Strategic Cost Analysis

Video Transcript

Have you ever had a spectacular idea that just fundamentally didn't get off the ground? Well, I want to take you back to 1996. I was a somewhat brand new consultant at the time, all gung-ho at one of the major strategic sourcing firms ready to make my mark, right? And at the time, I had been on the marketing side. I hadn't been a procurement person. So they had sold a big strategic sourcing program to a large bank. My boss, Allison, kind of one of those hardcore, old line consulting bosses, was going to tell me what my category was. So I was all excited. I come to Allison. I'm thinking, all right, I'm ready. I'm going to get temp labor. I'm going to get, you know, IT technology. I'm going to get professional services. And she says to me, "Sarah, your categories are dues and donations, corporate library, and floral arrangements." You can imagine my disappointment. I'm thinking, "How am I going to get promoted on floral arrangements?" But innovation, we talked innovation this morning. I took it as a challenge to be innovative. I thought strategic part of sourcing.

So now, let me fast forward to the infamous steering committee you guys all have been in, right? Where months later, we're in a steering committee meeting. I'll paint the picture for you. CFO of the bank, John, in front of the table. Allison, pretty hardcore right next to John. Eight of my consulting colleagues down the right-hand side. They got all the good categories. All the key stakeholders down the left-hand side. Meeting kicks off. All good. So they ran through all the good stuff. Five minutes to go. Meeting is supposed to be over. Allison says to me, "Sarah, could you just quickly give us, you know, your recommendations. Identify what you've done." So I'm thinking, here I go, right? This is it. So stand up. I'm going to use my five minutes wisely and I say, "This bank spends $495,000 on floral arrangements. That's $2.5 million a year. So here's my recommendation. I'm going to eliminate all floral arrangement spending entirely because I went out and I got the requirements from the branch managers. What they really care about was a new floral arrangement in their branch every month or every week to be honest. So I said, we're going to buy 962 silk flower arrangements and I'm going to put them in every branch, but that doesn't meet the requirement of a new one every week, right? So being innovative, here was my idea. Armored car drivers. They go branch to branch to branch carrying the money, right for the vault. So I was just going to ask the armored car driver that while they carry in the cash, could they grab the floral arrangement from branch A and move it to branch B, and then branch B move it to branch C and move it on and on. And by the end of the year, every branch would have a brand new floral arrangement. We have no floral spending, Ta-da! I have saved $2.5 million.

You can imagine kind of how this went, right? John is staring at me much kind of like you guys are. Allison is glaring at me. You know, my promotion is going out of the window. She is like, this is not happening. My eight colleagues are looking at their papers snickering, you know, kind of going "Oh my God" and they dismissed the meeting. So I didn't get promoted. But, you know, I learned a lesson. I mean, my lesson was you're allowed to go out there with big, bold ideas. I still think my idea was a good one even if they didn't adopt it, but I think that's where I wanted to start, the strategic sourcing kind of way back circa '95, you know, yours truly.

But where are we going now 'cause it's 17 years later. And what I really see is there's definitely procurements caught what I think between a rock and a hard place. And we're going to talk about that and I'm hoping to give you guys some ideas of what I see clients doing to get out of the middle of the rock and the hard place. Right now, 17 years later, savings is still on everyone's agenda and we'll talk about the numbers but it's on the agenda. So savings, you've got to drive that. No doubt about it. But think about all of the other dynamics you have to address, right? Think about risk. We've got all sorts of risk. It's not just, you know the old force majeure but now, we have regulatory issues. We have brand-related risks. We have suppliers, big ones that just simply you know kind of default and go out of business. We have all sorts of risks. And from a risk point of view, it isn't simply looking in the rearview mirror and trying to predict who is going to go out of business or who is going to cause a problem. It's not simply trying to figure out what your risk mitigation strategy is if there's a problem. It's really trying to figure out how much risk should you have in your portfolio and do you have the right amount of supply risk in your portfolio. And if you do or don't, what do you do about that?

Well, that's just the risk complexity. You've got technology. I'm an old technologist. I actually started at free markets and in the e-sourcing space. I was absolutely convinced. I was quoted that by 2010, we would be doing a billion e-auctions a year. I kind of missed the mark on that one, but I thought it was going to be on everyone's desktop that we were all going to be doing e-auctions. And yet, you look at technology today. It's still not adopted. There have been many, many changes. Companies acquiring companies. Technology changing. Cloud arrived. So massive changes on the technology side. And then, operating model, right? There is no doubt that there are options available to you today from an operating model point of view that probably were not available you know 17 or 20 years ago.

So that's one side of your and That's what I would call your rock. Your hard place is every client I go to talks to me about talent. Talent is a problem. Resources are a problem. Having enough resources. Having enough resources doing the right thing. Having enough resources in the right place at the right cost. Everyone stretched way too thin and everyone is looking for resources. So, how do you get out from between this rock and this hard place? I'm going to go to the numbers because part of what I wanted to talk through is groundness in numbers. So we did a survey and partnered with Ardent Partners. You all have a copy of it on your seats. I ask that you don't read it now but you can read it later. But long story short, we went out and talked to almost 300 chief procurement officers. Ardent Partners went out and talk to them to be honest. The purpose of the survey was to actually get their perspective on the state of procurement, what they see are their key impediments, their key issues, what they see as their key strategies and they really even talk about some of the alignment challenges that are going on.

So let's start. One of the things I found most telling from a CPO point of view is it is still all about savings. Savings was by and far, their number one priority. It's their number one pressure. Now, does that mean and as you look at this and as you look at survey, does that mean that they're saying, well we've got all the technology working and we've got processes working and we have people in teams working. It's like and It says, I think the answer is no. It doesn't mean they have everything working, but job one is to drive savings. And I think a little word to note on here is it's to drive more savings, it's never enough. What you did last year isn't good enough for this year. So, that's really very much the pressure that the CPO is feeling.

Now, let's talk about, do we think it will change? And I kind like in this to and And I apologize, I have to tell stories, but I'm a proud mother of an 18-year-old. I just sent him away to college and for the last four years, while he was in high school, our discussion centered around grades. How was your test grade? How was your quarterly grade? How was your GPA? How was your homework? Now, I'm not a bad mother, right? We also talked about his friends and, you know, everything else but his job was his grades because that's where he was going. So three weeks ago, sent him away to the University of Utah. He's a big, you know, freshman there, woo-hoo! All ready for, you know, his independent free life. Our conversations are still about his grades. So on Friday, he said and He had his first midterm. How did you do? Are you ready for it? How are your grades? How is that looking? How are your homework? So I think, you know, we're naive when we think if your job is your job, you have to do that. That's your table stick. His job right now is to get grades. Procurement's job is to deliver more savings. That is definitely going to be and That's today's issue. That's tomorrow's issue.

Now, what I heard a lot about this morning and I hear from my clients all the time, is that's not all we want to be known for. We actually want to and As Scott Wilkerson said, we want to do savings and value. And so, the real question is how do we do savings and value and not simply just savings? But we have an interesting dilemma. We asked in the survey what does the CFO think and the CFO, what was real telling to me is if you look at number one here, CFO is asking for savings, but notice the word, "implemented." They're asking for not identified which I know, you know, we've been real good at doing, right? We can develop pipelines. We can identify negotiated savings if all else works, blah, blah, blah, blah, but implemented is definitely what the CFO is looking for. And I remember way back, you know, 10 to 20 years ago and I guess, not 20 years. Ten years ago, when I was working with Hewlett Packard at Chevron, he described it as "I don't really care about the money that is sitting on the table. I care about the money that I am taking and putting in my pocket." That's what the CFOs are saying is they are caring about the money that they have that you can prove has been implemented, they can book and identified as number three.

Now, back to that whole question around value. I find it kind of tragic, that cost avoidance is kind of down the list because frankly, when I work with clients, I think a lot of the value we, procurement professionals, can bring is we can help our business units users think about how not to spend. I've told numerous clients, you can save a heck of a lot more money by simply not buying it than you can by buying it for 10% cheaper. And with the way the world is changing, I had a client, a CPO, who was renegotiating photocopier contracts. And I said, "Why?" How many people print and photocopy? How many do you really need? Does everyone need their own photocopier? But unfortunately, cost avoidance from a CFO's perspective is lower down the list. So again, back to our rock and our hard place, we have to deliver implemented savings. We also want to all deliver more than just simply implemented savings. So how do we do this?

Before I go into how the landscape is changed, which I think all of you, you know, probably understand, I would like toand you know, liking it to another analogy because part of my mission is I really want to kind of spur all procurement professionals to think differently, be bold up our game, right? I'm not a big football fan, but we watch a lot of football around our house. So I've been watching it all weekend long and one of the things that occurred to me is, you know, when you think about football teams, we've got an offense and we've got a defense. Offense from a business point of view, I'm thinking, that's sales. That's marketing. I'll even throw R&D in there, right? They're scoring points. Defense, that's us. Defense, our job is to keep the points low, build that margin. That's how our companies win. And so, I really would like to suggest that if we think of ourselves as how can we be the most effective defense of team and how do we have the right people in the right positions, so that we don't have the 400-pound lineman trying to chase down the wide receiver. I mean, at the end of the day, if we can keep the points as low as possible, keep the spend as low as possible with the greatest value our companies can win because we're giving our Salesforce and our salespeople that kind of advantage.

So we talked about the business landscape has changed. I said there are more risks, no doubt about it. You guys all have to deal with that. Technology has changed. The people and the talent side has changed. This morning in one of the sessions, fascinating comment that I loved was the fact that we have a whole generation of people coming in to our profession that are much younger, 20, 25-year-old people that they're different than we are. They're motivated differently. They interact differently. I know from a consulting point of view, that we are managing them differently. I would even assert from a procurement point of view, we need to think about how to have them help transform our discipline and make it the world class discipline that it can be.

Now, one more thing and Here it is, sorry. So we asked and We did ask the CPOs what's their problems, right? What's getting in the way? And they did say number one, staffing and talent constraints. I have people all the time come back to me with, Sarah, can you and We're trying to recruit an X, Y, Z manager. Do you know anybody? Or we've gotand I have a client right now that has 300 people in a sourcing organization that they admit are probably 300 of the wrong people. So they're trying to figure out what do we do because we've got 300 really transactionally-oriented people and we don't necessarily have 20 category management people? So, I think there's no surprise, staff and talent is an issue.

I think we're still struggling and I think there are building blocks. They're still struggling on aligning processes, aligning systems. None of you guys, I've yet to hear any procurement group say to me, "hey, I just got a massive budget increase." You know, "life is really good." I haven't heard that one. And then, the whole lack of engagement. And that lack of engagement issue has been hanging out there for as long as I've been doing this. I was on a call last week with one of our big teams doing a big sourcing project where half of the waves are delayed because the stakeholders are too busy. They won't engage. And I got frustrated with our team because their typical response was, "We're escalating it." And my pushback is always, what good does just escalating it do, right? I mean, you know, do you understand their priority. If you're not in their top five priority, then it's pretty hard to get them engage because I know, for me, if you're not in my top five priority, it's pretty hard to get me to respond, right? So, lack of engagement is an issue.

And you'll see in the survey, one of the things that I found really telling and almost upsetting was the counter, which was 70% of the business users think procurement is simply not an influence or they think procurement is silo'ed and they think procurement is transactional. So, the vast majority of business users don't have a great feeling for, you know, our discipline. Definitely a challenge. No doubt, we still have a long way to go to get out from this rock and the hard place.

Let me go back to and you know, and I'm going to blame this one on Mr. Wilkerson again, but go back to my football analogy. I think in today's world, with all the challenges facing you, all of you are playing pro NFL football or you better be playing it. You're in the pros. I think the problem is many of you have teams that might be college capable. They might be high school capable. Scott said they might be flagged football capable. And we've got to do something about that because we can't keep waiting to have it magically fixed by a silver bullet technology or a new influx of people or kids or whatever.

So I've started negative and I apologize. I don't want to imply that all is lost and no progress has been made because in the survey, the CPOs wereand they were pretty positive on some issues, right? They definitely think they're getting more executive engagement. That's a good thing. They have focused on improving their strategic sourcing processes. They're improving their kind of linkage with finance and they're increasing their spend under management. Now, that's and But if you look at the percent up here, it's still not a lot, right? I mean, it's still, we're not saying, you know, 90% are saying this. We're saying in the 50%. And they still have issues that they're trying to work on. What I thought was equally interesting and I highlighted them in red here, was the lack of use of third parties to help them out of this conundrum. So 17%, I think, or 17% really were at this point outsourcing something. And we're going to talk about outsourcing. I call it the "O word" but we're going to talk a little bit about it. But really, a very small percent were even looking at any aspect of outsourcing. You know, a pretty small percent, 24% are leveraging third party resources to help them in any way, shape, or form.

So again, what this feels like to me is it's a much more complex world. We're definitely stuck in a rock and a hard place. There are resources that are out there that could be leveraged and could be used and they're not being used. I think what that would say is, your football team may not make it much past if we don't start doing something kind of radically different. So let me get into what do I see? How do I see procurement taking the kind of the driver seat and what do I see them doing? I see a lot of movement right now in operating models. That seems to be where companies are definitely focusing. And when I see operating models, what I'm seeing is we have companies decentralizing. We have companies recentralizing. We have companies creating shared service centers. We have companies beginning to outsource pieces of the process. And we have kind of everyand We have people green field building all of the above. So there is no doubt there's a lot of discussion around how do I actually fix this in a holistic end-to-end way as opposed to the 1996 way where let's just do another sourcing project? And I think that makes a heck of a lot of sense. It really does.

An emerging trend just to real quickly talk about outsourcing, ignore the eye chart, but at least I want to bring to life for you that there are and the outsourcing has changed. So ten years ago, the initial procurement outsourcing providers, they were pretty much all end-to-end. They wanted you to give them everything or nothing. And it made itand And I don't know very many procurement people that went for that. That was a little bit kind of you got to be kidding me, right? It's, I'm not handing you everything. It has certainly become much more of a plug and play. And it has certainly becomes a solution that companies are using to fill in where you have talent gaps or to offload and get a better different type of resource.

So let me give you a couple of examples of clients that I know of and how this is actually working. So think large, branded retailer. So one of my clients, brand is most important tripling in size. Procurement budget is not tripling in size. So they have to enable this massive growth of their company as with the same old, same old. Oh, and by the way, I think if I use my football analogy of where they are, they're probably about you know freshmen high school kind of level. They really just stood out their procurement kind of functions a couple of years ago. So they are really learning as they go.

Well, as they have in the last year begun to say we have to do something different. We don't have time to just let this gradually grow and gradually evolve. They made a conscious effort to say let's take all rec to pay and we'll put it in a shared service center. Captive shared service center, we own, we run, we'll run it in a lower cost location. Let's build category management becauseand And in particular, for categories that really matter to them like marketing because they're a branded retailer. We will go out of our way to go recruit very expensive marketing people that can talk to the marketing people and actually help them really rethink the whole use of digital and the whole use of the marketing experience and become almost an internal consultant to their marketing department.

They're doing two other unique things. They decided to use a little bit of outsourcing to split off their sourcing support. We got to be honest. When we go back and we think about writing an RFP, publishing an RFP, collecting RFP responses, most of us that that's sort of what we did. That's now become a little bit of the tactical aspects of sourcing. It's not that strategic part. So they've gone and they found a boutique provider that can at least handle in a very cost effective manner that sourcing support. So that's the only piece of outsourcing. But then the other thing they finally did is they said, what about our tailspin? We still have a big tailspin sitting out there. We know that there's dollars to be saved. We have no bandwidth, no time; don't want to put my expensive resources against it. So they went and they hired a consulting firm, another boutique consulting firm to simply, as a project, rationalize and attack the tailspin. Bring it down and save what they can.

So I consider that a hybrid model, but it's a use of all the different components that are available. So now, let me talk about a different one. Consumer products company, under resourcedand under resourced procurement group. This happened with a consumer products company. I've got a chemical company, same, same issue. It's amazing how many, you know, multibillion dollar companies have eight people or nine people in their sourcing group and they're supposed to be managing billions of spend. So in both of these cases, what they decided to do was simply augment their current group. You know the no change of headcount, no headcount lost whatsoever, but they went and they outsource to a BPO provider. They said, okay, how do I get you guys to bring in the expertise, build my pipeline, drive my activity, make this really happen? And both have been widely successful.

All of those three examples, the senior person that started it off, since they got their machine working and that's what I call their machine or their team because they were pretty bold and they made their team work, they've all been promoted. They've actually begun to take on more and more corporate responsibility. So I think that works and that works well. But that's not the only answer.

So let me go back to the bank. So it's funny how it's a small world. Seventeen years later, I seem to have found my way back to the same bank where I embarrassed myself and came up with the floral arrangement idea. Much bigger bank now. It's been merged, divested, acquired, grown. It's just huge. It's just a whole different entity and fortunately, John is long gone and Allison is long gone. So I'm safe on that front. But same challenge. Their challenge is, now, they've got the regulators, you know, absolutely down their throat saying that they must know for every vendor if that vendor is compliant to all the local laws and regulations in any place where that vendor operates. Holy cow! Can you imagine that one, right? By the way, they need to save money. That savings target didn't go away and the CFO, once he realized savings, not just nice pipeline of identified savings.

So this bank has spent about two years. We worked with them for a long time as they and They really deep dive assessed their procurement functionality. And they admit they're a flagged football capable. They're about as immature as you could possibly get. So they looked at BPO. They really did look at a hard end-to-end BPO solution where they said maybe our best answer for a true sea change would be to outsource as much as possible. And after looking at BPO, they decided that wasn't for them. And that was okay because that's also a perfectly good decision, but what they learned in the process is they learned much of the functions that a BPO provider would provide, they can build themselves.

So they're now on a journey where they are building category management. They are transforming their sourcing people so that sourcing support is going to get peeled off and the remaining sourcing people really do sourcing. They are moving rec to pay to a captive center. But they're also building spot by desk. They're building a savings tracking function at the compliance level so that they can report on compliance spend and realized savings, not just identified savings.

It's a long journey and they recognized it's a long journey. And that's just a little bit of what they are doing. But at the end of the day, I would assert all of these are examples of companies fundamentally using their operating model as a way to get out from between the rock and the hard place because an end is possible. You can't save more money. There's tons more money to be had and put on the table and there's tons more value for each one of us to bring to our business partners.

All right. So with that, one of the things I just wanted to kind of close with. I wanted to and the purpose of my discussion is I wanted to say if you're feeling squeezed, you're not alone. And if your CPO is feeling squeezed, they're not alone because all the CPOs are definitely reporting that they are caught between this rock and the hard place. But there are solutions. And I would encourage all of us to go bold. I think it'sand maybe I have been saying this now for 17 years, but I definitely think this is the time for procurement to step up to the table and actually get your teamand get your defense to be the number one defense and begin working with your offense and make it work. There's many ways to do that and I'm happy to dialog on that. I'm happy to answer questions. I'm really and If anyone wants dialog on the results, you can always reach me at sarah.pfaff@ey.com. Pfaff is a weird name. It's pretty easy to find. And take it from me just in conclusion, from someone who recommended the armored guards should move floral arrangements around, I really do think there are no bad ideas. I just actually think there are ideas that we're too chicken to do anything about. So with that, I'm going toand I don't know how much time I have and

Host: You have five minutes for questions.

Sarah Pfaff: I have five minutes for questions. So I am warning you, any questions that are hard go to Scott Wilkerson. I already told him that.

Beatriz: Hi. Beatriz Loizillon at J.Crew. I have a couple of questions. So, you know, you mentioned the talent shortage and I'm wondering, you would think the outsource providers would be facing the same thing and you know, are they and how are they handling that? And then the second question also around outsourcing is, you know, how do you do that, but maintaining the same ROI because that's something else that our CFOs in organizations are looking at?

Sarah Pfaff: You got it. You had two questions. So are the outsource providers having the same talent challenge? I would assert their talent challenge is a little bit less than your talent challenge on the category management and sourcing side. And the reason is because they can have an expert in travel. They can have an expert in temp labor, professional services. They can have experts in marketing that they get to work on multiple clients. So they have a career path. They get lots of experience because they're in the market time after time after time. They can get paid more by the outsourcing provider. So you're competing against the outsourcing provider for some of those category experts. The other piece to it is most of and A lot of clients and I don't know about you guys, but you struggle with and your headquarter locations are not always exactly where people want to live. So when you try to recruit the best expert in digital marketing and you happen to be in, you know, the middle of Arkansas, sometimes they don't want to move. And many of us don't have great virtual environment set up. So the outsourcing providers on the category management, they're pretty solid there and every client I know that's looked at them have always come away extremely impressed. The second half of your question is the ROI. The ROI, Sarah's opinion, it doesn't work if you're just doing a labor arbitrage play. It's not and it's not about outsourcing rec to pay. It is literally, if you believe that they can drive more savings, then the ROI is well worth it because they can drive. Their engine is faster. It's faster, more robust, more just plain old oomph than a lot of our engines can be. If you can build the same engine, then go for it, but if and And that's where the ROI comes in. It's not the solution for everyone though. So I really do want to say and Like I said, I've got my client up here. We're building it. They're building it themselves and I am convinced they can build as good an engine themselves, but mind you, they have an awful lot of scale.

Host: Anyone else? One more.

Sarah Pfaff: I'll be happy to tell you some of my other great innovative ideas that fell flat on their faces.

Guy: Hi, Sarah. My name is Guy with Amway. So I've got just a quick question related to retail. So, as this war on talent continues to rage throughout our entire professions, how does and and in your surveys has remote work come into play at all or how much of that is going to be relevant in the new world of procurement or just in the profession?

Sarah Pfaff: Yeah, it is. I think we need to begin to seriously think about how to change our working model to attract the talent. I think we need to be able to work more remotely. I think many of your companies, you actually do work remotely. So the interesting thing is I watched companies where your business units are distributed all around the world and then you centralize your procurement in one building. And I query that one, right? I say, why and Why do you have to do that? Why do you have to have, you know, the regular, you know, 7:00 to 7:00, five day a week work week and is that going to really work with kind of the new generation coming up? So to attract new talent, I think we have to change some of our working models. I would also assert to attract new talent; I would encourage all of you, go out and attract them from different pools. We don't have to always hire people that say they want procurement. I'm a huge fan. Huge fan of saying, go out and raid your Salesforce. Raid some of your salespeople. Convince them to come in and be part of procurement for just some period of time because sales and procurement are really an interesting kind of hand-in-glove kind of activity. And I actually know as a CPO, one of the great ways that he showed value to his business partners, we all do should cost analysis, right? So he had a huge 12-person analytic team doing should cost analysis on all their vendors. He went to salespeople who are trying to sell their service to clients and the clients are always saying, well, you know, could you give me an extra 10% off, 5% off or whatever, whatever, whatever. He brought his should cost analysis analytic team to the salespeople and started making transparent what it really did cost them to produce. And as a result, they won more business. They won more business. It was like a great partnership. So I do think talent, we're looking and I think we looked too narrow. I think when the business users say that procurement is silo'ed, I cannot deny that statistic and maybe it's something we need to open our eyes to and begin to broaden and take in some kind of other people, fresh brought. All right. I think my time is up. I thank you. I appreciate your patience and look forward to talking to you later.