Sourcing & Category Management
Ensuring sustainable value and continuous improvement
Effective sourcing can transform an organization’s procurement function from being a bureaucratic form-filling engine, into a business partner that adds significant value to other business divisions. With indirect procurement in particular, it is essential to engage a large number of stakeholders and present a unified, consistent front to suppliers, and this is only possible through procurement professionals applying rigorous sourcing and change skills.
If successful, sourcing generates significant value; up to 15-30% savings on spend, improved control over your supply chain, and a better informed and more energized supplier network.
From strategy and opportunity identification we’ll execute the sourcing project to a successful implementation and ensure that their full potential is realized through ongoing category management.
At Xchanging, we believe in solid facts not optimistic forecasts. For example, we do not recognize a saving until a transaction has taken place and the saving has actually been achieved. That’s why we have an unrelenting focus on the post-RFP implementation of contracts, supplier issue management, compliance management, supplier performance measurement and reporting, contract management and category review.
As the contracting process proceeds with each supplier, our objective will be to build in contractual clauses that commit the supplier to delivering incremental value over the life of the contract. Regular performance management reviews are held, involving our team, the customer and the supplier, in order to manage the contract and ensure further optimal value is delivered to the customer.
HR services, including contingent labor, continues to be one of the categories of spend that is most actively managed by organizations.
This can be attributed in part to the central management of HR as a function generally and the added attention the category receives as a direct result of the volume of spend.
Sub-categories of spend:
- Contingent labor
Contingent labor often accounts for the biggest portion of spend and that doesn’t seem likely to change any time soon. As the “Baby Boomers” continue to retire from the workforce, organizations have increasingly taken the opportunity to replace them with a contingent workforce. Doing this has made previously-fixed costs variable, while giving companies more flexibility in the face of market fluctuations; two things that are crucial against a background of economic uncertainty.
This has had a direct impact on recruitment companies, who derive the majority of their revenue from commissions and fees on permanent positions. Compounding their woes, consider that hiring decisions have been postponed generally and voluntary employee turnover has reduced.
This movement toward a more flexible cost base is not confined to contingent labor sourcing; HR service provision is seeing the same trend. More administrative services, such as relocation support and training, are now being outsourced to specialist providers rather than a company hiring the expertise in-house. In other areas, a more consultative approach is being taken. The recession of the past few years has led to more layoffs for example, which has led in turn to increased demand for benefits and compensation expertise; something firms have brought in on a consultancy basis.
Given this shift toward a more flexible HR cost base through contingent labor and outsourcing, good HR functions are required to strategically manage those costs more than ever. With an often fragmented supply base, proliferation of technology solutions, increased regulatory challenges, rising social scrutiny and ever-present cost pressures, organizations need all the help they can get. Xchanging is able to combine deep functional expertise with robust sourcing practices to help customers stay in control of their HR spend.
Five key trends in Human Resources
- Financial constraints: As employers work to control costs there will be a continued impact on HR offerings and hiring practices
- Healthcare reform: The face of employer health plans will change in the coming years as healthcare reform and general regulation changes inevitably take effect
- Technology impact: HR is already arguably the area of business that has been most impacted by social media, with LinkedIn now a core element of the hiring process, and that trend will continue, creeping into other areas of HR delivery, such as L&D and wellness initiatives.
- Performance-based metrics: Continued economic constraints will create an emphasis on outcome-based engagements to justify expenditure, leading to more standardized HR metrics that can be better tracked and measured.
- Social responsibility: Scrutiny of major organizations in terms of responsible HR practices will intensify, including fair-pay, employee welfare, equal opportunities and more.
Life as a CIO is not always a walk in the park.
Compare the typical technology lifecycle, which is measured in weeks, with those in HR where benefit design might be fixed for a year, for example. This ever-accelerating pace of technology evolution coupled with requirements relating to risk mitigation, cost containment and the operational reliability of IT systems, puts pressure on the CIO.
Sub-categories of spend:
- Voice & Data
So who can the CIO turn to for support? Probably not the CFO, who continues to see IT as another expensive overhead that all-to-often delivers late, over-budget and with reduced scope. Instead, the CPO is increasingly providing support to the CIO by aiding the IT department in achieving operational and strategic goals and therefore building a higher degree of confidence with the CFO.
Xchanging understands the dynamics of this situation and we would work with the CIO to improve the IT department sourcing function’s performance against five key parameters:
- Data Integrity: Sourcing should contribute to a high degree of data integrity making analytical accounting possible and accurate, but should also deliver the basis for asset management and contract management.
- Compliance: The quality of the contracts should protect the company from compliance problems in today’s ever-changing software licence environment. Compliance also needs to adhere to internal policies as well as local and international law.
- Risk mitigation: While contractual terms can oblige a supplier to take necessary action to protect the company against fraud, industrial espionage and data protection, it should also deal with areas such as reversibility and business continuity.
- Quality and overall IT strategy: Cost containment depends on the right to challenge the requirements and the quality of the preparations of the negotiations. It is important to have the sourcing strategy aligned with overall IT strategy.
- Vendor relationship management: Does the organization have formal or informal vendor relationship management for their key suppliers and is there KPI monitoring in place where appropriate? A mature organization should have a preferred suppliers list, especially for IT consultancy, and formal governance structures for interaction with the suppliers.
Five key trends in the IT Industry
- Information beats process: The key driver of competitive advantage is shifting from business process design to information management, such as customer experience, data analytics and knowledge management.
- IT as a business service: Rather than being a standalone shared service, IT applications and infrastructure will increasingly be embedded in and delivered as an element of a business service
- Externalized delivery: Third-party vendors will expand the scope of their offerings to the extent that they can deliver without using internal resource, who will become brokers instead of providers.
- Differentiation over standardization: Business units will play a greater role in obtaining and managing their own technology rather than services being mandated from a central function.
- Diminished central IT role: The roles that we associate with IT today, such as strategy and governance, will be embedded in services, evolve into business roles or be externalized.
Of all categories of indirect spend, marketing is probably perceived as the least commoditized and is managed the most independently of sourcing and procurement involvement.
This situation stems from a fear on the side of the marketing department that procurement would interfere with the creative process, a belief that sourcing principles cannot benefit a category where requirements are often unique and a high proportion of entrenched supplier relationships exist.
Sub-categories of spend:
- Commercial printing
- Trade shows & events
- Public relations
- Market research
- Misc. Marketing
This status quo is often not aided by the procurement function’s lack of flexibility when it comes to sourcing this category. Though the aforementioned misconceptions may be just that – misconceived – they are not completely without merit.
Often, sourcing and procurement functions need to show a greater willingness to collaborate with marketing and show recognition and understanding that a different sourcing approach can be applied. That is what we do at Xchanging, while reinforcing our belief that solid sourcing foundations still apply.
A good place to start is with the more transactional elements of marketing spend, such as pre-press and print services or promotional items, even promotional events. Creative agencies will usually bundle these transactional services with their high-end creative services – managing the print and distribution of the material they conceive and design, for example – adding some margin for themselves in the process. Delineating these services and going to market separately can reap financial rewards without hindering the creative process, winning over the marketing department and maybe even showing that savings, once realized, can be reinvested back into the marketing budget.
At Xchanging, we know that, in order for this strategy to work, three core characteristics need to be met by procurement:
- Expertise and understanding of the myriad products and services that make up the category and the supply- and demand-side drivers that influence each one.
- Willingness to collaborate and engage with the marketing department and to take a step-by-step approach to building the relationship
- Ability to modify the sourcing approach in such a way as to still apply effective sourcing principles while not sacrificing the creative integrity of the marketing department.
Five key trends in Marketing
- Supplier consolidation: This trend has been ongoing for a number of years in the base of traditional advertising agencies and the shift now is toward the big agencies acquiring smaller and niche providers, especially in the area of digital.
- 2013 subdued after 2012: This year was a strong year for industry revenues, due to in large part to the Olympics and US election cycle, but that was an anomaly; spending in the industry is still well below pre-recession levels and 2013 will likely be another difficult year.
- Digital media growth: Gone are the days when TV networks and daily newspapers had a captive audience. Traditional media will see a its relative spend portion eroded by digital as online marketing, especially via mobile platforms, continues to grow.
- Promotional services on the up: Companies are beginning to see the benefits of going direct to manufacturers for promotional items, leaving the creative agencies looking to plug the gap through managing promotional services, such as trade shows and events, instead.
- From West to East: Following a trend echoed in many industries, marketing spend in the Western world suffered greatly during and since the 2008 recession, while the emergence of a huge middle class in the BRIC economies has seen spend in those countries jump.
Maintenance, Repairs and Operations (MRO) is often a broad category and, consequently, can impact, or be impacted by, a large number of stakeholders.
Historically, this has led MRO to be relatively unaddressed due to perceived complexity; but the impact of the financial crisis has changed that.
Sub-categories of spend:
- Electrical supplies
- Industrial supplies
- Equipment rental
- Machine parts
- Safety equipment
MRO is a sizable and inherent chunk of the cost base for manufacturing organizations, an industry that was hit particularly hard during the recession when the bottom dropped out of discretionary spending in the majority of western economies. This left manufacturers looking for new ways to trim fat from their cost base in order to remain profitable and competitive.
The automotive and aviation industries were the first to trend towards greater MRO outsourcing; consolidating spend across facilities and geographical boundaries to gain more leverage then utilizing MRO integrators and large distributors to achieve greater value. Most large consumer products manufacturers are now following suit.
Given the diverse range of products and services in the MRO category, the supplier base is also broad and diverse, including original equipment manufacturers (OEMs), niche providers, general distributors, high street retailers and integrated suppliers. At Xchanging, we have experience dealing with each of these supplier models and see a trend toward ‘Total MRO Outsourcing’ through integrated suppliers.
These organizations will take over storeroom management at a customer’s facility, ordering stock, managing inventory and taking responsibility for the requisition, purchasing and invoice payment process. These fully integrated providers can deliver all categories of MRO supply and allow customers to concentrate on their core value-adding competency.
Five key trends in MRO
- Superior inventory management: This reduces operational risk by eliminating instances of stock out, reduces working capital requirements through better stock management and limits impact of obsolete stock.
- Global consolidation: organizations are collaborating on a more global basis, consolidating spend and adopting global go-to-market strategies in order to realize cost reductions and also develop more strategic supplier partnerships and better supplier management.
- Better P2P management: The benefits of better P2P processes, including reduced ordering and transaction processing costs, higher accuracy of purchase orders and invoices, improved compliance management and more user-friendly catalogs, are now clear to more organizations.
- MRO integrators: Manufacturers are adopting an integrated MRO supplier model and realizing the benefits of more TCO focus, access to specialists, more value-add services, production efficiency gains, consolidated invoices and the release of engineer time to concentrate on core competencies.
- Technology-enablement: As with most areas of business, technology is enabling manufacturers to manage data more effectively and improve decision making through spend visibility, as well as easing the ordering process and allowing for product rationalization.
The professional services category is often seen as a sensitive and mission-critical category that is difficult to source and best handled by functional business areas.
At Xchanging, we appreciate this perception and understand the risks and the implications on business continuity if a consultancy project is not delivered on time or legal counsel is not of a high enough quality, for example. However, we also believe, and have proven, that sound sourcing principles can still be applied to deliver quality and value to our customers.
Sub-categories of spend:
- Financial Advisory
- Engineering Services
- Legal Services
The key is to combine those sound principles with expert understanding of the sourcing environment. In that respect, this category is not entirely simple to summarize given the relative breadth of services that fall within and the conflicting fortunes between those service industries and even within those industries.
For example, during the financial downturn of 2008-09, consultancies that focused on corporate restructures performed well as the majority of that industry suffered from organizations’ restricted investment and project-work. Engineering firms saw a similar fate; as capital expenditure on construction projects in the private sector were drastically cut back they found a greater proportion of their revenue coming from the public sector.
On the flip side, during the recession accountancy firms and law practices fared relatively well. As the recession hit, corporate defaults soared and the associated litigation fed the legal services sector nicely and, to a certain extent, accountancy is a counter-cyclical industry anyway. Accountancy firms see a good deal of revenue come from bankruptcies and restructuring during the ‘hard’ times and don’t see much of an upside from their standard services during the ‘good’ times.
Coming out of recession, those accountancy firms have had to find alternative sources of revenue from value-add services such as corporate tax to mitigate the loss of “recession revenue”. Furthermore, as the supply market in this sector has become saturated and technology solutions have improved, pressure on margins has increased.
Technology is also having a major impact on the supply and demand side of the professional services sector, both with positive implications for provider firms. As the global economy becomes ever more technology-enabled and web-based, so increases the demand for cyber-security, social media and data security advisory services. Meanwhile, firms are seeing their cost-to-serve as technology directly reduced administrative costs by providing for much more effective document management.
Post-recession, the biggest winners in the professional services arena have been consultancies. Although the global economy is still fragile, much of that fragility stems from the public sector. Corporations are actually seeing bumper profits, while somewhat contradictorily, striving for efficiency gains to improve service at the same time as reducing operating expenses. This has led to an upsurge of consultancies that focus on projects that, in a short period, will enhance operating ratios and reduce business costs. Positive corporate cash positions have allowed them to make that investment.
Five key trends in Professional Services
- Growth in niche providers: This trend is pretty common across the category. Examples include national law firms in the US losing share to regional and state-specific firms, accountancy firms looking to expand their portfolio of offerings by providing niche services such as forensic accounting and consultancies becoming highly specialized in specific industry practices like HR or Procurement.
- Red tape boosts consultancy: As industry-specific regulatory requirements continue to grow – think Basel III, Dodd-Frank and Sarbanes-Oxley – so do cross-industry pressure such as in the area of social and environmental responsibility. Both increase the demand for specialist consultancies that can offer expert advice to guide corporations through the maze of red tape.
- B2B and B2C merging in legal: B2B clients are demanding more performance-based commercial models from law firms, emulating a trend that has swept the B2C legal market in the last ten years.
- Consultancy as a shared service: Especially in the very large corporations, there is a trend toward internalizing the provision of consultancy services by creating a central shared service that will provide services back to the business.
- Project management competition: Project management is only a relatively small portion of overall engineering services spend but it is a high margin area and one in which firms are concentrating on increasing their market share to mitigate a loss in their traditional revenue streams.
Services within the Facilities Management (FM) area can be broadly viewed in three groups:
- Facilities support services (janitorial, security, vending, catering, laundry, etc.)
- Property management (rent, insurance, asset management, renovations, relocation, etc.)
- Building repair and maintenance (energy, mechanical, HVAC, lighting / electrical repair, etc.)
Support services are “soft” services due to their low-skilled labor intensity. For the most part, only the overhead portion of these service providers’ costs can be addressed for savings due to minimum labor-wage thresholds. Repair and maintenance services, on the other hand, are usually “hard” services and have greater overhead cost components, which in turn yields greater value when conducting sourcing exercises.
Sub-categories of spend:
- Property management
- Facilities services
- Capital projects
- Office supplies
- Repair & Maintenance
From our experience, on average, hard services offer more savings opportunity (10-20%) than soft services (5-15%).
But addressing FM on a service-by-service basis would be to potentially leave value on the table. The FM market consists of an extremely large and competitive supply base, ranging from relatively small individual service providers to integrated outsourcing conglomerates with thousands of employees. Most of these major players specialize or have their origins in specific facility service areas, but have since diversified into “one-stop shops” to meet growing market demands.
There are advantages to contracting with individual service providers – retaining greater control and cost management, to name two – but this strategy forfeits leverage and can be dysfunctional. Many organizations have already moved beyond this toward a bundled service provider model, sourcing groups of ‘single’ services from one provider. This model negates some of the disadvantages of having multiple individual service providers, though it can dilute control and complicate communication. The more recent trend has been for organizations to engage with integrated service providers that can self-deliver all services, delivering economies of scale, releasing management time and elevating the FM relationship to a more strategic level.
Of course, any one of these models may be the most suitable, depending on an organization’s situation. Xchanging’s role would be to bring the market knowledge and supply-base knowledge to a customer and ensure they make an informed decision and that it is effectively implemented.
Five key trends in Facilities Management
- Supplier consolidation: As facilities management becomes more complex, the supply base is responding by expanding service portfolios to enhance value for customers.
- Pan-geographic expansion: As demand for integrated FM providers increases, so does demand for consistency across boundaries to support multi-national organizations. Growth in emerging economies has also spawned accelerated demand for FM services in Asia and the Middle East.
- Sustainability: With environmental consciousness and energy constraints at the forefront of many business operations today, facility managers are challenged to find creative ways to reduce energy consumption and waste.
- Emerging technology: From improved energy efficiency, to better process automation and functional / systems integration, technology allows facility managers to do more with less, saving time and operating costs.
- Change management: As the impetus for outsourcing facilities management increases, organizations’ personnel, roles, and philosophy are changing accordingly.
By any metric, Transportation and Logistics is one of the world’s largest industries.
Transport and Logistics is so inherently linked with the global supply chain, trade and consumer demand, that when the 2008 financial crisis hit, the industry was deeply affected. Since 2010, the global economy has rebounded and so has the transportation industry; but problems persist. The continued debt crisis across Europe, stubborn unemployment numbers, the ramifications of the US deficit reduction initiatives, the threat of a triple-dip recession in the UK, and slowing BRIC economies (most notably, China) are all indirectly influencing transportation industry trends. Xchangings’ market indicators find this area (more than any other) requires precise commercial management and a tailored service specification targeted at the customer’s objectives.
Sub-categories of spend:
- FTL / LTL
- Ocean Freight
- Rail / Intermodal
- Airfreight / Expedited
- Small Package
- Courier & Messenger
- Storage & Warehousing
Operating in an uncertain environment, transportation providers have sought to differentiate themselves through services and innovation, demonstrating that better logistics service relationships can be transformative to a companies’ business.
The saying goes that “knowledge is power” and in this industry, data is knowledge. Vast gains have been made in recent years through data management, fueling better inventory tracking, shipment efficiency, and improving most every other aspect of supply chain management. Technology-enabled third-party logistics (3PL) providers now must compete on the quality of their value-add services, such as shipping support, scheduling and distribution services, in order to help customers compete in an economy where volumes are not growing exponentially.
While there has been a growth in 3PLs, it is clear that execution-orientated activities still lead in terms of outsourcing. The activities most frequently outsourced continue to include those that are more transactional, operational and repetitive, while those less frequently outsourced are those that are more strategic, customer-facing and IT-intensive. In the future, customers may be more receptive to strategic services that may be available from 3PLs.
At Xchanging, we understand that successful transportation relationships are built on openness, transparency and good communication. Agility and flexibility to accommodate current and future business needs and challenges, such as collaborating with other companies, even competitors, to achieve logistics cost and service improvements.
Whether working with a customer on negotiating contracts for the more transactional services or leading a more transformational service based outsourcing initiative, we bring the same deep industry insight and understanding of critical success factors.
Five key trends in 3PL services
- Continued contributions: Companies across industries and around the globe regard logistics and supply chain management as key components of their overall business success, sometimes crediting their logistics partners with helping provide innovative ways to improve logistics effectiveness.
- Utilization on the rise: The majority of shippers are increasing their use of 3PL services, though a minority of others are insourcing some former 3PL services or even reducing or consolidating the number of 3PLs they use.
- Successful relationships: The cost and service improvements resulting from successful 3PL relationships are validated by metrics including logistics cost, inventory cost, fixed asset reductions and order fill rate and accuracy.
- Sustainable selection: Fuel efficiency and carbon emissions are becoming a more important part of a shipper’s 3PL procurement decision-making process.
- Don’t believe the hype? Among the most prevalent reasons cited for not outsourcing to a 3PL provider are that; “logistics is a core competency at our firm”, “logistics is too important to consider outsourcing”, “cost reductions would not be experienced” and “too difficult to integrate our IT systems with the 3PLs’ systems”. However, other shippers reveal these are some of the same factors that are responsible for their decisions to use 3PLs.
Like the oft cited ‘coming paperless society,” business has yet to be impacted the way some projected by the emergence of technology that could take meetings virtual.
People still like to meet and conduct business in person. While travel budgets have inevitably been impacted to some extent by the proliferation of e-meeting technology, the effect is often temporary. What has impacted business travel spend is the economic downturn of the last few years. Travel was one category where guidelines could easily be changed to restrict spending, such as reducing hotel limits, changing business travel allowances or enforcing a stricter trip pre-approval process.
Sub-categories of spend:
- Air travel
- Rental car
- Travel card
- Car fleet
Business travel volumes have improved since the low of 2008-09, but we expect they will see a reduction in early 2013 as uncertainty over the global economic situation again makes the travel category the first port of call to address indirect cost.
In the supplier market, the last decade or so has seen consolidation in the supply base of major sub-categories; notably, hotels, rental car and airlines. This trend shows no sign of abating, especially in the US, as these organizations seek to mitigate the aforementioned falling volumes. Compounding supplier woes and further contributing to the trend of consolidation, suppliers are seeing raw material commodity price rises. A second year of poor wheat and corn harvests in the US has contributed to above-average energy cost inflation, hitting hotels hard, and, despite the success of ‘fracking’ in the US, jet fuel prices continue to be volatile, negatively impacting airlines’ profitability.
It is not all doom and gloom for travel suppliers, though. Hotel chains have seen strong occupancy in tier one locations and this will continue to apply upward pressure to pricing through 2013. In the airline industry, American and European short-haul carriers have experienced difficulty, but long haul international travel is a relative bright spot, especially from locations in the West to developing regions such as China, India, Africa and Latin America.
In this economic environment, opportunities exist for organizations to derive value from their travel expenditure though better managing their spend, driving compliance, utilizing share shift, building stronger supplier partnerships and using technology more effectively.
At Xchanging, we know the global travel industry in depth and, no matter what stage of the economic cycle, we have the processes and expertise to be able to extract value across all sub-categories of travel spend on behalf of our customers.
Five key trends in Travel
- Getting a clearer picture: More organizations are using spend analytics to give them much clearer visibility of their travel spend, allowing them to monitor travel patterns more closely and proactively manage the category to derive incremental savings.
- The importance of traveler perception: Companies are making more of a conscious effort to gather qualitative feedback from travelers, especially for hotels, where various options may be available in the same locale, and use that information to continuously tailor the travel solution they provide.
- Presenting a united front: Businesses now recognize the advantage of presenting a single face to the supplier community, globally. More specifically, this refers to larger organizations, who can really attract the attention of suppliers by consolidating spend across regions and going to market as one company.
- Negotiate the detail: For too long, companies had negotiated only on the headline fares for services such as hotels, rental car and especially air travel, and then found themselves unable to effectively manage spending on ancillary items. The trend now is to include all those items in an RFP and negotiate everything.
- Data is knowledge is power: The information age has given companies access to vast amounts of data, which they are starting to use to their advantage. Where previously businesses might continue to use an organization based on a relationship, through data they can now better manage competitive rates for performance.