what to do when asked to cut costs (again!) may 2012

What to Do When Asked to Cut Costs (Again!) May 2012

© 2012 IBM Corporation 2

What to Do When Told to Cut 2013 Costs by (another) 10%

Too often, we are challenged to do “better for less.” The economic challenges of operating a shared services operation in the present day contribute to the pressure. This session will address strategic areas that you can employ to “Dig Up” additional savings to deliver to your organization.

– Simplification and standardization

– Scope expansion

– Variable model

– Leverage-driven delivery model

– Power of leveraging scale

Many companies have addressed some,but not all of the improvement opportunities


Companies Developing Global

Services

Companies Developing Global

Services

What Is New in Shared Services?

Many of the Subject Matter Experts for knowledge focused processes reside in distributed business units

Captures knowledge and standardize processes and toolkits without having to co-locate key resources

Manage ALL general and administrative support functions regardless of Service Delivery Model

Standardizing operating models and processes on a global basis

Career path for future functional leaders

Central management of synergies Economies of scale and expertise embedded in

one organization Leverage the benefits (economies of scope,

effectiveness) to be obtained in the retained processes

Shared Services as the Organizing Construct for

Retained Services

Shared Services as the Organizing Construct for

Retained Services

Creating Virtual Centers of Expertise

Creating Virtual Centers of Expertise


Developing Your Strategy

Alice came to the fork in the road. "Which road do I take?" she asked.

"Where do you want to go?" responded the Cheshire cat."I don't know," Alice answered.

"Then," said the cat, "it doesn't matter." — Lewis Carroll, Alice in Wonderland


Assessment & Strategy — Answering Key Questions

TargetServices

Constraints (regulatory, privacy, IP, etc.)

What is the business context?

Issues driving the engagement

Constraints

BusinessStrategy Issues

Analysis Risk Profile Business /

Competitive Strategy

Types ofFixes by Area

DifficultyAssessment

What are the opportunities and

priorities?

Quick fix Outsource Process redesign Major technology

investment Consolidate/

decentralize Increase/

decrease funding Optimization

strategy Etc.

Risks Timing Organizational

change

Org.Options

JV Build, Operate,

Transfer Commercialize

Services Delivery Model

Roadmap Business Case

Services Delivery Strategy

Benefits

$ savings Strategic

capabilities Improved

Service levels

Access to technology

Access to markets

What strategy should I pursue?

Risks

ServiceDeliveryModel

Risks Assessment

Function / process model

Technology Capability Organization

Market maturity

Reference models

What is available in the external market?

Mark-to- Market

Mark to Peer Benchmarks Cost

comparisons

ServiceProviders

MarketData

Reference models

Results achieved

Peers / Competitors

How good are we today?

Technology

PerformanceCapabilities

Financial

Current costs Primary driver

data Trend data Current situation

/ context

Operating Metrics

Financial Performance

Core Competencies Infrastructure

Applications Network

The Assessment & Strategy Framework is developed around a set of key questions — all addressing the desired business outcome.


Simplification & Standardization


Fully integrated, end-to-end BPM enabled solutions provide all key essential capabilities

Modeling

Monitoring

Automation

Governance

Optimization

Rules

Information

Cases

Events

Integration

Collaboration

Analytics

ExecutiveManagement

CustomerService

Risk ManagementTeams

Invoice Reconciliation

Teams

AccountAdministration


Simplification Examples

► Procurement card for all transactions under $1,000

► Pareto rule is alive and well; In many companies, that would relate to well over 200,000 invoices under $1,000

► If P-cards were used for even 50% of these transactions, a company could save 9 FTEs

► Roughly 30% of the A/P effort is data entry; OB10 eliminates the data entry effort by generating electronic invoices


Typical Best Practices – Procure to Pay Example

► Imaging and workflow

► EDI / EFT payments & receipts

► Optical Character Recognition (OCR)

► IVR and Vendor Portals

► Common applications and standard processes

► Negative approvals / Assumed receipt

► Account reconciliation tools

► Closing tracking tools

► Automated journal entries

► Electronic remittance

► Clearing house for intercompany transactions

► Procurement cards

► Evaluated Receipts Settlement (ERS)

► Electronic catalogs

► Electronic billing

► Lockbox

► Mandated use of purchase orders or P-cards

► Electronic receiving


Protect your Run Rate

► Demand Management: Implementing strong Demand Management processes will increase the efficiency of your environment through cost avoidance while maintaining standards across your business.

► Cost Transparency: Through improved cost transparency, proper allocation/chargeback can be directed to the areas consuming increased services driving the correct behavior.

► Manage Services Consumption: Services consumption can increases 20-40% year on year after migrating to shared services – business units are no longer “paying” for or are responsible for, so the services are “free.”

While cutting costs and finding areas to leverage in your environment, you need to also make sure that you’re putting processes in place to manage against organic cost growth within your existing scope


Scope Expansion


The Three Flavors of Scope Expansion

► Complementary

– Scale – Adding more volume to your existing services

• Expansion into additional countries/regions• Expansion into additional business units by adding new customers:

– Internal– External

– Vertical – Adding different services that are either upstream or downstream to your existing services

• End-to-end business process: Hire-to-Retire, Purchase-to-Pay, Order-to-Cash, Record-to-Report

► Diversify

– Horizontal – Adding services that are not natural offshoots of your existing services

• Financial Planning & Analysis, Customer contact centers, clinical research, etc.

Complementary scope expansion is the natural extension of your core service offering and the easiest to implement.


Scale Expansion

Payroll

North America Europe AsiaLatin America

- Current service offering - Service under consideration

•Deep process expertise is a strong foundation

•Center of scale

• Improved span of control

•General process knowledge is resident

•Moderate risk – failure to know what you don’t know

Advantages Misconceptions Obstacles Best Practices

• Common ERP is a prerequisite

• Processes need to be re-engineered first

• The best practice exists inside the shared services organization

• The team must sit together

• Regions and business units have an arbitrary influence over process

• Change management

• Lack of strategy

• Consolidation is not a complete strategy

• No commitment to benefits

• Regulatory environment must be understood to separate necessary compliance from myth

• Current performance

• Employee Self Service

• Manager Self Service

• Paperless Time & Attendance

• Paperless Payroll

• Integrated with HRIS

• Use a third party

• Minimized the number of payroll cycles

• Increased direct deposit and/or pay cards

Consumer

Bus. Unit A

Commercial

Bus. Unit A

Retail

Bus. Unit B

Consumer

Bus. Unit C

Channel Partners Bus.

Unit D

Scale expansion is not the fastest approach to expanding service offerings due to change management challenges.


Vertical Expansion

Procure-to-Pay

Order PlacedServices Received

Invoice Received

Invoice Released

Payment Disbursed


•Enterprise optimization

•Reduction of downstream errors

•Elimination of redundancies

•Cycle time improvement

• Improved span of control

•Process knowledge is resident

•Integration is fast

•Minimal risk



• Processes need to be reengineered first

• Regulations such as SOX prevent vertical expansion


• Where the team sits

• Relatively few

• Knowledge of upstream and downstream processes is generally strong leading to an informed approach

• Spend analysis

• eProcurement

• Direct and indirect spend

• Automated invoice processing

• Integrated with enterprise cash flow strategy

• EIPP & EFT

• Supplier self service

Vertical expansion is the fastest, least risky approach to delivering benefits by expanding service offerings.


Horizontal Expansion

R&D / Engineering

Financial Analysis

Finance & Administration

Human Resources

CRM


•Shared services platform already built

•Strategic Governance

•Operational Excellence

•Large repository of enterprisewide data



• There are no synergies across the functions

• Regulations such as SOX prevents Horizontal Expansion


• The team must sit together

• The team must be separate

• Lack of strategy

• Consolidation is not a complete strategy

• No commitment to benefits

• Regulatory environment must be understood to separate necessary compliance from myth

• Change management

• Current performance

• Leveraging transactional data into information and analytics

• Creating holistic models for cost of supply that include supplier contributions to R&D and Engineering

• Linking functional and IT strategy

• Linking CRM with all of supply chain and R&D

IT

Similar to Vertical expansion, but with more obstacles.


Variable Model


Transaction Based Pricing

► While many organizations strive for transaction based pricing, few have achieved it

– Two of our Clients have accomplished this but have not taken the “differentiated” approach to unlocking value

– Many companies do not have the visibility into true cost models to enable actual differentiated pricing

► Unlocking the real value requires differentiated pricing to change the organization’s behavior

– The lowest cost processes will be those that business units migrate to over time to drive down their total cost


Visibility and transparency of work drivers enable shift to transaction pricing

Efficiency

Effectiveness

PO%

Paid onTime %

Cost /Invoice

Cycle Time

PO%

Invoice processing time

% Automated Invoices

P-Card %

Vendor Master Managementtime per unit

Exception rate

Exceptionmanagementtime per unit

Process Performance AnalyticsInvoice Processing


Leverage Driven Delivery Model


ProcessRe-engineering

Centralization

Value ChainRationalization

Business Process

Outsourcing

Shared Services

Commercialization

Asset MonetizationJoint Venture

A systematic approach to analyze the business driven by requirements resulting

in cost reduction and customer satisfaction 1

Analysis and design of work flows

procedures, policies and activities

resulting in cost reduction 1

Co-location of activities to increase scale and performance

Creation of a legal entity to commercialize existing capability in a non-core

function through partnership with a third

party

Sale of existing non-core functions to a third party resulting in economic benefit

Conversion of non-core function into a competitive

business resulting in revenue enhancement

Centralization of non-core activities into an internal company in a low cost location or developing country resulting in a significant cost reduction 1, 2

Sub-contracting of non-core functions to a third party resulting in cost reduction through lower labor costs, task elimination, and tax savings 2

Notes:1) May include technology deployed as part of the solution2) Offshore variants of shared services and business process outsourcing will include greater labor arbitrage and potential tax savings

Build,Operate,Transfer

Contract with service provider to build, transition, operate, and stabilize functions, then provide the client with an option to buy

Emerging Service Delivery OptionsInnovative functional strategies are being increasingly implemented by companies seeking transformation and financial improvement.

Internal & ExternalPartnerships

New Ventures

Internal Transformations


Ris

k 3

HighLowEffort 1

High

Relative size of benefit 2

Internal Transformations

A. Value Chain Rationalization

B. Process Re-engineering

C. Centralization

External Partnerships

D. Domestic Shared Services

E. Offshore Shared Services

F. Onshore Outsourcing

G. Offshore Outsourcing

H. Build, Operate, Transfer

New Ventures

I. Joint-venture

J. Commercialization

K. Asset MonetizationA

D C

B

F

G

EK

I

Notes

1) Effort is defined as the work activities required to achieve implementation, deploy technology and manage change

2) Benefit is defined as a combination of cost, economic benefit and service level improvements of a given option

3) Risk is defined as the business, regulatory, legal and change risk associated with realizing the benefit as a result of the effort

Each delivery strategy offers different levels of risk, effort and reward.

Key

Low cost and low risk options have lower benefits

Low cost and low risk options have lower benefits

Five Year Time Frame

HJ

Delivery Strategy Solution — Tradeoffs and Dependencies

Illustra

tive

Illustra

tive


Power of Leveraging Scale


The Power of “Scale”

► We all know and understand Economies of Scale and their impact on shared services

► What we do not always consider are other elements of “Scale” that drive improvement:

– Focus: The more an organization focuses on specific processes (achievable when you have appropriate scale), the more expert they become and results in more attention to improvement

– Management & Support: Often considered part of economies of scale, one of the critical elements of scale is the ability to leverage scarce management resources over larger and larger operating teams

– Expertise: One benefit that service providers often have over captives is their scale provides the opportunity to leverage key skill sets like Six Sigma, Lean, process expertise

– Best Practices: Another benefit that service providers have is the view that their scale provides over multiple clients and processes. This allows them to identify best practices and determine the applicability to other clients

– “Decoupling”: If sufficient scale exists, processes can be decoupled from themselves to allow for processing in the most cost effective delivery centers


Fully Leveraging Scale Can Drive Significant Value

Real-Time, Role-Based Visibility into Business Processes

► Improved ROI► Lower Cost & Risk

► Enable Agility► Accelerate Speed to Value

Create realistic demand forecasts using historical

& real-time data

Better ResourcePlanning

Refine processes with actual performance data

Continuous Process Improvement

Immediately respond to changing business

conditions

Take Action Quickly


► Forget about offering 31 flavors

► Each and every variation carries unique costs

► Simplify

► Standardize

– Systems

– Processes

► Shed renegade variants

► This is as true for service providers of like functions as it is for product categories

Diminish Flavors


► Take actions that are the inverse of what you do in times of growth

► Approach your providers and expand the scope of responsibility of the one that behaves most like a true partner

► Geographic consolidation can often result in a quick win with respect to the reduction of management and supervisory levels

► Standardizing processes and inputs/outputs will improve the productivity of your processing teams

Increase Concentration


► Move as much expense as possible from your balance sheet

► Divest anything that is better bought than built

► Benefit from labor arbitrage

► Review productivity levels and determine ways to increase it

► Implement strong volumetric reporting and monitor monthly

► Move to transaction based pricing on a differentiated transaction basis and change behavior to lower total cost

Get Variable


► Recognize that there is a spectrum of points of leverage available to get more from the assets that are serving your business

► Consider the role of technology

► You do not need to carry the entire load yourself, if you know how to create a leverage-driven delivery model

► Leverage can be found through lower cost resources as well as “decoupling” of processes to change the skill mix of the resources

Use Leverage


► It is times like these when the sacred cows of departmental autonomy must be sacrificed for the power of leverage and scale.

► Do not tolerate redundancy for the sake of intimacy – the perceived value that comes from being organizationally dedicated to a singular purpose.

► Some redundancies are hidden via internal maneuvering, and some are buried within third-party contracts – seek them out

Consolidate Power


What to Do When Told to Cut 2013 Costs by (another) 10%

► Diminish Flavors Simplify and standardize, shedding any renegade variants. D

I ► Increase Concentration Take actions that are the inverse of what you do in times of growth.

G ► Get Variable Move as much expense as possible from your balance sheet by divesting anything that is better bought than built.

U ► Use Leverage Recognize that there is a spectrum of points of leverage available to get more from the assets that are serving your business.

P ► Power Consolidation It’s times like these when the sacred cows of departmental autonomy must be sacrificed for the power of leverage and scale.

Thank you!

what to do when asked to cut costs (again!) may 2012

Documents

ibm corporation

global services

shared services operation

knowledge focused processes

marketswhat strategy

key resourcesmanage

business context

set of key questions