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The advantages of developing a strategic sourcing plan

Simon Tennant
27 October 2009

Simon Tennant, Head of PA Consulting Group’s Shared Services Consulting, reveals the advantages of developing and rolling out a full strategic sourcing plan – and acknowledges that many of the cost benefits won’t appear until the mid-term.

“It is counter-intuitive for organisations looking to deliver short-term cost savings that the most effective course of action is to simply make the best of the sourcing structure already in place. This should go far beyond squeezing the best value out of the various suppliers to reviewing what is included in the existing sourcing structure and how to get the best out of existing relationships.”

Tennant says that through ‘good housekeeping’ you may discover areas where you can reduce the costs of your sourcing arrangements to achieve a number of objectives.

1. Reduce or eliminate demand

The first area on the list to address would be false demand, created by a lack of knowledge, rework or customer error. You may find that you are paying for services you are not using – this is particularly common in multi-national arrangements where despite the good intentions of the original team, countries on the ground don’t seem to want to adopt the specified service. In some cases, organisations are effectively paying for the same service twice.

2. Revisit all changes

Review all changes made since starting the service and where the price has increased, as a result of the change, understand whether you can revert to the original approach. This may not always be feasible given the likely interplay between changes.

At the same time assess the current service levels and understand whether you really do need the targets you have agreed with the provider. If possible dial back on some of the current service levels and seek a price reduction from the provider. This may prove more challenging in a front office trading environment than in a middle or back office function, but all avenues should be explored – now is the time to challenge and slaughter some of the sacred cows.

Finally, review the business case for each proposed change and ensure that it meets your immediate demands, be prepared to move the change pipeline around fast tracking changes which have an immediate cash impact and stopping or delaying those which don’t.

3. Expand scope

Look for simple opportunities to develop the scope of services that your sourcing arrangements provide, taking further cost out of the wider organisation. For instance, where it is easy to do so, consider moving higher knowledge-based processes and tasks into your arrangement, such as market research, analytics and data management.
Paybacks for these improvements can be measured in months rather than years.

4. Extend reach

Now is the time to pull in those organisational outposts that originally declined to take up the services, often for obscure reasons on how they are different. Standardising operating models across all territories and divisions allows for a much greater return on a shared service investment.

5. Simplify and standardise

Many organisations have historically allowed sourcing to be managed at an individual business level, resulting in multiple arrangements with multiple providers. The current situation provides the organisation with a prime opportunity to explore the rationalisation of their provider base, the removal of service overlaps between different providers and seek further economies of scale.

At the same time the reduction in number of providers managed may provide a fertile area for cost savings as you simplify and standardise your interactions with providers. Now that leaders are faced with some stark survival choices, they are much more accepting of moves to standardise financial processes and cease delivery of services that are deemed discretionary.

6. Review your governance processes

Check that your governance approach is delivering the value and benefits you expected. Could controls be tightened to prevent value leaking from your arrangement? Are there further savings you could make, especially if the service is stable and mature?

A recent PA sourcing survey found that only 16% of companies would assess themselves as having a mature governance model.

7. Ask for a discount

Many of our larger clients are actively reviewing their contracts, with focused programmes designed to improve their return on existing financial sourcing relationships. This is often accompanied by a request to the provider for a discount or a change in the phasing of payments.

Such a request is rarely welcomed, but if approached in the right way (by understanding the balance of risk on both sides), it can be successful. Remember your provider exists in the same cash constrained environment, so there will be limits of what they can feasibly offer. In exchange, consider whether there is anything that you have that they value, such as references, assets or additional scope.

Explore and exploit all opportunities to get your provider to pay for changes which help both them and you, do not lose sight of the fact that they themselves are feeling the same cost pressures you are and if you are able to help them cut cost while protecting and ensuring your service delivery then why would you not do this? Challenge your provider to act as a partner and support each other through the difficult times.

Never lose sight of the long term intent of any sourcing arrangement and at each stage check that your approach is not undermining this. Understand that you have, today, a prime opportunity to put in place changes which will better support your organisation as you move into a period of higher growth – remember change is an opportunity.

This article is an extract from PA Consulting Group’s new book, ‘Surviving and thriving in the economic crisis: The sourcing opportunity’, and is available free of charge. To request a copy of the book, please visit us at Exploiting shared services

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