Archive for the ‘Governance’ Category

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Travel Cost Cutting Frenzy and Risk Management

November 6, 2008

As the effects of the economic downturn continues to send shock waves through the business world; big spenders (Spend Matters take a swipe at Google and other rising market giants here) are all starting to take a look at where their money is flowing.

Both ABC and NBC have recently had internal memos released to the public with cost cutting on the agenda. In an e-mail to the staff; NBC Universal’s chief executive Jeff Zucker is reported to have said that cost focus will be on cutting promotional expenses and discretionary spending such as travel. In a similar move, David Westin, president of ABC News, sent out an e-mail to inform his staff that ABC News (along with the rest of Disney’s Media Networks Group) will be implementing new guidelines aimed at reducing administrative costs; notably by scaling back on travel accommodations for executives as well as cancelling magazine and newspaper subscriptions and planned holiday parties.

Now this might seem like desperate moves; more like a show of action than any thing else; but one has to wonder how actions like these affect travel patterns and the airline industry. The airline industry is experiencing a crush of it’s own; over thirty airlines have collapsed so far this year (including the UK’s third-largest travel operator XL – who left 90 000 holidaymakers stranded abroad) and recently Willie Walsh, chief executive of British Airways, forecasted  that another thirty will be gone before years end.

So far many of the collapsed airlines are low cost carriers whose margins were based on high volume and chances are high that this pattern will continue so the question one has to ask is:

If business travels are asked to choose cheaper alternatives; will the new travel patterns come into effect soon enough or will the cheaper alternatives go out of business before this new wave of potential travellers even hit the market?

Recently I had a conversation with a colleague of mine (who is acting as travel manager at a mid size European manufacturer) regarding travel policies and the use of low cost carriers and from his daily perspective, low cost carriers was a non-issue for many companies – travel policies may state that lowest price is a priority, but this only seems to apply to the traditional airlines, low cost carriers are still seen as unworthy of business travel.

It remains to be seen if this is still the case as the screws are turned on both travel management and the airline industry. In any case; risk management needs to be prominently on the agenda when addressing the issue.

Posted in Business, Governance, Risk Management, Sourcing, Strategy | Leave a Comment »

When Purchasing’s Lost Control

October 28, 2008

The rapid decline of the music business has hardly escaped anyone; rarely has a downfall of business model been so public. Yet one has to wonder in which world the executives of EMI were living in as details of their day to day exploits start to trickle out. The record label responsible for acts such as The Beatles, The Beach Boys and Rolling Stones as well as contemporary stars such as Robbie Williams, Spice Girls and Coldplay has in the last few years experienced a dramatic crash; just five years ago the group reported profits of £401m on turnover of £2.1bn. Last year revenue had fallen to £1.458bn, and losses to an incredible £757m.

In August 2007, EMI was acquired by the private equity firm Terra Firma; ending a long lasting courtship from rival industry giant Warner. Terra Firma set up a financial vehicle to run EMI called Maltby Capital Ltd, who oversees the EMI businesses and provides a corporate governance role.

Maltby Capital recently published the annual report for the year ending March 31 2008 and it’s an amazing story of not only a business model in grave need of change but a company totally out of control.

Spend management and governance highlights include:

  1. Reporting structures so dysfunctional that the new management struggled to find out the true picture.
  2. A decision which abolished EMI’s global procurement function, resulting in the use of multiple suppliers – as many as 10,000 was in use in the UK alone.
  3. An exceptionally liberal approach to cost control, while there were appropriate policies, they were not consistently applied.

The report states:

In particular, EMI operated in an industry in which generous spending on hospitality, travel and similar expenses were considered normal. In EMI Music, this type of cost was not closely monitored and employees were not encouraged to feel accountable. The approach to travel and expense policies was more than generous. Recent investigation showed EMI Music to be the fourth largest spender on a well-known taxi firm in London, with a bill of over £700,000 in the last year. This was only slightly less than the bills of 3 investment banks, with 8-10 times more staff than EMI Music.

But the report not only gives the insight into a business in decline, it also outlines how they plan to deal with the situation. The full report can be downloaded here: EMI Group Report (PDF).  It’s a roadmap to what may happen when governance and corporate control are lost.

Posted in Business, Governance | 1 Comment »

Structuring Your Purchasing Change Management Efforts

September 18, 2008

When it comes down to it; we, as humans, have two primal impulses that drive our behaviour. The first is the need to conserve energy, or in essence, to flee danger. The second is the exact opposite of the first; we strive to expand energy in order to hunt for food or seek a mate. The first impulse is the strongest, and the second only comes after strong stimuli.

This has to be taken into account when you are setting up your change process.

Because people are afraid of change, it’s deeply rooted in us as humans, and we need strong motivation in order to overcome this very conservative impulse. Just telling people about the goals and the processes is not enough. As humans, we focus on feelings, not facts, so the change needs to be perceived as positive and result in positive emotional memories in order to be successful.
Change is a fragile fruit, and should be treated as such. It’s a process of what you reap is what you sow. As in any growth process, control is of the essence.

A structured approach to change management follows this four step process:

Stakeholder Management and Change Leadership

  • Stakeholder analysis
  • Change management plan
  • Set up of global and local change management organizations
  • Communication

Communication plan

  • Project marketing
  • Expectation management
  • Motivate and support
  • Integrate and build acceptance

Organization Design and Training

  • Job and organizational design
  • Skills and competences gap analysis
  • Training

Benefit Identification and Tracking

  • Business case
  • Project goals
  • KPI follow-up
  • Feedback

This needs to be supported by a project team building effort.

Still, even the most well planned change program can fail and numerous risks have to be taken into account. But following the above mentioned guidelines gives you both a basis for risk assessment as well as a structured and controlled process.

Posted in Change Management, Governance, Organization, Strategy | 1 Comment »

A Pragmatic Approach to Spend Analysis

August 21, 2008

I think all purchasing professionals agree that spend analysis is the key to successful purchasing and there are numerous schools of thoughts in this area, not to mention the variety of tools that are used for performing the analysis.

The fact is that a pragmatic approach to spend analysis does not necessarily include the use of a dedicated spend analysis solution. Great results can come to those who focus on the big picture; the spend volume and the number of transactions.

In brief, a spend analysis can be described as a five step process:

  1. Agree on a spend tree
  2. Pull supplier data
  3. Pull chart of accounts
  4. Categorize supplier data
  5. Make the data actionable

While the first four phases are pretty straight forward and self-explanatory the really interesting bit is when you analyze the data and plan for future actions.

So, where does one start once you are done with the data gathering, cleansing and categorization? The pragmatic in me likes this five phase approach.

Classify your suppliers
A simple yet effective method is to classify your suppliers into “Good”, “Satisfactory” and “Poor/Lacking Contract”. This gives you a first indication where there is a sourcing potential.

Classify your supplier spend
This can be done using two categories; “Contract spend” and “Open for sourcing”. The suppliers with which you have long term contracts must be omitted when you’re doing the sourcing planning.

Calculate your supply base consolidation
For each sourcing group, count the number of suppliers that account for 80 percent of your spend. A low number means that you’re doing just fine; a higher number indicates sourcing potential.

Classify your sourcing groups according to market segments
Try to use simple and clear categorization; “Commodities”, “High competition” and “Low Competition” works just fine. This allows you to further see where you have sourcing potential, commodities such as raw material often have open markets which publish spot prices (for instance; the DILF driven Kairos Commodities publishes price analysis on many raw material groups); hence the sourcing potential is limited. What you should be looking for in this stage is sourcing groups that are not commodities but still have highly competitive markets, this is where you can find the highest savings potentials. It’s also important to have a look at the length of your supplier relationships (or when you last sourced the category), this can open up even more possibilities.

Decide on appropriate call-off methods to ensure spend capture
Finally, classify your sourcing groups into “goods” and “services”, by adding this parameter to the spend analysis containing transaction volume and total spend, this enables you to assign appropriate call-off methods to the sourcing groups, raising the potential spend capture.

Following these simple yet effective steps allows you to perform a spend analysis that supports your sourcing planning for the coming year, as well as providing valuable insight into roll-out and enhancement of your procure to pay initiative.

Posted in Business, eprocurement, Governance, Organization, Procurement, Sourcing, Strategy, Supply Chain Management | 2 Comments »

KPIs for e-procurement program development

August 18, 2008

Most people will say that Spend Under Management is THE most important metric when it comes to procurement KPIs, and I am not one to argue with that fact. But for most companies, and especially those who are still in the early stages of e-procurement adoption or roll-out, Spend under management is too rough to actually track the development of the program.

For the purchasing functions in the early stages of e-procurement adoption, I would propose that they track these three KPIs in order to monitor their progress:

  • Order development – Spend Volume tracking both value and number of orders
  • On/off contract spend – Again tracking both value and number of orders
  • Usage per BU/Geography – Monitoring adoption by tracking volume and number of orders compared to the total procurable spend.

The charm of this pragmatic approach is that these three KPIs can easily be monitored using a seven point scorecard (easily fitting on a single A4 spread sheet), giving management and steering committees a clear and transparent picture of the program development; ensuring managementorial buy-in and increasing risk awareness all whilst keeping purchasing in the driving seat.

Posted in eprocurement, Governance, KPI, Supply Chain Management | Leave a Comment »

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