So, where to start? If you are the CEO or report directly to the CEO perhaps you are in a position to advocate a change in strategy or a wholesale shift in reconfiguring services or department structures or process. For most organizations, these are daunting choices and they come with far-reaching implications.
Ready to call a meeting with your head of purchasing or procurement to discuss this initiative? Perhaps you should ask yourself the following questions first:
- Is your purchasing team “best in class”? By what measure?
- Do they have the additional capacity required to execute this initiative in a reasonable timeframe (months vs. years)?
- Do they have the supplier expertise required in every expense category?
- Are you dismissing any areas of potential opportunity out of hand due to political or other limiting reasons? Is this consistent with your fiduciary responsibility?
- Are you really taking a fresh look or just recycling old ideas?
- Are your RFP’s asking the right questions?
- What supplier industry benchmarks will you be using?
- Do you have adequate processes in place to track supplier compliance? Internal compliance?
- How will you measure success?
Case in point: we recently completed an engagement with a large healthcare clinic with multiple locations that had their own internal procurement team. At first, they were very skeptical that we would be able to add any value beyond what they were already doing. And in fact, we did validate that they were doing a great job in 5 of the expense categories that they managed. However, in the other 6 categories we reviewed, we were able to identify incremental opportunities to reduce cost. The result? The client is saving in excess of $600k annually.
Besides generating incremental cash flow beyond what’s possible with existing internal resources, some additional benefits of engaging with an outside cost management firm with deep industry insights can be:
Improved Visibility and Transparency
Often outside firms can offer insight to help senior management understand where transparency is most important which provides senior management with the ability to make a better-quality buying decision. Transparency can often identify and break down silos that often increase cost and impede efficiencies while exposing flawed assumptions and old ways of doing things.
Yes, benchmarks matter. External benchmarks on some measures may be difficult to get, but they can enable management to compare their organization’s performance against their peers as well as across industries and geographies. Internal benchmarks are certainly easier to access and can often provide helpful insights, but they don’t always represent the extent of what is possible to achieve. As a result, organizations often settle for far less than what is actually possible.
By partnering with a third-party cost management firm an organization can either determine that opportunity exists to lower their indirect cost, or they can obtain a valuable independent validation that their indirect costs are at or near market benchmarks. The former drives cash flow, which is always desirable, and the latter can often be an opportunity for the senior leadership team to demonstrate to their board and other key stakeholders that they are exercising strong financial stewardship on the G&A side of the operation.
Improved Contract Negotiation and Contract Management Processes
Firms that manage a large volume of projects across multiple supplier categories can often provide insights into a wider variety of negotiation strategies and tactics. These tools and insights can provide greater leverage with a client’s supplier base while facilitating improved standardization of how contracts are negotiated, managed and renewed with less risk/financial exposure, etc.
Market Trend Analysis
Provides the client with the ability to more closely track the market and identify opportunities to adjust/optimize when there are material changes in market conditions.
Savings Leakage Identification/Tracking
Drives increased compliance/adoption of the new solution to optimize savings.
Improved Internal Accountability
Improves spend control. Allows the client to reward employees who are managing expenses well.
Improved Purchasing/Supplier Compliance
Greater visibility of each expense category tends to drive improved compliance.
Identification of Additional Savings Opportunities
Engaging a third party with deep category expertise can provide broader insights and help spread understanding of operational cost optimization across more operating expense categories.
Provides deeper industry insights on how to manage each expense category. Can also offer opportunities for employee/organizational development/learning which leads to a culture of operations expense management and improved skill sets (increases employee value).
Depending on management’s priorities and where cost management sits on that list will determine how each of the above benefits will be valued. In our experience, most organizations find that they can enhance their cost management capabilities through knowledge transfer across several of these disciplines by engaging an external partner to assist them with this initiative.