Three Ways To Mine For Cost Savings

Confidential and Proprietary©2009 Ed Kerbs KERBS

Best Practices In Cost Savings and Expense Reduction:

Ed KerbsMarch 2015

Use three effective and proven methods to mine for cost savings.

Auditing

Rationalization (Demand Management) and Business Process Reengineering

Negotiations


Best Practice

Three Common Tools To Deliver Savings:

1) Audit• Forensic accounting• Auditing inventory, contracts, invoices • Performance - SLA’s

2) Demand Management & Business Process Reengineering• Spend Rationalization• Vendor Consolidation• Process Enhancement and Re-Engineering • Insource / Outsource – Nearshore, Onshore & Offshore

3) Negotiations• Internal & External • Domestic & International • Tangible ($’s) & Intangible (Something else)• RFP, RFI, SOW, Contracts

Taking full advantage of these three proven tools can feed a thriving cost savings pipeline. This presentation coins cost savings mining ideas and best practices.


How To Find Cost Savings:“Audit”• Auditing – see that you get what you deserve for the dollars paid

• Can be the easiest form of deliverable cost savings • Start a cost savings office with a tracked managed pipeline of opportunities & results• Mine areas neglected for 1 year or more • Look for empty category management slots, downsized orgs – offer a consultative review• Put out an APB for initial leads during cross divisional global “Lunch and Learns” • Offer on the spot rewards ($1, $5 and $25 cafeteria / Starbucks credit) – log names and publish • E-mail and “interoffice mail me any anonymous confidential leads” Build relationships on trust• Increase rewards for big game via existing or newly sanctioned mechanisms

• Review all contracts approaching end of term (EOT) for savings opportunities. • Consolidation, volume discount, enterprise agreement, insource, outsource, terminate, bid out• Don’t let EOT force you to do suboptimal deals • Do now as this may uncover a top priority• Get in front over time via managed portfolio and system – do contract management • 90 days may not be enough

• Start with big $’s or complex monthly deals – 80 / 20• Look for big contracts that do not have a person assigned (or understaffed)• Ask legal, purchasing, finance for sources of fire drills

Best Practice – Mining for Savings

Cost Savings pipelines thrive with governance and structure.



• Examine & bring laser focus to non glitzy & sacred cow contracts in reluctant or neglected areas • Irrational responses to savings partnering attempts may indicate need for finesse & large upside potential• Focus relevant discussions around Corporate, Real Estate, Marketing, IT, Finance, HR (Sacred Cows)• Take on persnickety, traditionally rogue buyers. Offer a fresh look confidentially on a consultative basis

• Some Sacred Cows will remain long after your tenure – be careful • Hidden financial arrangements – get a high level executive sponsor to vet first, “eyes wide open”• Understand 2 way business relationship, circumvent blindside executive escalation during negotiations

• Make sure global demand is well understood and agreed to. Don’t forget to: • Challenge risk and assumptions, especially if sniff test fails • Ask users about internal sunk costs• Ask users about potential for internal systemic increase / decrease • Ask users internal cost drivers and external linkages & drivers• Partner with architecture or other logical rational internal or external helper• Ask users in all divisional, departmental or international about demand usage• Ask vendor to share information as appropriate and necessary

Best Practice – Mining for Savings Immediately get any and all dollars owed credited Set up a Cost Savings Office Track all savings via managed, rationalized and prioritized pipeline reporting venue



• Neglect = overbillings, underbillings, doublebillings, misbillings• Two edged sword – Always risk of “collateral damage”• “Law of averages” & “test of time” say you will benefit more than vendor from any audit activity• Large dollars at stake, tread lightly and challenge rationally - “peel onion” & “get the whole story”• You will find underbillings. Promptly pay recent underbillings net of savings (take high ground)

• Compare invoices to inventory to contracts • Supplier by supplier review of any inventory on your premises, get the details check contract & invoice• Full review of any inventory via on site supplier premises visit, get the details check contract & invoice • Even if there is no contractual recourse log and note for future leverage as appropriate • Go find them and see if you are billed correctly currently (P * Q)• Put out an APB for initial leads (outsource above) • Prioritize and get “Quick Hit Wins” via Forensic Accounting

• “Forensic Accounting” • Go back in time, “walk the trail” see if billed correctly (P * Q)• Audit invoices and agreements to see TAX, COLA is being paid correctly • Check to see that every agreement with first year warranty was not doublebilled maintenance• Request credits immediately with a professionally crafted case with spreadsheets• Maintain 100% accuracy & precision, 100% Ethics and integrity with all credit requests

Best Practice – Mining for Savings Elevate all relevant helpers to rock star status via top down praise and with monetary remuneration as possible Check contract to see if there are limits to the ability to get forensic accounting credits If credits are contractually restricted, track and maintain list for future negotiations (big list = big leverage)



• Maintain an inventory of contracts containing a continuous improvement clause• Negotiate credit if supplier not honoring commitment• Amend contract to clarify any suboptimal language

• Maintain an inventory of contracts containing a benchmarking clause• Appropriate proactive invocation is a strategic cost savings function• Just the specter of such an action can result in an offer to reduce costs

• Do competitive audit• Appropriate proactive invocation is a strategic cost savings function• Just the specter of such an audit can result in an offer to reduce costs

• Invoke audit rights against most favored nation• Just the specter of such an audit can result in an offer to reduce costs• Even if literally just signed – why leave $’s on table? Offer yourself as the auditor.

• Audit to see if vendor breached clauses • Use of subcontractors• Badge employee, “A” team swap outs, use for leverage

• Make vendor provide a credit check instead of refunding monies in an invoice credit • There is no morale booster better than posting blown up copies of credit checks all over the CSO


Invoking favored nation, benchmark, continuous improvement needs careful plan to save relationship continuity Ask vendor for cost savings ideas, bring senior management and make request at the highest level



• Consider hiring expert temps or pro service: • Data gathering task is daunting or “I can’t let you poke around those sensitive…”

• Get trained OTJ – offer your time in trade for audit – “you help my P&L I’ll help yours”• Get pro trained to “bit level” – expert category managers know which stones may be unturned • Do off hours, on weekends, on holidays, during maintenance windows, off season – self funding• Pay to automate data gathering – business case needed – repeatability is best case

• To accelerate save timing sooner rather than later (net cost of help from hard dollar save)

• You are a profit center and garnering support for hard dollar saves may require bringing a business case including some incremental cost to the right level of management

• Consider taking some or all of the same dollars you were going to spend with the “pro” service and insourcing the audit – cost avoidance with benefits

• Costs can be reduced and employees can benefit via bonus, comp days and/or other rewards • Instill pride and loyalty, save money • Don’t forget to put a process in place to make sure this does not happen again and/or• Schedule next audit


Challenge everything rationally – create and retain “Trusted Partner” status. Create a business case for what you auditing and become a profit center.


How To Find Cost Savings:“Audit”• Audit SLAs – Performance Management

• First read the contract, bring in the vendor for a full explanation • How it works both technically and contractually• Technical and process detail around each and all SLAs • Insure contracted responsibilities are clear or amend contract

• Determine if measurement system is competent and delivering accuracy and precision• If not repair as a priority • Assign PM from both Vendor and Firm. • Enforce dates, amend contract

• Make certain the complete inventory of services is being covered – no SLAs overlooked• Automation of SLAs fosters accuracy

• Compel automation where possible

• Make sure that reporting features any and all defects in service• This includes even excused or meeting requirements performance• Get detail, even raw data monthly• Vendor provided portal for accessing all data including problem management is optimal • Evaluate vendor against Firm’s experience for sanity test.• Get the root cause in writing with plan to remediate for any defects

Best Practice – Mining for Savings Current best practice has assertive vendor management style in vogue Ask only for what you legitimately need for business and do not be grandiose Investigate resistance – ask why and escalate - evolution opportunity may be found


How To Find Cost Savings:“Audit”• Audit SLAs Performance Management

• Absence of contractually competent measurement may have put $’s at stake • Negotiate compensation or make detailed notice to use for some later negotiated benefit

• Forensic Accounting: • Go back far as possible, follow the trail, • Use e-mails, service management artifacts to weave a credible story • Can involve detailed spreadsheets and big $’s – maintain 100% accuracy & precision

• Onsite auditing of vendor SLA management • Helps bring better service even if dollars are not effected in short term • Train end user organizations to tightly manage this function

• Unhesitatingly get any and all SLA dollars owed: • Credited, refunded, recorded, reported & applied as sanctioned and appropriate • OR - “horse trade” for equitable compensation – leverage• Manage this function over time with a governance and full set of scorecards and artifacts


Treat audit in long term relationship context, but insist on settlement by default If root cause causing poor service is buyer’s, own up and partner to repair


How To Find Cost Savings:“Demand Management & Business Process Reengineering”

• Spend Rationalization • Reduce all nonessential spend, assign owners, rationally challenge & audit every monthly spend

• Look at all “Federalized” or “Allocated” services, make transparent, allows for rationalization • Make sure sunk costs, minimums or timing issues no not render efforts a non starter- P&L winners

and losers, get in front

• Look at “Federalizing” or “Allocating” services where management & accounting overhead is large• Ex: Chargeback against real estate, voice and data services can be consolidated as a simple sunk cost

• Determine what service levels are needed. Implement a just enough policy. Look at all contracts with levels

• No sacred cows and in each case ask for a “business plan” (Simple is OK) ask “Why?

• Turn it off if not using or low use – check contract, negotiate best termination do business plan• Assertive contract management can include going off maintenance - consensus and business plan required

• Determine what features are really needed and look at options to ratchet to that requirement• Renegotiate scale back but make sure a price is set for future expansion.

Best Practice – Timing of The Save

Rationalization is very worthy of time & resource.



• Spend Rationalization • Get rid of all escrow or invoke “iron clad” mechanism and run only on that version

• Escrow event occurrence with a big company is more than unlikely – never seen or heard • Eliminate all escrow charges from all but small and strategic vendors – know what you are buying • Audit all big company software for escrow and justify each one – both service and vendor• Test escrow - prove vendor has not honored agreement with updates and bug fixes • Functionally you got nothing, it will not work and you are owed a refund (over deal term) or • At least get a better price from big vendor • Court might be sympathetic in a live dispute rendering escrow moot - you may get code but…• In escrow event getting useful object code with or without escrow is likely to prove difficult or impossible• This due to compiler issues, updates missing, hidden tweaks, platform specific failures etc..• The only way to make sure that escrow will work is to run production off escrowed version• This includes updates and bug fixes for the life of the deal• Full SOP and platform environment are needed, staff and supervision • Dependant on software – plan to take it over in an escrow event• What makes sense? Build business case around risk and

• Assign (exec sign off)• Accept (eyes wide open) • Mitigate (run prod off escrow, find another option, buy company)

Best Practice – Escrow One school of thought tells us that the only way to make sure escrow will work is to run production off only the escrowed version and prepare to manage the code if required. Getting rid of all escrow as a cost savings opportunity is something to consider carefully.



• Spend Rationalization • Approve all spend requests via approval board, many tiny cuts feed large save• Eliminate any unnecessary and/or duplicate data do a “Manhattan Project”

• Records retention (boxes back or fly out and look) - “7 year golden rule” • Backup (onsite or offsite) especially outsourced services being most expensive• Minus legislative, judicial or regulatory hold or documented (get legal on CFT) • Business need (no lame excuses) – look at all the bills from storage – big $’s on table

• Give a fresh eye to painful or difficult relationships – “Zero Tolerance”• Put a TCO business case together, Enlist highest level sourcing (or finance) savvy executive sponsor• Negotiate out the pain or change – COPQ - supplier, rework, burdened headcount, management• Press hard for rightful credit against any management consulting for arrangements gone bad

• Gather a list of every report in the division, assign an owner and rationalize, shut down, consolidate – Track $’s

• Work with finance to determine savings based on % burdened headcount / month / report • Leverage opportunities to create/move to automated business intelligence platform – publicize and track

$’s • Offer help or hire someone to be reporting tsar. Centralize infrastructure, manage tight portfolio

Best Practice – Timing of The Save

Rationalization can be lucrative and drive management satisfaction around the buy Take any pain point, determine cost of poor quality (COPQ) and do a cost case to mitigate



• Vendor Consolidation & Volume Discounts – not just dollars• Consolidate & Automate (MSP) all IT, Administrative, Legal temps (if not yet)• Insource, Outsource, Nearsource, Onshore, Offshore, Hybrid

• Do not put a a process out for bid until you: • Fully document and optimize current processes, procedures, document savings• Develop optimized formal SLAs and fully automate operational data • Develop a business case for outsourcing that includes i) in sourcing & ii) realistic management

• Enterprise Agreements • Must really understand demand and inventory – time well spent

• Money and time wasted not going in “eyes wide open”

• Eliminate term charges and minimums, use i) OTC and ii) term charges based on true cost • Unbundling increases transparency and savings

• Develop a global business case including competent management• Manage from the VMO – (provide fractional or whole headcount as needed) • Assign someone with actual bandwidth to demand manage global usage

Best Practice Vendor consolidation can resource savings, higher quality & agility, translates to $’s. Start by evolving the process before outsourcing if possible. “Manhattan” project saves up front. A carefully crafted business case up front is essential. Don’t skimp on appropriate management.



• Process Enhancement – evolution is challenging• Six Sigma, Lean, Design For Six Sigma, TQM

• Cost savings complexity – big rewards but time effort expertise and political savvy needed• Quality improvement in process and defect reduction can be measured and can translates to hard dollar savings• Reduction of Time in process renders competitive agility, can be measured and can translates to hard dollar savings

• Common Tools – Some Not Rocket Science• Detailed Process Map – knowledge is power – process intimacy is king• Cause and effect diagram – manage causes for better output• Kaizen – lock best empowered team in room until facilitated solution is found• Best of Best (BOB), Worst Of Worst (WOW) – change process by learning best from both• 5 Why’s – Ask why a problem occurs. Repeat until you have a list of process inputs, fix so output is improved • Gap Analysis – problem/cause details, issue list• Risk Analysis - cost of failure, probability of failure, cost to remedy. Prioritize and assign, mitigate, accept. • Validated, Relevant Performance Measurement – can’t fix what we can’t measure accurately• Pareto – 80/20 analysis• Process control – Mistake proofing, SOPs – reduces performance variability• Corrective plan – Get responsible party to actually implement sound advice – not done enough• Control Plan – documents what is required to maintain evolved performance – make a habit of adhering

Best Practice

If best efforts & smart people cannot improve the process then a proven focused method like Six Sigma can help. DOE, ANOVA, Hypothesis Testing, Chi2, Control Charts require expert application & savvy to be successful.


How To Find Cost Savings:“Demand Management & Business Process Reengineering”• Process Enhancement – Evolution is challenging – Hurdles to best practices

• Enhancers only work on projects part time • Project is put on hold pending governance sanctioning and reprioritization

• Enhancers choose their own projects• Project is put on hold pending governance sanctioning and reprioritization

• Projects are poorly or inaccurately scoped• Re-scope and put on hold pending governance sanctioning and reprioritization

• Process Owner fails to support enhancer or team or participate in project reviews, sign offs etc.

• Project is put on hold pending new owner or governance sanctioning and reprioritization

• No single process owner • Enlist executive above them all as sponsor, re-scope, or find peer owner - project is put on hold pending

governance sanctioning and reprioritization

Best Practice

Business process reengineering can be worthy but is typically the most complex & challenging way to cut costs. Rational prioritization requires strong leaders and governance.


How To Find Cost Savings:“Demand Management & Business Process Reengineering”• Process Enhancement – Evolution is challenging – Hurdles to best practices

• Finance not consulted during project selection and prioritization• Redo Business case w/ Financial Mgr - Project is put on hold pending governance sanctioning and reprioritization

• No budget or cost overruns• Project is put on hold pending governance sanctioning and reprioritization

• Team members lacking skills or not available• Project is put on hold pending governance sanctioning and reprioritization

• Excessive workloads, missed deadlines• Project is put on hold pending governance sanctioning and reprioritization

• Resources not dedicated to providing data• Project is put on hold pending governance sanctioning and reprioritization

• Measurement systems ignored• Project is put on hold pending governance sanctioning and reprioritization

• Inadequate data or analysis limited• Project is put on hold pending governance sanctioning and reprioritization

• Gains not sustained• Re-initiate control plan or savings project pending governance sanctioning and reprioritization

Best Practice

Business process reengineering can be worthy but is typically the most complex & challenging way to cut costs. Rational prioritization requires strong leaders and governance.


How To Find and Define a Pipeline Of Cost Savings: “Negotiations”• Negotiations Leverage

• Preparation is critical• What/Why I want

• Prioritized features• Responsibilities coined• Must haves documented• Gain agreement • Escalate to get the team and information you need

• What/Why do they want• Anticipating what they want up front makes you agile at the table

• Build a list of sweeteners • Badges• Referrals• References• Contracted Publicity• Equity Stake• Support Causes

Best Practice

Preparation for negotiations is a way to mine for savings up front.



• Preparation is critical • Best total cost quality and service

• TCO mentality• Complex & changing models require support• Escalate to get technical, financial, End user support needed

• Business case 1st: • Firm wide org chart, executive alignment, spend, pipeline• Strength / weakness, Audited financials fiscal year, • Merger / acquisition, distress/success, negotiation history. • Escalate to get time and/or resource to do homework.

• Make a habit of asking all references to join you to • Build relationship • Exchange information (keep legal)• Go to industry conferences, use Linkedin, stay in contact

Best Practice

Institute a new requirement for more preparation. Take dollars off the table.



• Preparation is critical • Threat of infringement suits?

• Build your own portfolio and use defensively

• Get information from • Industry experts • Benchmarks and research • Get in the habit and do this every time

• Do contract management well• Locate and manage all the contracts, amendments and SOW’s• Review advance of any negotiations• Use standard contract terms and conditions as default• Track end of term, manage renegotiation as a proactive portfolio

Best Practice 5 minutes of preparation is better than nothing Many hours of preparation saves big $’s



• Preparation is critical • No single source or dual source.

• At least 3 bidders• Level up then target costs• Agree on weighted rankings up front to insure fair, equitable and timely decisions • Make awarding with negotiated savings the norm

• Single source with • “Eyes wide open” • Audited financials, D&B (weakness = leverage=risk)

Best Practice

Competitive bidding allows for negotiated savings to be the norm.


How To Find and Define a Pipeline Of Cost Savings: “Negotiations”• Negotiations

• Don’t let time get in the way of saving money – plan internal process well • Track fiscal, calendar and quarterly vendor urgency:

• Plan accordingly

• Understand contract portfolio and plan strategically: • Renegotiate rationally and in an orderly way

• Increase credibility: • Understand & catering to internal financial & business approval process

• Gain agreement on exception approval as soon as need is known: • Use sparingly if at all – let vendor know about the window up front

• Make time by gaining management approval for delay of buy if rational: • Identify risk and escalate

Best Practice

Letting time rush the buy is suboptimal - plan strategy around the buy



• Don’t let time get in the way of saving money – plan internal process well • Plan for time off and delegation of signatory authority:

• Do every time, plan completion in advance

• Fully understand and document signatory authority: • Verify with purchasing & finance quarterly• Make sure all signatories have delegates

• Drive and monitor all processes that are inputs to the buy: • Do not be shy about escalating – make sure you get what you need to optimize process

• If deadlines and complexity are truly overwhelming get competent pro help• Good investment

• Put together a project plan and a business plan for every purchase• A simple short set of milestones, and an abbreviated business plan can be sufficient

Best Practice

Letting time rush the buy is suboptimal - plan strategy around the buy



• Professional & ethical is the norm• Set professional expectations and make best effort with vendor around process

• Assertive not aggressive• Clear, pointed, but in check

• Know when your Limbic system is interfering with your good judgment • Walk out and / or cooling off encouraged

• Fact based negotiations • Tell them what you want and tell them why

• Typically you do not want to renege but • “Over time my philosophy has changed” - what / why

• Honor conduct rules, be 100% ethical and display highest level of integrity at all times• No games

• Redline, redline, redline, redline mentality – redline university (used to be fax)

• If your side is at fault own up and repair it quickly, then reinitiate negotiations

Best Practice

Fact based negotiations - tell them what you want and tell them why

Documents

Three Ways To Mine For Cost Savings