commerce Case Study: Realizing value from PO This case study describes the outsourcing program that Greif, a leading industrial packaging manufactures, deployed with ICG Commerce, a PO supplier. Over five years, the program has driven over 10% in realized savings and a 8.3x ROI. Introduction to Greif Greif is a world leader in industrial packaging products and services with over US$2.8 billion in revenue in 2009. The company produces steel, plastic, fiber, corrugated and multiwall containers, protective packaging and containerboard, and provides blending, filling, and packaging services for a wide range of industries. Greif also manages timber properties in North America. The company is strategically positioned in more than 45 countries to serve global as well as regional customers. Key drivers for outsourcing We selected ICG Commerce through the competitive sourcing process as they seemed most intent on understanding our specific requirements and creating a customized solution, rather than force-fitting their existing models. Myron Gramelspacher VP, Global Logistics and Indirects In 2004, Greif launched a business transformation initiative that covered all 60+ facilities in North America and included a strong focus on sourcing excellence. As they began to reengineer the company, it became apparent that Greif did not have sufficient indirect sourcing resources to handle the scale of operations across its North American facilities. Recognizing that there was an opportunity to consolidate purchasing to gain volume benefits, Greif looked for solutions that would provide access to external expertise in a wide range of categories and help it better leverage its internal spend. Deciding to pursue an outsourced solution to manage its indirect spend rather than building an internal capability, Greif looked for suppliers that would have the ability to provide expertise in a wide range of categories with the scale and scope to handle the growing demand in Greif. It was important to Greif that the solution meet its requirements including gaining buy-in from key stakeholders across its facilities in North America. ICG Commerce proposed the winning solution who Greif felt developed the most tailored solution as opposed to a spend-aggregator model proposed by the other suppliers. E v e r e s t R e s e a r c h I n s t i t u t e w w w. e v e r e s t r e s e a r c h i n s t i t u t e. c o m 1 3
Scope of work Originated in 2004 with an initial term of three years. Extended mid-term in 2007 for a further three years. Again expanded and extended mid-term in 2009 for five years to 2014 Managed spend of US$550-600 million Outsourced processes cover the source-to-pay spectrum (spend management, strategic sourcing, vendor management, day-to-day purchasing, performance management and spend/savings reporting) Categories covered include all indirect spend (IT/Telecom, marketing, finance, facilities, operations, and HR) Original geographic scope included North America and expanded to Europe. Expansion to Asia and Central & South America is in the pipeline Delivery locations all over the globe (North America, Central & South America, Europe, and Asia) Managed service fee pricing model Solution details Greif had a number of business objectives for its outsourcing solution. E X H I B I T 6 Greif ICG Commerce engagement-solution details Greif business objective 1. Increased transparency and visibility in indirect spend 2. Consolidation of suppliers and spend across facilities 3. Driving continuous improvement Y-o-Y 4. Ability to expand category and geographic scope going forward ICG Commerce solution ICG Commerce provided a consolidated view of spend and timely reports on compliance, etc., which increased visibility and transparency Negotiated win-win contract terms with suppliers across facilities, tied to a single contract Better supplier monitoring, leading to higher compliance Initial two years were focused on strategic sourcing and spend unit reduction In 2007, ICG Commerce helped execute an internal and external benchmarking exercise that helped drive focus on demand management/consumption reduction Starting with traditional indirect categories, the relationship grew consistently to include non-traditional categories and capital equipment by 2007 Geographic scope is also increasing with Europe, Asia and Central & South America being integrated into the existing solution We have worked with many consultants in procurement who can identify savings, but ICG Commerce has realized savings for us by driving compliance, monitoring suppliers, etc. Myron Gramelspacher VP, Global Logistics and Indirects Greif faced a few key challenges achieving the business objectives above. Initially the communication between Greif stakeholders and ICG Commerce team members was not fluid, and it took time to create day-to-day working relationships and trust on both sides. As they selected and implemented new suppliers across all the North American facilities, ensuring compliance and adherence to negotiated contracts was an issue. To address the specific challenge of non-compliance, Greif and ICG Commerce used compliance reporting to increase the visibility and identify specific instances of noncompliance. The team worked with purchasers to understand the reason for non-compliance and to address concerns where possible. E v e r e s t R e s e a r c h I n s t i t u t e w w w. e v e r e s t r e s e a r c h i n s t i t u t e. c o m 1 4
Value delivered Looking at the value delivered along a continuum from a direct-cost reduction to business to a strategic impact, Greif focused its solution on improving business and indirect procurement effectiveness. ICG Commerce s impact on our business has been recognized at the highest level, closely followed by both our CEO and CFO. Myron Gramelspacher VP, Global Logistics and Indirects Nature of impact Buyer objective Impact delivered Strategic Business effectiveness Continuous improvement with Y-o-Y savings Achieved 10-11% cumulative savings on spend ROI of 8.3 Business Procurement effectiveness Improved efficiency Support expansion into adjacent businesses through acquisitions Expand category and geography scope to integrate operations globally Increased transparency and visibility in indirect spend Increase value from acquisitions through faster integration of procurement operations Current scope includes both traditional and non-traditional indirect spend categories Europe roll-out underway, with Asia and Central & South America next in line ICG Commerce provided a consolidated view of spend and timely reports on compliance, etc. E v e r e s t R e s e a r c h I n s t i t u t e w w w. e v e r e s t r e s e a r c h i n s t i t u t e. c o m 1 5
About Everest Everest Group is a global consulting and research firm that comprehensively serves the sourcing market. An industry leader since creating the sourcing consultancy practice in 1991, Everest has earned a worldwide reputation for ongoing innovation by helping clients capture optimum value through the development and implementation of sourcing strategies and implementations, including captive, outsourced and shared services approaches. We help companies create strategies and sourcing relationships that deliver total value improving performance and results while effectively managing risks. Since its inception, Everest has forged over 600 major outsourcing relationships, advising clients on complex sourcing issues in more than 30 key business processes worldwide. Our experience spans numerous Fortune 500 clients in industries including banking, energy & utilities, healthcare, hospitality, insurance, manufacturing, media & entertainment, retail, and telecom. The Everest Research Institute serves as a central source of independent and objective strategic intelligence, analysis, and actionable insight for leading corporations, suppliers, technology providers, and investors in the global outsourcing and offshoring marketplace. Our research analysts address both business process and information technology sourcing topics, providing the global sourcing community with information that empowers highly productive, sustainable sourcing strategies and relationships. Through a uniquely integrated consulting and research delivery model, Everest offers its clients the flexibility and scalability to support a broad scope of business situations, client needs, and project requirements. Service offerings range from comprehensive support for critical initiatives to modular support for ad hoc inquiries. Everest is headquartered in Dallas, Texas, and has offices in New York, Toronto, London, Amsterdam, New Delhi, Melbourne, and Sydney. For more information, please visit www.everestgrp.com and www.everestresearchinstitute.com. For more information about Everest, please contact: Everest Research Institute +1-214-451-3110 info@everestresearchinstitute.com For more information about this topic please contact the authors: Katrina Menzigian, VP, BPO Research kmenzigian@everestgrp.com Saurabh Gupta, Research director, FAO and PO sgupta@everestgrp.com E v e r e s t R e s e a r c h I n s t i t u t e w w w. e v e r e s t r e s e a r c h i n s t i t u t e. c o m 1 6