Unlocking Funds For Innovation By Lowering Run Costs

UNLOCKING FUNDS FOR INNOVATION BY LOWERING RUN COSTS

Helping Clients Leverage Global Services & SourcingAdvisory | Supply Monitoring | Governance Supportwww.NeoGroup.com | www.SupplyWisdom.com

www.NeoGroup.com | www.SupplyWisdom.comCopyright © 2016 Neo Group, Inc. All Rights Reserved.

UNLOCKING FUNDS FOR INNOVATION BY LOWERING RUN COSTSCopyright © 2016 Neo Group, Inc. All Rights Reserved.

Quarterly Earnings are reported and the results are not what

the street expected or for that matter what your shareholders

expected. Corporate starts making calls to all the business

unit and key functional owners to start thinking about next

year’s key initiatives. Without even hearing it from anyone

else, you know reducing your run costs will be in the top 3 of

the corporation’s key priorities.

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Introduction


This time it will have to be what they call “radical” or “out of the box” or input your own clever “catch

phrase” for reducing the cost of operating your business.

You scramble your team and start scheduling brainstorming meetings to figure out how to cut more

costs from your operations in the midst of trying to stay ahead of the competition with new products,

entering new markets to capture more share and meet key customer commitments with existing

products. Sound familiar?

Typical run cost strategies tend to focus on several areas: tactical across the board cuts, reducing

staffing levels and implementation of continuous improvement programs to reduce operating costs.

These standard initiatives are certainly a step in the right direction, but do they deliver the needed step

function, sustainable cost savings and strategic value needed for companies to remain relevant in

today’s global economy?

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INTRODUCTION

UNLOCKING FUNDS FOR INNOVATION BY LOWERING RUN COSTSCopyright © 2016 Neo Group, Inc. All Rights Reserved. 4

Today, more and more companies are focusing on how to cut costs, while continuing to

invest in growth. They are looking not only at their traditional methods of reducing their run

costs, but are also looking at new ways to fund growth. With technology advancements

and the breath of global talent available today, companies are looking at fueling innovation

to stay ahead of their competition.

INTRODUCTION


APPROACH TO

INNOVATIONThe term innovation can mean many things

depending on the audience. It is critical

before one begins to establish any type of

initiative to be specific and clearly define

what kind of innovation is expected for the

company as a whole, a particular business

unit or specific functional team. By doing so,

expectations and the associated risks can

be clearly communicated both internally as

well as externally to key suppliers.

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As the type of innovation varies so does the approach used to enable it.

We view innovation as:

Innovation is not only about designing a new product or service to sell, but also focusing on existing business processes and practices to improve operational efficiency. Innovation can also be in small incremental steps or significant breakthroughs that change the game.

APPROACH TO INNOVATION

• Incremental Innovation: Innovation that keeps existing offerings competitive.

• Breakthrough Innovation: Innovation with new value propositions that allows

extention into new markets.

• Transformation Innovation: Innovation that creates a new market or industry.


Some companies have a bottom up approach

to innovation. There is an inherent culture

within these companies that has either been

around from the beginning or that developed

over time. Each business unit, each functional

organization has an embedded and disciplined

innovation process that constantly pursues

innovative ideas to improve their teams’

performance and bring business value to the

company. Typically this method is a self-

funding approach to pursuing innovation that is

specific to that organization or business unit.

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Another approach is to drive innovation from the top

down. The company’s leadership team sets the top

innovation objectives for the corporation and diverts

funding to those projects to be pursued. A variation to

the top down approach is the use of dedicated teams

solely focused on moving ideas through a formalized

innovation gate process from the incubation stage

through commercialization of the idea. This approach is

typically independent from the mainstream business,

uses a VC type approach to funding and has more

flexibility when it comes to the business case hurdles

since it is primarily focused on the long term.




While approaches vary, what is consistent with

companies who are successful at enabling

innovation is the focus they place on the talent

of the team, resilience of the leadership to stay

the course and not being afraid of failure, and

a disciplined governance method put in place

to ensure diversity of thought and progress

toward delivering business value to the

company.

For example, companies like Procter &

Gamble and Boeing found out early on that

their talent pool and diversity of thought

expanded when they found ways to include

their suppliers in their innovation process.

Boeing

Boeing builds the most complex commercial

product in the world. Each project almost

literally is a “bet-the-company” experience.

The Boeing 787 “Dreamliner” aircraft was such

a project that involved 50 partners from over

130 locations working together for more than

four years. Boeing’s objective was to leverage

the unique capabilities from this advanced

network of partners and share risks with them.

While Boeing continues to possess deep

individual technical skills, a competitive

advantage Boeing has acquired is the ability to

orchestrate, manage and coordinate a network

of hundreds of global partners.



P&G

P&G’s degree of corporate growth could not be

achieved without significant innovation across all

aspects of P&G’s business even extending to their

relationships with suppliers and partners.

A concept P&G institutionalized to do this came to

be known as Connect & Develop. The goal was to

gain half the ideas from inside and half from

outside the company. This flipped the conventional

sourcing approach of incenting based on

Performance Metrics or SLAs to challenging and

incentivizing its’ suppliers for innovation.

P&G would focus much of the business model

around contracting for transformation instead of

contracting for day-to-day work under a

transaction based or managed services

agreement. Key to their success was making

innovation a disciplined, reliable, repeatable and

measureable process. Another key to P&G’s

success is their choice to work in a highly

strategic and collaborative manner with their

suppliers.


OPPORTUNITIES TO FREE UP THE FUNDS TO INNOVATE

Today, more companies look to free up funds to fuel

innovation by implementing some of the following

run cost reduction strategies:

LEVERAGING NEW

TECHNOLOGIES

1. Move to Cloud InfrastructureCloud services can provide significant cost reduction

and flexibility to a company’s operations. The reason

is because the Cloud was designed from the ground

up to harness the internet, virtualization, and

automation to streamline business operations. Most

Cloud options are self-service, so that one can

easily scale resources up and down.

The Cloud also employs systems management

and automation tools to ensure that resources

are being used to their full capacity and that

resources are available in case demand

increases.



Companies like Amazon and Salesforce.com

pioneered the cloud with their respective

Infrastructure-as-a-Service (IasS) and Software-

as-as-Service (Saas) offerings.

Platform-as-a-Service (PasS) offerings are also

available, which enable the development of

custom applications or add-ons to existing ones

through API’s.

There are many companies today that provide

strong cloud or SaaS offerings. ADP, for example

offers many key services such as payroll over

cloud. Tata Group’s Tata Communications

division offers an infrastructure as-a-service

(IaaS) cloud computing service. Accenture offers

its cloud platform to clients.

Infosys together through a partnership agreement

with China’s Huawei Technologies Co Ltd and

others offers its’ customers a portfolio of cloud

services. HP’s services arm also offers a portfolio

of cloud products and services.

While there are immediate flexibility and financial

benefits of enabling Cloud capabilities, one also

needs to be careful about reliability, security,

development roadmaps and support associated

with Cloud services that may be implemented.

Because Cloud has a shorter track record,

companies may start by using it for less critical

areas of technology before getting more

comfortable with it over time. Not everyone will put

their enterprise critical applications in the Cloud

and most companies will want a mix of both.






While the storage of massive amounts of data on big computers is not a new idea, what has changed is the need and expectation of mining that data for making key decisions. That’s what is called Big Data analytics and all experts agree that the ability to analyze big data will be the difference between success and failure in almost every type of business in the coming years. Companies with superior data analytics capabilities have found ways to build long-term advantages. FedEx Corp., for example, has for years used its team of analytics professionals to create and maintain a competitive advantage through lower costs and increased revenue as a result. One of the factors that has helped Wal-Mart Stores Inc. become one of the world’s largest and most successful retailers is the strength of it analytics.

More companies are creating data science capabilities to enable competitive advantages. Building internal capabilities can be time-consuming and expensive, especially since the limited pool of data scientist is in high demand. Because data science talent is rare and the demand for such talent is high, organizations often work with outsourced partners to fill important skill gaps. Before one decides to source analytics, a fundamental question to ask is, “how critical is the data to your business”? If the data is essential to the company’s business survival, some companies may decide it should be kept in-house. Other analytics can be outsourced. Companies should be careful to not to lose their expertise or their core intellectual property (IP), which suggests that companies should first do a thorough job of identifying which capabilities are core and which could be better severed by a partner.

2. Investments in Big Data Analytics



Enabling data science capabilities whether internal or using a partner requires organizational leaders to think about what the business is trying to accomplish. They also need to understand how data is used through the organization and consider how the project or initiative will affect people, processes, technology and decision-making. Sourcing analytics requires a carefully constructed relationship, and the negotiation and evolution of this relationship needs to clarify who does what, who owns what and how each party can use the information it has.

Today, the digital revolution has changed everything. A generation of tech savvy consumers is creating new demands that will force enterprises to adapt or be forgotten. The focus is not on “how much”, but on “when”, “where”, and “how good is it”.

3. Leverage Automation

Businesses are now looking to work smarter rather than cheaper. Some analysts estimate that automation technologies can achieve cost savings of as much as 60 percent savings and reduce headcount by around 50 percent. Smart enterprises are learning to change the rules of the game from a focus on scale to a focus on outcomes, and intelligent automation is one key lever that will enable this transformation.



An example of intelligent automation is what is commonly termed Robotic Process Automation (RPA). Companies are using RPA to automate processes that are repetitive, rules-based and frequent. Here are some examples of RPA impact on businesses: 1. A major global bank automated a wide

range of processes, including Fraudulent Account Closure, Loan Application Opening and Right of Set Off, saving over 120 FTEs and reducing their bad debt provision by £175million pounds.

2. In a UK insurance firm, a team of just 4

people can process around 3,000 claims documents a day (of which around a quarter are on paper) – without RPA the team would need as many as 12.

3. Following the implementation of RPA

technology, NHS Shared Business Services is able to close 180 sets of accounting books every month in just four hours.

4. A large US firm introduced a Service Desk

robot that was able to answer 62,000 calls a month from the firm’s IT staff, solving 2 out of every 3 of the problems without human intervention.

Automation is evolving rapidly. As software gets increasingly more sophisticated, and more and more processes can be automated, companies will take a DIY approach to managing and automating their own processes. In the meantime, new service providers / systems integrator are emerging that are focused first and foremost on RPA. These providers will take a set of business processes, whether they have been outsourced or not, and automate them. The remaining tasks that are currently too complex to automate are left for the traditional providers to pick up.


LEVERAGING PARTNERS THROUGH SOURCING

Companies who successfully work with their suppliers, find themselves going through an evolution – the ability to move from a cost focus to one of enabling strategic business value. The progression starts at the beginning stage of basic labor arbitrage and efficiency to a more mature and advanced stage that delivers process and operational excellence to finally reaching the leadership stage of driving strategic value. Companies that are driving their suppliers for strategic value want them to innovate constantly. Within high performing relationships, the clients and suppliers collaborate to perform a series of innovation projects that deliver substantial long-term improvements to operating efficiency, business process effectiveness and strategic performance.

LEVERAGING PARTNERS THROUGH

SOURCING



Consider the following examples: • A supplier to a health care company

helped improve the claims adjudication process by using analytics to predict claims likely to result in rework. The predictive tool now intercepts more than 50% of claims that would have been reworked, saving the client $25 to $50 in administrative costs per overpaid claim and $6 to $12 per underpaid claim.

• An aerospace manufacture worked with its

supplier to add new key performance indicators and processes to manage third-party vendors. This allowed the client to improve customer-order fill rates for new parts from 60% to 85% and turnaround times for delivering parts to grounded vehicles from 21 hours to 17 hours.

• A supermarket chain collaborated successfully with its supplier to implement new forecasting tools, techniques and methods that improved the client’s stock fill rate from 80% to 95%, reduced inventory by 27% and reduced error rates by 50%.

• A semi-conductor firm leveraged advisors

to evaluate engagement models and align them as per program intent. Moving significant portions of applications support and infrastructure monitoring enabled them to reduce run costs by over 30% a year.


Companies and their suppliers must work together to foster innovation.

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Companies must motivate suppliers with incentives and both parties must nurture a collaborative culture that produces continuous waves of innovations that accumulate to improve the overall business performance. Here are some ways to enable a co-creative relationship: Focus on productivity Collaborate with your service providers on exploring ways to enhance productivity. We see market leaders able to improve the client’s productivity by 3% - 5% per year.

Reserve time to drive the ‘Innovation Agenda’: Innovation objectives slide down the priority list when people are focused on operations. Contractually dedicate time each year to drive the innovation agenda. Gain Share Specific to Innovation Projects: Build business cases for each innovation project and agree in advance how the financial compensation would be allocated. Use Governance to Incent Innovation within Organizations: Create special innovation governance provisions that go beyond the existing committees governing the day-to-day operational deliverables.



Ensure an ‘Idea Generating Culture’: In many instances multiple organizations take part in ensuring innovation happens. Each organization needs to understand what’s in it for them and what their part contributes to the overall performance of the business. Unify the culture across the organizations and make it one that welcomes and rewards innovative ideas. Encourage all levels of the organizations to challenge the status quo, to question assumptions and to identify innovations that will improve overall business performance.

Developing People & Talent: Working across internal organizational boundaries and with suppliers, across many countries and cultures to orchestrate and drive innovative ideas that deliver true business value requires unique skills. Evaluate recruiting, training and reward processes to ensure the right talent can be identified and retained. Embrace Change Management: High-performing relationships understand that they cannot wait for innovation. They must aggressively manage the change that innovation brings to their organization. Implementing the resulting innovation requires a strong commitment to change management in order to transition individuals, teams and organizations from the current state to the desired future state.


ConclusionIn today’s global economy, organizations are

striving to explore and find ways to reduce their

costs to stay competitive and survive. While

traditional cost reduction initiatives are a

necessity, finding new ways to reduce operating

costs so one can fund innovation is even higher

on the priority list. Cloud Technologies,

Automation, Big Data Analytics and the use of

Strategic Outsourcing Contracts are just a few of

the ways companies are trying to strike a balance

between the need for control, cost benefits and a

co-creative innovative environment that brings

lasting business value.

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Neo Group Can Help

The global sourcing landscape is constantly evolving. For a deeper discussion on planning and executing a

successful globalization strategy, contact one of our lead advisors.

Adolfo Masini Brad Pickar Hemant Puthli

Partner & SVP Partner & SVP Partner & [email protected] [email protected] [email protected]

Kevin English Pankaj Sharma Vikram Naaidu

Partner & SVP Partner & SVP Partner & [email protected] [email protected] [email protected]

About the Authors

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Adolfo Masini has over 30 years of experience leading

global business transformations. As a Partner & Senior Vice

President, Adolfo plays a critical role in assisting clients

across the full sourcing lifecycle, including strategy,

sourcing, governance and organizational management

services. Prior to joining Neo Group, Adolfo held a variety of

executive leadership positions at Comverse, Mobileum,

Alcatel-Lucent and Motorola.

Sachin Ghanekar has over 12 years of

experience in business process migrations of

major scope and complexity, and process

consultin. He has managed several process

migrations from North America and UK also

participated in process diagnostics, due diligence

activities and development of outsourcing

transition plans. He is a subject matter expert for

process mapping of business processes identified

for outsourcing.

mailto:[email protected]







About Neo Group

Founded in 1999, Neo Group helps organizations meet business objectives and address business

challenges by leveraging global services and sourcing. To learn more about Neo Group, please visit

www.NeoGroup.com.

About Supply WisdomSM

Supply WisdomSM is a unique cloud-based service that provides data and intelligence for sourcing risk

and opportunity monitoring of global countries, cities and suppliers. To learn more about Supply

WisdomSM, please visit www.SupplyWisdom.com.

No part of this report may be reprinted/reproduced without prior permission from Neo Group.

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