Procurement Outsource vs Insource Strategy Development IACCM Conference April, 2004 Greg Spray gspra

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Procurement Outsource vs In-sourceStrategy
DevelopmentIACCM ConferenceApril, 2004Greg
Spraygspray_at_ariba.com
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Topic

• Competition and pricing pressures require
  companies to continuously explore new strategies
  to achieve their spend management objectives. 
  While some choose to develop an in-house
  competence, others choose to outsource the
  management of select categories and/or
  procurement processes. Learn about the approach
  that makes most sense for your company, the
  categories and processes that are best suited for
  outsourcing and hear case studies on how this
  works at some organizations.

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Agenda

• Overview
• A Holistic Approach to Spend Management
• Decision Criteria and Evaluation
• Benefits Savings Opportunity
• Implementation Methodology
• Service Provided By Ariba and Case Study

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Procurement Outsourcing Market Continues to Grow
Source Aberdeen Group, Is it Time to Outsource
Procurement ?
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Procurement Is Seen As The Next Area
Where would you be interested in doing
outsourcing over the next 12 months?
Interested
Plan to pilot/sign contract
Doing it now
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HR
Procurement
Customer
Accounting
Claims
Outbound
Product
development
service
processing
sales
Source Forrester research, 2003
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What Is Driving The Trend Towards Outsourcing?
Change in competitive landscape
Cost pressures and economic climate driving
fundamental rethink
Reassessment of strategy
Growth strategies are not yielding
dividends Spend management strategies assessed
Organizational priorities
Aggressive internal cost management Cost centers
scrutinized
Outsourcing
Total system cost focus Outsource processes
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Data Suggests Least Strategic Procurement Aspects
Outsourced First
Current and Future use of Procurement Service
Providers

• Technology hosting is (least strategic) biggest
  driver of trend
• Though strategic sourcing and procurement
  compliance are growing opportunities

Source 2003 Accenture Procurement BPO Report
survey of 200 executives PSP Procurement
Service Provider
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Customers Take A Category View
Current and Future Use Of Procurement Service
Providers By Indirect Category

• Companies are selective about outsourcing
  indirect spend
• Office Equipment and Travel will remain the most
  outsourced category
• Marketing and Sales lag most likely because
  they are more strategic

Source 2003 Accenture Procurement Report
survey of 200 executives PSP Procurement
Service Provider
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Realized Savings Has Direct Impact On Shareholder
Value
Millions
If Indirect Buy Were 5 Less
As Reported
Revenue 6,625 COGS 5,613 Purchases
Direct 2,807 Purchases Indirect 1,403 1,
333 Other direct expenses 1,403 Gross
Profit 1,102 1,082 SGA Expenses 813 Operati
ng Income 199 269 Taxes and Other
Expenses 129 175 Net Income 70 94 Shares
Outstanding 56.3 Earnings Per
Share 1.24 1.67 Stock Multiplier (P/E
Ratio) 25 25 Market Value Per
Share 30.93 41.83 Improvement 35.3
Source CSC
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However Achieving Savings Can Be Difficult

• Poor spend visibility
• Unclear where the opportunities are
• Resource constraints
• Resources focused on tactical and operational
  issues
• Knowledge deficit
• Do not possess requisite category knowledge
• Geographic reach
• International procurement needs difficult to
  manage
• Inability to invest in technology, process or
  resources
• Economic climate and corporate focus is on
  reducing investments

Source Ariba analysis and research
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Where Is Your Organization Spending Time?
How and where should time be allocated?
Identify sourcing strategy Resource optimization
Strategic
Achieve compliance Allocate resources
Operational
Implement Reconcile
Tactical
Procurement organizations focus on three
fundamental elements
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Not Surprisingly Strategic Focus Is Biggest
Reason to Outsource
High
Avg. Rating
Low

• Increase focus on strategic priorities
• Internal resources freed for more strategic
  purposes
• Reduce and control operating costs
• Reduce transaction cost
• Fixed costs become variable
• Expertise leading to leverage and aggregation
• Reduced total cost to manage indirect spend
• Better prices for goods and services more
  savings faster

Source 2003 Accenture Procurement Report
survey of 200 executives
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Procurement Outsourcing Models Evolving
Customer Focus
High
Low
Full process model
Partial model

• Vendor manages pieces of the procurement function
  such as
• Strategic Sourcing
• Transaction processing
• Catalog enablement
• Indirect spend
• Allows companies to gain expertise in areas they
  may be lacking
• Sometimes used as a first step or trial of a full
  process outsourcing relationship

• Vendor manages most if not all procurement
  functions including
• All spend
• Full transfer of people, assets and processes
• Tend to be large (100M) deal sizes

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So What Exactly Is A Managed Service?
Managed Services (Ariba)
Value to Customers
Sourcing Experts
Software Vendors
Consulting Firms
Hosting Services
Best Practice Processes
Hosting
Technology
Expertise
A managed service vendor provides capabilities
that spans the entire spectrum of customer needs.
A one-stop-shop providing more value to customers
than point solution vendors
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Who Should Consider Managed Services?
Organizational Issues
How AMS can help?
AMS uses best in class Ariba applications to
deliver our service. Achieve goals without a
technology investment
Organizational goal is to accelerate ESM savings.
However, manual processes still prevalent and
investments in systems or processes unlikely in
near future
Cost Reduction Pressure
Organization ability to manage a broad range of
categories stymied by resource pressures. Either
resources too slim or do not possess requisite
knowledge in high spend categories
Utilize AMS category experts to understand the
best levers of value for each category and get
them delivered using world class technology
Resource Constraints
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Who Should Consider Managed Services?
Organizational Issues
How AMS can help?
Utilize AMS process-specific offerings. For
example, catalog enablement services to
accelerate spend capture or supplier enablement
services to improve compliance
Investments in technology made but inability to
implement and execute. Spend capture and
compliance efforts stalled
Poor Spend Capture
Utilize the AMS staff for operational areas such
as invoice reconciliation or data analysis and
allow customer organization to focus on strategy
Mature ESM organization that is trying to
continuously improve. Procurement staff needs to
focus on more strategic issues
Poor focus on strategic issues
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Agenda

• Overview
• A Holistic Approach to Spend Management
• Decision Criteria and Evaluation
• Benefits Savings Opportunity
• Implementation Methodology
• Service Provided By Ariba and Case Study

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Spend Management
To Manage Enterprise Spend

• Single, closed-loop process
• Category-specific best practice
• Deployed to the frontlines of the business

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Spend Management Process Overview
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Organizations Need To Manage The Full Breadth Of
Categories
Category Group
Example Categories
Catalog
Office supplies, Industrial MRO Gaskets,
Computers, Desks, Cubes
Travel
Airline, Hotel, Rental Car Cruises, Fleet
IT Help Desk, Facilities, Landscaping, Contract
Mfg, Snow Removal
3rd Party Services
Time Based
Programming, Admin/Clerical Accounting,
Marketing, Legal
IT Consulting, Project Consulting, Marketing,
Print, Event Management
Project Based
Express Mail, TL Freight, LTL Freight
Logistics
Utilities
Telecom, Energy Services Bandwidth
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Three Ways To Spend ManagementCustomers can
choose the appropriate model

• Single closed-loop technology platform to manage
  all spend
• Flexibility to configure a variety of processes
• Promote the use of best-practice ESM processes

Expert Assistance
Self Sufficiency

• Implementation and delivery
• Methodology to increase spend capture and
  compliance
• Strategic sourcing services over a broad range of
  categories
• Project and process management capabilities

Spend Management

• Category managed services
• Process outsourcing services (e.g. content
  management, supplier enablement, transaction
  processing)
• Help desk support
• Immediate benefits
• Global presence

Managed Service
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Spend Management Strategy
Expert Assistance
Facilities
Platform
Construction
In-House Spend
Lab Supplies
Managed Services Spend
IT Services Equipment
Travel

• Managed on a single platform
• Sourcing leverage
• Compliance

Print
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Ariba Ensures That Customers Are Working On
Strategic Issues

• Customers manage the overarching strategy and
  vision
• Align corporate strategy with ESM objectives
• Mitigate risk and manage corporate policies
• Identify categories managed internally versus
  externally

Customer Managed
Ariba Managed
Leadership
Policies
Strategy

Spend Visibility

Travel

• Ariba manages the execution
• Achieve ESM objectives through a focus on
  categories and processes
• Provide operational and tactical support

Energy
Sourcing
Support Help Desk Hosting Implementation
Categories Managed
Leasing
Processes Managed
Requisition Services
Labor
Invoice Services
Marketing
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Agenda

• Overview
• A Holistic Approach to Spend Management
• Decision Criteria and Evaluation
• Benefits Savings Opportunity
• Implementation Methodology
• Service Provided By Ariba and Case Study

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Key Questions That Every Customer Must Answer

• How does one think about the risks associated
  with outsourcing?
• What are the typical risk factors to consider?
• Which categories or processes should be managed
  in-house versus externally?
• What is the appropriate framework for
  decision-making?
• What is the internal criteria for decision
  making?
• What criteria should be used in selecting a
  vendor?

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So How Does One Assess The Risks?
High
Impact of risk
Low
High
Low
Probability of risk
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Framework For Decision Making
High
Self-sufficiency
Importance Of Control
Expert Assistance
How important is it to have direct control?
Managed Service
Low
Small
Large
Knowledge Capabilities
How does in-house knowledge compare to vendors?
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Categories Should Be Appropriately Segmented
For Illustrative Purposes
Agency Advert.
High
Mgmt Consult
Clinical Trials
Direct Matls
Marketing
Freight
Importance Of Control
Telco
Temp Labor
Design Mktg
Print
What is the specific criteria for decision making?
MRO
Travel
Energy
Low
Large
Small
Knowledge Capabilities
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What To Look For In A Vendor?Six Capabilities To
Address Customer Needs
Service-oriented resources that support customer
needs immediately. Help desk support and issue
resolution in minutes not days
Managing a process or category on a world-class
technology platform allows AMS to create
significant sources of value through process
efficiency gains
Speed
Technology
Cost Pressures
Our category and process experts develop
specialized knowledge and execute using the best
technology and best practices
Consolidated functions across multiple customers
in lower cost locations minimizes transaction
processing costs
Scale
Resource Constraints
Technology Needs
Customer Context
Expertise
Poor Spend Capture
Ariba provides a hybrid delivery model giving
customers a variety of options to appropriately
manage categories
Best practices allow customers to achieve the
vision of a closed loop ESM process
Flexibility
Processes
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Agenda

• Overview
• A Holistic Approach to Spend Management
• Decision Criteria and Evaluation
• Benefits Savings Opportunity
• Implementation Methodology
• Service Provided By Ariba and Case Study

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AMS Achieves Savings On Spend And Process Related
Costs
Savings Levers
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What Is The TCO To Manage A Category?Can someone
else do it for less?
Supplier A
Type of cost
Inquiry
?
Additional Cost
Negotiation
Additional Cost
Supplier Price
Ordering
Supplier Price
Shipping
Receiving
Payment
Technology
Help Desk
Personnel
Admin Overhead
Total
Company X Category Cost
Managed Service Provider Category Cost
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Three Levers For Managed Service Advantage
Total categorycost index
100

• Category Leverage is driven by
• Commodity expertise
• Industry and supply base knowledge
• Volume leverage (spend aggregation)

ESM Platform Efficiency
Process Efficiency

• Process Improvements is driven by
• Use of best practice ESM processes
• Leveraging resources for multiple clients
• Automating processes

Category Leverage

• ESM Platform Efficiency driven by
• Best-in-class modules
• Creating a closed-loop infrastructure

Company X Category Cost
Managed Service Category Cost
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Agenda

• Overview
• A Holistic Approach to Spend Management
• Decision Criteria and Evaluation
• Benefits Savings Opportunity
• Implementation Methodology
• Service Provided By Ariba and Case Study

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Implementation Methodology
Diagnostics
Sourcing Plan
Procure-to-Pay Plan
Transition Plan
Engagement Plan
Measure Results

• Ariba follows a rigorous implementation
  methodology for each client engagement
• In each phase, best practice processes,
  technology and implementation services are
  utilized for maximum efficacy

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Agenda

• Overview
• A Holistic Approach to Spend Management
• Decision Criteria and Evaluation
• Benefits Savings Opportunity
• Implementation Methodology
• Service Provided By Ariba and Case Study

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Ariba Managed Services Offerings
Category Managed Services (IT Hardware
Software, Travel, Leasing, Energy, etc. )
Category Specific Services
Spend Visibility Services
Sourcing Management Services
Requisition Services
Invoice Services
Catalog Supplier Enablement Services
Process Specific Services
Application Hosting Services

• AMS manages the entire ESM process and
  technology platform for a customer
• Manage any major spend category
• Manage ESM sub-processes for multiple categories
• AMS becomes the procurement and IT organization
  for a customer

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Scope Of AMS Offerings

• Category Managed Services
• Our category teams are responsible for the
  entire needs of a client category by category
  from supplier negotiations to ensuring spend
  compliance. Fundamentally, AMS, is responsible
  for delivering savings and ensuring that those
  savings are realized by the customer. Other
  activities include issue resolution, data
  analysis/reporting, and management of the clients
  suppliers, contracts, leases and assets. Category
  teams also perform spend/compliance analysis,
  follow-on opportunity assessments, user needs
  definition, negotiation, renewal and contracting
• Spend Visibility
• Our category teams analyze the clients total
  spend on an on-going basis to identify
  high-potential, innovative savings opportunities
• Sourcing Management Services
• Working with the client, we manage the strategic
  sourcing of a number of categories achieving
  significant savings

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Scope Of AMS Offerings

• Catalog and Supplier Enablement Services
• The catalog management team handles all aspects
  of supplier enablement, catalog creation and
  ongoing content management. Suppliers are
  supported in all aspects of e-readiness from
  content creation through payment certification,
  while clients receive customized catalog views
  and seamless content updates for any required
  language.
• Requisition Management
• Our teams review, validate, and track each
  non-catalog requisition to improve accounting,
  reporting, compliance and spend management
  efforts
• Invoice Services
• For all catalog requisitions, we reconcile
  orders to procurement card statements (invoices).
  For non-catalog transactions, our teams manage
  blocked invoices by contacting the end-user,
  supplier or AP teams as necessary
• Hosted Services
• Our teams work together to implement, support,
  and manage the hosted Ariba applications. This
  includes helpdesk and call center services

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Case StudyFortune 100 Network Equipment Company
Client Overview

• Highly decentralized procurement
• Over 145,000 employees globally
• Many autonomous regions and business units
• Multiple, incompatible legacy systems and manual
  processes
• Heavy market and operating cost pressures
• Top-down cost, spend and expense reduction
  initiatives
• Undergoing significant organizational change
• Visionary leadership recognized strategic bottom
  line impact of indirect procurement
• Looking to lower cost and increase value in 11
  non-core spend categories

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Case StudyResults achieved by AMS
Results Achieved

• 11 spend categories successfully transitioned to
  AMS
• eProcurement system successfully deployed to 30
  countries/900 locations in 11 months
• Centralized transaction processing 16 client
  centers down to 2 AMS centers (Colorado Dublin,
  Ireland)
• 3 weeks processing time down to lt2 days
• All accomplished in a downward spend environment

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Savings Achieved With Reduced Operating Expenses
Compliance Savings for Spend Categories
Comparison of Operating Expenses to
Outsourcing Fee

5
4
3
Savings
2
1
0
Operating Expenses
Fees
FY01
FY02
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Preferred Supplier Usage and Bypass Spend
Improvements
Reduction in Bypass Spend Trend
Spend with Preferred Suppliers
50
20
Non-Preferred Suppliers
40
60
30
of Bypass Savings
20
80
Preferred Suppliers
10
40
0
Pre-AMS
Current
FY01
FY02
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