Cost cutting – fine-tune your sourcing arrangements
In a series of two articles, Simon Tennant, finance transformation specialist at PA Consulting Group, discusses how, while sourcing strategies are typically seen as ways of reducing costs over the long term, substantial short term cost savings can be realised through small amendments to the current arrangements.
It is widely recognised that sourcing services can provide ways of fine-tuning the running of an organisation. However, developing and implementing a full strategic sourcing plan will not secure significant cost benefits rapidly, these savings are typically only realised in the medium term.
Even though it may be counter-intuitive, for organisations looking to deliver short-term cost savings, the most effective course of action is simply to make the best of the sourcing structure already in place. However, this should go far beyond squeezing the best value out of the various suppliers, and instead focus on reviewing what is included in the existing sourcing structure and how to deliver the best out of existing relationships.
Through this kind of good housekeeping, organisations can identify areas where they can reduce the costs of sourcing arrangements. The first three areas are set out below, and a further four will follow in next week’s article:
• Reduce or eliminate demand – organisations need to address the issue of false demand, created by a lack of knowledge, rework or customer error. They may find that they are paying for services they are not using. This is particularly common in multi-national arrangements where, despite the good intentions of the original team, in individual country operations there is a reluctance to adopt the specified service. In some cases, this means organisations are effectively paying for the same service twice.
• Revisit all changes – organisations need to review all changes made since starting the service and where the price has increased as a result of the change, understand whether it is possible to revert to the original approach. However, this may not always be feasible given the likely interplay between changes.
At the same time, it is important to assess the current service levels and identify whether the agreed targets are still needed. If possible, current service levels should be reduced and a price reduction sought from the provider. This may prove more challenging in a front office trading environment than in a middle or back office function, but all avenues should be explored. Finally, organisations should review the business case for each proposed change and ensure that it meets their immediate demands, and be prepared to fast track changes which have an immediate cash impact and stop or delay those which do not.
• Expand scope – organisations need to look for simple opportunities to develop the scope of their sourced services and take further cost out of the wider organisation. This could include, considering moving higher knowledge-based processes and tasks, such as market research, analytics and data management, into the sourcing arrangement,. For example, PA helped a transport and engineering organisation extend the services provided by its finance service centre so it now includes further financial accounting and management reporting activities, as well as real estate management services. The payback for these improvements can be secured in months rather than years.
In his second article next week, Simon Tennant will discuss further methods to fine- tune sourcing arrangements to deliver both immediate benefits and long term advantages.