Accenture Spend Trends Report Q1 2014

Spend Trends Report Q1 2014

2 Copyright © 2014 Accenture. All rights reserved.

Insights Born from Experience

We are pleased to bring you the new Accenture Spend Trends

Report, which combines the Accenture Supply Watch with the

Procurian Spend Trends Report and reflects the best thinking,

insights, and intelligence from both publications. We are excited

about having doubled the size of our team though the combination of

category specialists from Accenture and Procurian, which provides

even more market activity, data, and experience to draw upon.

Our team helps more than one hundred clients optimize billions of

dollars of spend across the globe. This means they are in each major

supply market dozens, sometimes hundreds of times a year. The

result: powerful aggregate supply market intelligence and a unique

set of cross-client spending and spend management insights.

With this unique set of intelligence and insight, we have compiled a

summary of the top trends we are observing in each major area of

spend—whether changing market dynamics or new spend

management strategies—and offer new initiatives to consider.

Our core commitment is to deliver actionable insights and market

intelligence to you, our clients. We welcome and encourage your

feedback to help make this report more valuable to you.

Keith Hausmann

Managing Director, Global Delivery for Procurement BPO

Accenture Operations

Author:

Mark Hillman—Manager, Market Insights & Analysis—Accenture Operations

Category Specialist Contributors:

Ed Sands—Logistics

Ryan Shadle—IT/Telecom

Greg Coletto—Marketing

Perianne Grignon—Media

Peter Hirano—HR

Manfred Vogels—Contingent Labor

Allan Brown—Travel

Luis Gile—Equipment, Engineering, and Construction

Vladimir Ryabovol—Packaging

Ravi Sethi—Global Raw Materials

Cobb Pearson—Energy

CATEGORY EXPERTISE ANNUAL

PROJECTS

SUPPLY MARKET

EXPERTS

MRO / Facilities 597 ~ 80

Logistics 291 ~ 50

Marketing 989 ~ 80

Corp. Services 1,036 ~ 60

IT/Telecom 1,464 ~ 70

Direct Materials 282 ~ 30

Capital (EEC) 765 ~ 40

Travel 589 ~ 30

Energy / Sustainability 515 ~ 30

Sourcing Utility/Spend Managers -- ~ 600

TOTAL 5,158 ~ 1,050


Executive Summary and Macroeconomic Backdrop

Notable highlights from the first quarter:

• S&P 500 Index +176% since the March

‘09 bottom; +19% in the past year

• Business sentiment improving;

consumer confidence strong

• Developed markets strengthening;

emerging markets hit speed bumps

• Mergers & Acquisitions activity +52%

y/y, best start since 2007

• Two-year budget deal helps reduce

regulatory/governmental risks

• Cash levels continue to reach record

levels but high capacity utilization levels

point to higher capital spending

Overall economic conditions continued to improve in the first quarter of 2014. There are signs that confidence is

returning to the market with global mergers and acquisitions (M&A) activity up more than 50 percent vs. the same

period last year. Business demand for credit is on the rise, and survey data indicates that more CEOs plan to

boost capital spending in the coming years to meet more stable demand. At the same time, improving global

demand growth could lead to more commodity cost pressure. In such an environment, businesses will require

keen supply market intelligence in order to support growth initiatives while managing cost pressures.

50

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100

Jan

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7

Oct-0

7

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Consumer, Business Confidence Levels Near Multi-Year Highs

University of Michigan Consumer Confidence NFIB Small Business Optimism

Recession



Worldwide Gross Domestic Product

(GDP) Growth Forecasts Tick Down for

2014 as Emerging Economies Slow;

Outlook Stable for 2015: The U.S.

economy has continued its slow and steady

recovery while Europe, still dealing with high

levels of unemployment and highly varied

levels of economic activity across the Euro

zone, is moving from recession to recovery.

At the same time, emerging economies are

experiencing more volatility and GDP growth

estimates for China continue to moderate in

the 7 percent range after nine years of

growth in excess of 9 percent.

Bringing it all together, in its most recent

World Economic Outlook Update, the

International Monetary Fund (IMF) slightly

lowered its outlook for 2014 (3.6 percent vs.

prior 3.7 percent estimate) based on

emerging markets volatility, while the outlook

for developed economies remains strong.

The IMF continues to expect GDP growth to

accelerate to 3.9 percent in 2015.

Source: International Monetary Fund World Economic Outlook

3.3%

4.0%

3.1%

3.8%

2.9%

3.6%

3.0%

3.7%

3.9%

3.6%

3.9%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2013 2014 2015

IMF Worldwide GDP Forecast Updates

Apr-13 Jul-13 Oct-13 Jan-14 Apr-14

http://www.imf.org/external/pubs/ft/weo/2014/01/


$200

$300

$400

$500

$600

$700

Repurchases Capex Dividends

2011 2012 2013 2014E


Outlook for Investment Spending Continues to Improve: A curious

chicken-and-egg problem has been a recurring theme of the current

economic recovery: corporations have been hesitant to make new capital

investments because of concerns over whether the economic recovery is

sustainable…but in order to have confidence in the recovery we need to

see more capital investment.

The result of this dynamic has been that corporations have focused on

returning cash to shareholders though growth in dividends (+24 percent in

2013) and share repurchases (+23 percent in 2013) at the expense of

capital investment (see chart below), but that trend is expected to change.

According to data from FactSet Research Systems, Inc., analysts estimate

that capital spending will rise 6 percent in 2014 after rising by less than 1

percent in 2013. One possible reason: the strong rise in stock market prices

means that share repurchases are more expensive and deliver less bang

for the buck than they did just six to twelve months ago, making share buy-

backs a less appealing use of capital.

Other factors support the case for improving capital spending. The age of

corporate fixed assets is at multi-decade highs, and capacity utilization

reached 79.2 percent in March (see page eleven), a post-recession high. At

levels above 80 percent, strong capital investment tends to follow.

Additionally, nearly half of the 122 CEOs surveyed in February and March

by the Business Roundtable said they planned to boost capital spending in

2014 vs. 39 percent of CEOs last year.

Another survey just released by the National Association for Business

Economics showed that 61 percent of corporate economists expect their

firms to increase capital spending in 2014 compared to an average reading

of 52 percent over the past four quarterly surveys.

Improving Confidence Driving Robust M&A and IPO Activity: Investors

seem to be encouraging companies to focus on growth over simply

returning capital to shareholders. Global M&A volumes climbed more than

50 percent in the first quarter of 2014, but most notably, for announced M&A

deals of $1B or more, 72 percent of the acquiring companies saw their

share prices rise after announcing acquisition (vs. the long-run average of

50 percent). This implies that investors are applauding efforts to grow the

top line via acquisitions. In addition, with the rise of the stock market over

the past several years, potential acquirers have stronger currency (stock)

with which to make potential acquisitions.

Initial public offerings (IPOs) also grew 41 percent year over year to more

than $11B, reflecting strong demand in capital markets and providing more

capital for growing companies to invest.

S&P 500 Companies Use of Cash (USD in Millions)

(4)%

24%

11% 0%

6%

22% 7%

Source: FactSet Research Systems, Inc.



Keep an Eye on Inflation as Economic Activity Rebounds: Increased

economic activity and growth in capital spending is almost universally

positive. However growth in investment and end demand can mean greater

risk of inflation. A recent survey conducted by the national Association of

Business Economics found that 31 percent of businesses saw higher

material costs in the first quarter (double the prior survey) and 35 percent

reported rising wages and salaries.

Oil prices continue to climb steadily higher (see below) with potential

impacts on a variety of input costs as well as logistics costs. Natural gas

also continues to rise, and experience elevated levels of volatility (see page

thirteen). As growth picks up, labor shortages are more likely to be

exacerbated, requiring companies to consider new approaches to manage

recruitment and retention, as well as likely labor cost inflation.

As we will discuss throughout this report, to effectively capitalize on growth

opportunities while also managing inflationary risks will require deep skill

and category market insight.

Q1 Spend Trends: The Big Five

• Coping with Skills Shortages Becoming a Core Competency: As the

economy recovers, skills shortages and wage inflation pressures are

rising for more skilled and semi-skilled occupations, requiring firms to

adopt a more robust total workforce management strategy to meet

demand for skills and keep a lid on labor costs while also managing risk.

• Tightening Logistics Market Requires New Strategies to Fulfill

Demand: In the over-the-road market, carriers have been reluctant to

add new capacity, fearful of another economic pullback. Now, with

demand improving, shippers need to look at ways to become more

driver-friendly as they are forced to compete for scarce supply.

• Energy Budgets Under Pressure from Volatility, not Just Rising

Costs: In Q1, energy and power prices reached levels of volatility not

seen for years—requiring energy users to consider new strategies to

manage energy costs and risk.

• Regulations Increasingly Driving Capital Investment Cycles: Not

only are assets aging, and capacity utilization levels high, but regulations

on air pollution and water use are forcing capital upgrades—and

opportunities for major efficiency gains—in certain segments.

• Rise of Shadow IT Shifts Role of IT Organization: The pervasiveness

of Software-as-a-Service (“SaaS”) has allowed functional departments to

acquire point solutions for specific functions, resulting in unmanaged

“Shadow IT” spend which IT will need to tackle through increased

partnership with business stakeholders.

Source: US Energy Information Agency

$30

$40

$50

$60

$70

$80

$90

$100

$110

$120

Ap

r-09

Oct-

09

Ap

r-10

Oct-

10

Ap

r-11

Oct-

11

Ap

r-12

Oct-

12

Ap

r-13

Oct-

13

Ap

r-14

Cushing Crude Oil Weekly Futures Contact Price (past five years)


ENERGY

EQUIPMENT,

ENGINEERING, &

CONSTRUCTION

CORPORATE

SERVICES—

TRAVEL

CORPORATE

SERVICES—HR

MARKETING

& MEDIA

LOGISTICS

INFORMATION

TECHNOLOGY

INDUSTRIAL

& MRO

(4)%

(2)%

0%

2%

4%

6%

8%

10%

Jan

-07

Ju

l-07

Jan

-08

Ju

l-08

Jan

-09

Ju

l-09

Jan

-10

Ju

l-10

Jan

-11

Ju

l-11

Jan

-12

Ju

l-12

Jan

-13

Ju

l-13

Jan

-14

12-Month % Change 12-Month Moving Avg.

Top Trends in Logistics

Competing on Convenience? New Strategies Required in Tightening Over-the-Road Supply Market: So, you spent the winter

months successfully negotiating favorable truckload rates for your most important routes…but now there seems to be a problem: your

preferred carriers are not taking your loads, resulting in higher than expected truckload costs. The result: scrambling to find carriers

with capacity (likely at a higher rate than anticipated) and the risk of poor delivery performance to your best customers. Several factors

are at play. As the economic recovery continues, demand for over-the-road capacity continues to rise. At the same time, there is a

supply crunch as carriers struggle with aging workforces, high turnover rates, and regulations forcing them to hire more drivers to ship

the same volumes. Although average hourly wages for drivers are on the rise, recruitment remains a challenge for carriers. With more

demand and tight supply, carriers and drivers are pickier about which loads they will accept. If drivers have to spend six hours waiting

for a slot on the distribution center dock, they lose earnings potential (most drivers are paid on a per-mile basis). Shippers increasingly

need to ask, “Am I a driver-friendly shipper with a facility that is efficient and well managed?” to lower the risk of delivery performance

problems and higher logistics costs.

Key Action: The increasingly tight truckload market is raising this issue to the executive level. Shippers should investigate the costs of

being driver un-friendly, and actively discuss ways to create driver-friendly facilities, build top-to-top relationships with carriers, and

provide more visibility to forecast demand and customer requirements.

P3 Alliance Ushers in a New Era for Ocean Shipping—How

to Respond: In March, US regulators gave approval to the

“P3” Alliance which combines the three largest global container

shipping firms into one operating alliance that could control

more than one-third of global shipping volume. The ocean

freight market has dealt with overcapacity for years, leading to

favorable rates for shippers. The alliance promises better

vessel utilization, and potentially better profits for ocean

carriers. The competitive response to—and ultimate impact

of—the P3 alliance is yet to be determined, but if prices were to

rise 25-50 percent (likely what shippers need for sustainable

economic returns), companies will need to re-assess global

sourcing strategies.

Key Action: Rising labor costs in emerging markets and the

US shale gas boom already have companies examining re-

shoring. There is elevated risk that ocean freight pricing will

rise; you should at least be considering that risk as part of mid-

term and long-range global supply network planning. Source: U.S. Department of Labor

Year-over-year % Increase in Hourly Wage; Long-haul Trucking


ENERGY

EQUIPMENT,

ENGINEERING, &

CONSTRUCTION

CORPORATE

SERVICES—

TRAVEL

CORPORATE

SERVICES—HR

MARKETING

& MEDIA

LOGISTICS

INFORMATION

TECHNOLOGY

INDUSTRIAL

& MRO

Top Trends in Information Technology

Act Now to Get a Handle on “Shadow IT”: The rise of Software-as-a-Service (SaaS) continues to reshape how companies buy

software. Increasingly, software purchase decisions are being made at the functional department level (Marketing or HR, for example)

because perceived technical integration requirements are lower, and the per-user, per-month subscription fee model allows

departments to build these costs into operating budgets rather than capital budget approval processes. Most companies don’t have a

handle on how much of this “Shadow IT” purchasing is happening, but most acknowledge that it is occurring. The result is potential

over-spending on redundant software [we’ve seen cases of executives in different departments fielding request for proposals (“RFPs”)

for the same software], elevated costs due to poor sourcing, and elevated risk to the enterprise. Tackling the Shadow IT issue is a

challenge for IT, which must deftly balance its mandate to ensure enterprise security and enforce policy, while also supporting the

needs of the business users (some of whom may have resorted to shadow buying due to poor support from IT).

Key Action: By becoming a center of excellence for multiple solutions, IT departments can ensure they are the go-to resource for

best-in-class solutions, thus helping reduce Shadow IT spending (and waste), and in partnership with IT procurement can deliver

lower costs and higher service levels to business users through a win-win partnership.

As Companies Embrace Cloud Computing Services, New Capacity Planning and Governance Considerations Are Required:

We have discussed the maturity of and growing interest in cloud services in the past, and the importance of demand management

and governance to control costs of customer-facing cloud

services (mistakes in estimating projected workloads and

demand can quickly blow up a cloud service budget).Similar

principles apply to moving internal functions to the Cloud. We

are seeing increased interest from clients in enterprise cloud

storage as internal storage demands continue to grow and

cloud storage solutions mature, requiring IT departments to

evaluate new strategic options.

Key Action: With enterprise data growing at more than 40

percent annually, strong demand is a certainty. Beyond

anticipating demand, IT must weigh concerns including

security, internal resource planning, storage tiering strategy

and performance requirements, along with total cost of

ownership over time, when evaluating cloud storage services

vs. internal on-premise storage, or a hybrid approach to satisfy

performance requirements.

Source: Accenture

Storage

Networking

Database

Compute

Enterprise Apps

…Higher Shadow IT

risk. Establish buying

platform and preferred

supplier programs

…Areas that are

typically under the

control of the centralized

IT Organization

IT-Driven

CRM

Productivity Apps

Desktop BI

HR

Marketing

Business-Driven


ENERGY

EQUIPMENT,

ENGINEERING, &

CONSTRUCTION

CORPORATE

SERVICES—

TRAVEL

CORPORATE

SERVICES—HR

MARKETING

& MEDIA

LOGISTICS

INFORMATION

TECHNOLOGY

INDUSTRIAL

& MRO $0.0

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

$7.0

2012 2013 2014 2015 2016 2017

Display Spending Native Spending

Social Display: 16.1% CAGR

Social Native: 22.9% CAGR

Top Trends in Marketing

As Ad Dollars Continue to Shift to Digital, Marketers Embrace Data Management Platform (“DMPs”) to Improve Audience

Targeting and Campaign ROI: Consumers are becoming more and more digital, consuming media across multiple digital devices. This

trend creates more ways for advertisers to reach consumers—but also increases the complexity of advertising strategies, which must

target the right messages to the right audience through the right advertising vehicle and with strong message relevancy. At the same

time that marketers are embracing programmatic media buying to execute media buys more efficiently, we are seeing increased interest

from clients in evaluating DMP solutions. Marketers are looking to DMP as a means to collect and analyze data from multiple sources

(first-party data, external audience data, social data, etc.) for use in refining marketing plans, improving audience targeting, and

measuring actual campaign performance against expectations. Depending on the sophistication of the marketing team and the current

marketing strategy, teams need to evaluate whether a standalone DMP solution will meet their strategy, targeting, and measurement

requirements, or whether it should be paired with a Demand Side Platform (“DSP”) to seamlessly enable automated media buys based

on the insights and recommendations coming from the DMP.

Key Action: Leading marketers ready to adopt DMP are taking a holistic approach, looking not only at the tools and technologies, but

making sure they have the right technology and analytics skills either in-house or through partners, in order to capture the ROI that a

DMP can deliver.

Going Native—Content Marketing Drives Growing Focus on

“Native” Advertising: To get potential customers to engage with

their messages, advertisers are trying to make them look less like

traditional ads and more like content that is contextually aware and

organic for the user’s experience. So-called “native” advertising looks

more like a news story than an overt advertisement—content that

adds value and insight, rather than a purely sales-related message.

This approach can be highly effective, but in order for it to work, the

content needs to be very strong. To compete—and deliver valuable,

engaging content—can be expensive, requiring additional investment

in talent outside of existing internal or partner agency teams. This

incremental spend competes for tight budget dollars but can increase

the effectiveness of existing marketing investments.

Key Action: Native requires a new form of highly tailored, lower

frequency content that could drive content costs up. Advertisers

need to refine native strategy and decide whether to in-source or

outsource content development as more publishers offer content

solutions.

US Social Display vs. Native Ad Spend (2012-2017 Forecast)

Source: BIA/Kelsey


ENERGY

EQUIPMENT,

ENGINEERING, &

CONSTRUCTION

CORPORATE

SERVICES—

TRAVEL

CORPORATE

SERVICES—HR

MARKETING

& MEDIA

LOGISTICS

INFORMATION

TECHNOLOGY

INDUSTRIAL

& MRO

Top Trends in Corporate Services: HR

The Global Payroll Myth: As companies increasingly move to operate as seamless, global organizations, they also look to

implement global systems to deliver consistent processes, at lower costs while managing risk. Many view payroll as a simple or

routine function, but in reality there are myriad country and geography-specific tax and statutory requirements that must be complied

with. Keeping current on payroll-related tax and statutory requirements in every country or geography requires a major investment in

human capital and may still leave a company exposed to high levels of compliance risk. In looking for external solutions, those

companies that choose to outsource payroll will discover that there is no single provider with truly global coverage, requiring

companies to balance costs, coverage, and risk in defining an optimal global payroll solution.

Key Action: Implementing global payroll is rarely a ROI-based decision, but is driven by an operating and risk-mitigation strategy.

Executives need to consider whether an in-house solution, outsourced solution, or a hybrid approach is best, and compare available

solutions against their footprint of worldwide operations to identify coverage gaps and how to address them.

Managing Talent in an Era of Scarcity Requires a Total Workforce Approach: As the global economy continues to rebound,

more pockets of labor and skills shortage are emerging. Since the trough of the recession, labor rates in logistics, energy, and

construction trades have exceeded overall averages due

to high demand scarcity of skilled labor. In many U.S.

metropolitan areas, unemployment rates are below the

5.2-5.6 percent level considered by the Federal Reserve

as full employment, leading to competition for scarce

talent and higher wage and benefits costs. These talent

shortages are only likely to grow. There are signs that

companies are making more use of contingent labor to

address the skills shortage and retain flexibility in the

event of any hiccups in the recovery. Increased use of

contingent labor strategies can afford greater flexibility

and help address short-term needs, but can also increase

risks (such as co-employment risk) and costs

(decentralized departmental spend).

Key Action: Contingent workforce strategy should be

considered as part of a larger total workforce strategy

encompassing talent acquisition/retention, SOW

management, and viewing temporary labor as a talent

pool for future recruitment.

Source: American Staffing Association

-40%

-30%

-20%

-10%

0%

10%

20%

30%

20

40

60

80

100

120

140

160

Jan

-08

May-0

8

Se

p-0

8

Jan

-09

May-0

9

Se

p-0

9

Jan

-10

May-1

0

Se

p-1

0

Jan

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May-1

1

Se

p-1

1

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May-1

2

Se

p-1

2

Jan

-13

May-1

3

Se

p-1

3

Jan

-14

ASA Staffing Index (100 on 6/12/2006) Y/Y % Change

Temp staffing

growth accelerating

American Staffing Association Staffing Index (2008-date)


ENERGY

EQUIPMENT,

ENGINEERING, &

CONSTRUCTION

CORPORATE

SERVICES—

TRAVEL

CORPORATE

SERVICES—HR

MARKETING

& MEDIA

LOGISTICS

INFORMATION

TECHNOLOGY

INDUSTRIAL

& MRO

Top Trends in Travel

Firms Look for More Ways to Drive Improved Compliance

and Lower Costs in Travel by Encouraging Employees to

Think More Like Business Owners: In looking at the many

ways to manage travel costs, travel spend managers and

management teams often focus on the big ticket, high

visibility items such as negotiating better air travel discounts

or hotel rates. Another key element is establishing travel

policies designed to minimize costs by encouraging early

travel booking to secure lower airfares and mandating use of

preferred suppliers to monitor that volume requirements are

reached and discounts are maximized. However, many

companies seem to be missing out on an even more basic

opportunity to encourage better decision-making by managers

and employees to meter costs: utilizing an effective pre-trip

approval (PTA) process.

Done poorly, pre-trip approval processes can add to

bureaucracy and inadvertently increase costs. But executed

well, PTA processes can be effective in encouraging

managers—and employees—to think more like business

owners and view travel through the lens of ROI and business

benefit. One way to evaluate the effectiveness of a PTA

process is by the percentage of trips not approved. In

practical terms, any percentage greater than zero indicates

that actual criteria are being applied and some trips are being

rejected.

The key is not to implement a simply mechanical process that

can result in slow approvals (and higher costs if, for example,

a good fare expires) and management focus on

Key Action: Establishing a PTA process can result in 5–10

percent (or more) overall travel budget savings if implemented

effectively. The key is to encourage employees to think about

travel in terms of business impact, but also to train managers

about how to evaluate and approve (and reject some) travel

requests. Training employees to proactively ask, “Is this trip

worth it” can improve the impact of travel while eliminating

unnecessary expense.

Source: Accenture

Does your company have a formal pre-trip

approval process in place?

Yes

25%

No

75%


ENERGY

EQUIPMENT,

ENGINEERING, &

CONSTRUCTION

CORPORATE

SERVICES—

TRAVEL

CORPORATE

SERVICES—HR

MARKETING

& MEDIA

LOGISTICS

INFORMATION

TECHNOLOGY

INDUSTRIAL

& MRO

19

20

20

21

22

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

Years Average Age of Private Fixed Assets

Top Trends in Equipment, Engineering, and Construction

In Addition to Capital Replacement Cycle, Regulations

Increasingly Impact Major Capital Projects: The average

ages of capital assets on the books of corporations are at

multi-decade highs—one of the reasons that many

economists and forecasters are predicting an acceleration in

capital spending in 2014 and 2015. Another major factor in

play is the role of regulation driving the need for capital

upgrades or replacements. For example, a regulation

affecting Industrial Boilers and Process Heaters (referred to

as the “Boiler MACT” standard) was finalized in January

2013, with a January 1, 2016 deadline for compliance. The

regulations that apply to new and existing boilers will require

compliance tests and may result in expensive retrofits to

control air pollution (filter systems, scrubbers, etc.) or

conversions of boilers to natural gas power. New installations

can take one to two years, so the time to act is now. Asset

owners need to be aware of numerous other regulations that

will affect major facilities (The Agricultural Water

Conservation Act of 2009 is a major consideration for

companies with California operations for example).

Key Action: Most companies will consider regulations of this

type very onerous, but regulation is a fact of life for

manufacturers and heavy energy users. But the flip-side of

the regulatory mandate is the opportunity to fully optimize

major capital decisions like these. The benefits of an

integrated large capital project program include not only lower

risk through regulatory compliance, but also can deliver lower

total project costs, lower total emissions and carbon output,

reduced energy consumption, maximized use of rebates and

credits, and improved ROI on capital projects.

Source: BEA, Haver Analytics, Deutsche Bank Global Markets Research

Capacity utilization

approaching long-term

average of approx. 80

Source: U.S. Federal Reserve

60

65

70

75

80

85

Jan

-04

Ju

l-04

Jan

-05

Ju

l-05

Jan

-06

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l-06

Jan

-07

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l-07

Jan

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l-10

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-11

Ju

l-11

Jan

-12

Ju

l-12

Jan

-13

Ju

l-13

Jan

-14

Total Industrial Capacity Utilization (2004 to date)

Highest reading

since June 2008


ENERGY

EQUIPMENT,

ENGINEERING, &

CONSTRUCTION

CORPORATE

SERVICES—

TRAVEL

CORPORATE

SERVICES—HR

MARKETING

& MEDIA

LOGISTICS

INFORMATION

TECHNOLOGY

INDUSTRIAL

& MRO

Top Trends in Industrial & MRO

Industry Consolidation Trend in Corrugated Segment Raises Packaging Cost Risk: The corrugate industry has been undergoing

supply consolidation. Since 1987, the number of plants in the U.S. has declined by 25 percent. As a result of consolidation, share of

the top four containerboard suppliers reached over 70 percent in 2012, compared to 1984 when the top five suppliers held 34 percent

market share. Supply base concentration reached its peak with a wave of multi-billion dollar acquisitions over the last two to three

years. The net result of this consolidation wave is that suppliers achieved greater negotiating leverage, allowing them to successfully

implement four price increases since 2010, while better managing capacity and paper availability—therefore avoiding over-supply and

protecting pricing. However, the outlook for buyers may be improving. The price increases have led to higher industry margins, which

is attracting new competition (both green-field projects and conversion of unprofitable paper grades to containerboard). This may shift

market share away from dominant suppliers and drive more competitive pricing in the mid-term. But this may also lead to more

capacity closures and M&A activity in the long-term driven by the major suppliers trying to maintain favorable market dynamics.

Key Action: Users of corrugate have had to endure a multi-year period of cost pressure. We recommend that buyers actively

encourage new supplier development and promote cost transparency to help even the industry supply and demand balance and

better control supplier margins. In parallel, buyers should perform value analysis of their current specifications to reduce over-

engineered structures and rationalize the complexity of types and grades purchased.

With Oil Prices at risk of Remaining Stubbornly High,

Companies Explore New Ways to Combat Volatility: We

hear from many of our clients that with all of the available oil

supply and rising production, prices should be declining—and

so should the price of oil-based raw materials. However, oil

prices have continued to march upward, raising the risk that the

oil price reprieve many expect will not materialize, leaving

manufacturers to consider new ways to deal with rising—and

volatile—input costs.

Key Action: As a result of the shale oil and gas boom, new

cracker capacity is finally coming to North America (BASF SE,

Chevron Phillips Chemical Company, Dow Chemical Company,

Exxon Mobil Corp, Formosa Plastics Corp, Ineos Group Limited,

LyondellBasell Industries, Sasol Limited, Royal Dutch Shell plc,

Westlake Chemical Corporation, and Williams Companies have

all announced cracker projects). Companies should be looking

at the cost-benefit analysis of connecting their supply chains to

these new sources of supply as a way to reduce the volatility,

and potentially the costs, of oil-based input prices. Source: US Energy Information Agency

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Cushing OK Crude Oil Futures Contract 1 $/bbl

Henry Hub Nat Gas Price (BTU Equivalent)

Crude Oil vs. Natural Gas (BTU Equivalent) Weekly Futures Price

(past five years)


ENERGY

EQUIPMENT,

ENGINEERING, &

CONSTRUCTION

CORPORATE

SERVICES—

TRAVEL

CORPORATE

SERVICES—HR

MARKETING

& MEDIA

LOGISTICS

INFORMATION

TECHNOLOGY

INDUSTRIAL

& MRO

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1/2/14 1/17/14 2/1/14 2/16/14 3/3/14 3/18/14

Day A

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rice ($

/MM

BT

U) D

ay a

he

ad

po

wer

pri

ce (

$/M

WH

) ISO-NE Algonquin

Day-ahead power prices move

in line with gas prices—but are

much more expensive for

consuming companies

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Monthly Settlement 4-yr average

Recent settlements above

4-yr average for the first

time since 2008 could

signal sustained up-trend

Top Trends in Energy

Natural Gas and Power Prices Reach

Unprecedented Levels of Price Volatility Requiring

More Energy Expertise and Intelligence than Ever:

Even casual observers are aware of the extreme winter

weather events that impacted North America in the first

quarter, and the resulting price spikes in natural gas

and power. Not only are natural gas prices trending up

in general, but the volatility of gas and power prices

reached unprecedented levels during the quarter. As

prices exploded to multi-year highs owing to record

natural gas consumption on January 7, day-ahead

natural gas prices reached nosebleed levels of more

than $100/MMBTU in portions of the Northeast and

Midwest, with power prices averaging nearly

$200/MWH in some regions for the month of January.

Customers with index exposure saw bills three to four

times above normal levels in some cases.

Key Action: Energy consumers, especially in high-

volatility regions like New England, New York, the

Midwest during the winter months, and Texas during

the summer months, should layer on fixed price

protection during the highest-volatility periods. Gas

users can peg pricing to NYMEX Henry Hub

(Louisiana) instead of Northeastern price points that

are susceptible to weather and pipeline constraints.

With the right energy specialist knowledge, companies

can quantify the budget risk that exists in volatile

regional markets, and identify value-based or upside

risk-protection price targets in key markets. Finally,

buyers should work to identify suppliers who will

provide more flexibility around consumption bands so

that volatile day-ahead market exposure is avoided.

Monthly NYMEX Nat. Gas Settlement Price vs. 4-yr. Rolling Avg.

New England Region Day-Ahead Power & Gas Prices (Jan-March 2014)

Source: SNL Kagan


Sources and References

EXECUTIVE SUMMARY:

• Thomson Reuters Corporation/University of Michigan Surveys of Consumers:

http://www.sca.isr.umich.edu/

• National Federation of Independent Business (NFIB):

http://www.nfib.com/research-foundation/surveys/small-business-economic-

trends

• International Monetary Fund World Economic Update, April 2014:

http://www.imf.org/external/pubs/ft/weo/2014/01//

• Las Vegas Review-Journal, “Survey Suggests Businesses Feeling Pinch of

Higher Costs”, Retrieved from:

http://www.reviewjournal.com/business/survey-suggests-businesses-feeling-

pinch-higher-costs

• FactSet Buyback Quarterly: March 25, 2014, Retrieved from:

http://www.factset.com/websitefiles/PDFs/buyback

• FactSet Dividend Quarterly: March 24, 2014, Retrieved from:

http://www.factset.com/websitefiles/PDFs/dividend

• FactSet Cash & Investment Quarterly: March 26, 2014, Retrieved from:

http://www.factset.com/websitefiles/PDFs/cashinvestment

LOGISTICS:

• U.S. Department of Labor, Bureau of Labor Statistics, Wages/Earnings:

Transportation and warehousing – General freight trucking, long-distance,”

Retrieved from:

http://beta.bls.gov/dataViewer/view/timeseries/CEU4348412008

MARKETING:

• BIA/Kelsey, “BIA/Kelsey Forecasts U.S. Social Ad Revenues to Reach $11B

in 2017,” Retrieved from: http://www.biakelsey.com/Company/Press-

Releases/130410-U.S.-Social-Ad-Revenues-to-Reach-$11B-in-2017.asp

CONTINGENT LABOR:

• American Staffing Association, “ASA Staffing Index Historical Data,”

Retrieved from: https://www.americanstaffing.net/statistics/historical_data.cfm

EQUIPMENT, ENGINEERING, & CONSTRUCTION:

• Deutsche Bank Capex Outlook--An aging capital stock and a pick-up in

economic growth will boost capex in 2014, Torsten Slok, Peter Hooper, and

Matthew Luzzetti

• Board of Governors of the Federal Reserve System, Industrial Production and

Capacity Utilization, Retrieved from:

http://www.federalreserve.gov/RELEASES/G17/Current/default.htm

INDUSTRIAL & MRO:

• Young, Steve, Association of Independent Corrugated Converters.

“Consolidation in the Corrugated Industry”, Retrieved from:

http://www.fppa.net/events/2013convention/Impact_of_Consolidation.pdf

• U.S. Energy Information Agency, NYMEX Futures Prices, Retrieved from:

http://www.eia.gov/dnav/pet/pet_pri_fut_s1_w.htm

ENERGY:

• BIA/Kelsey, “BIA/Kelsey Forecasts U.S. Social Ad Revenues to Reach $11B

in 2017,” Retrieved from: http://www.biakelsey.com/Company/Press-

Releases/130410-U.S.-Social-Ad-Revenues-to-Reach-$11B-in-2017.as


About Accenture

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Documents

Accenture Spend Trends Report Q1 2014