Using Downturn To Your Advantage

Using the Downturn to Your Advantage

Using the Downturn to Your Advantage

Driving Results: Lessons We Can Apply to a Downturn

Ariba SupplyWatch provides insight into the latest category sourcing trends and pricing/savings opportunities across dozens of spend categories. This free resource is based on the market intelligence of more than 400 strategic sourcing professionals in the Ariba Global Services Organization. To learn about the latest pricing trends and opportunities from Ariba SupplyWatch and to read the latest feature story on why some Procurement professionals are smiling when a global recession is upon us and a turn-around is not on the near-term horizon, please visit www.ariba.com/SupplyWatch_q109.

2

In Washington, politicians are already using the economic downturn as an opportunity to push through legislation that might otherwise not get past committee discussions during more normal economic cycles. Along the same lines, especially in the financial services sector, companies are engaging in M&A activity that under usual market conditions would face significant regulatory and anti-trust scrutiny. What can we learn from these examples? Just as legislators and dealmakers are using the economy as a guise to implement programs and goals that might prove difficult under normal operating conditions, procurement organizations can take advantage of the downturn as well, pushing forward their own “legislative” agenda to improve business performance. The timing for such action could not be better. ISM’s manufacturing and non-manufacturing indexes continue to show a contracting economy. More people are staying on the unemployment benefit rolls for an extra week or longer than at anytime in the past 40 years. And unprecedented volumes of public companies are releasing dismal earnings reports and projections for 2009. Now is not only a good time to push through cost saving agendas that cut across the business, it is perhaps the best possible period in more than a lifetime to implement such initiatives. For politicians, there are numerous legislative ironies involved with getting things accomplished in a recession. Besides the obvious (i.e., using the downturn to push through what might be unpalatable under normal circumstances), there are other benefits to taking action in a downturn. One, of course, is bi-partisan support. But the concept of bi-partisanship should extend beyond the political. Just as in Washington, recessions can enable potentially strange bedfellows in companies to join in support under the simple rationale that “we’re all in this together”. Indeed, the parallels that procurement, finance and other organizations have when it comes to implementing cost reduction programs amidst the same economic backdrop are similar in a number of ways. Our recent customer experiences suggest that the recession affords an excellent opportunity for companies to tackle cost reduction projects that would otherwise be too controversial or require too much change management to undertake in a business-asusual environment. In this analysis we will explore a number of these initiatives, offering pragmatic suggestions for how companies can use the downturn to drive new rounds of cost savings opportunities throughout the business. While what you are about to read may not result in a filibuster-proof majority inside your company, it will most certainly point the way to building savings-driven consensus.

Copyright © 2009 Ariba, Inc. All rights reserved.

Using the Downturn to Your Advantage

Four Strategies for Success – Taking Advantage of the Downturn

1. Using working capital management to “work” out of the downturn together Working capital management strategies that integrate procurement and finance – specifically A/P, treasury and supplier management teams – can help companies to both preserve and profit from their working capital, which has become all the more precious amidst the credit crunch. One of the largest effects of the downturn on both companies and their suppliers has been the challenge of securing operating credit. But when traditional credit and banking channels pull in their credit ropes, it creates an opportunity for buyers and suppliers to collaborate, enabling a new source of capital and potential liquidity. For most companies, the disintermediation of bank funding does not happen overnight. Perhaps the largest inhibitor to creating new sources of liquidity and potential capital is the paper-driven process that plagues most A/P organizations. Paper not only limits visibility for both buyers and suppliers – it also creates latency throughout the requisitioning, approval and payables process. Whether a buying organization is looking to achieve savings through offering fixed or variable discounts to suppliers or, on the flip side, is looking to extend its days payables outstanding (DPOs) – or a combination of both strategies, depending on the circumstances and opportunities – automating and digitizing the A/P process is an essential first step to create flexibility in working capital management strategies. After implementing basic process enhancements and invoice automation capabilities, companies must next deploy the appropriate set of internal and external workflows to drive flexible working capital management strategies. This broader process, known as Electronic Invoice Presentment and Payment (EIPP), puts in place workflows that support and enhance existing ERP payment capabilities, but that are not available from these providers today. The most pragmatic EIPP infrastructure approaches include such capabilities as dynamic discounting, supply chain financing and direct-connection to suppliers (beyond basic EDI and connection portals) with a key emphasis on

Copyright © 2009 Ariba, Inc. All rights reserved.

3

Using the Downturn to Your Advantage

enabling the majority of the supply base rather than simply a handful of targeted suppliers. With these types of foundational capabilities in place, buying organizations can begin to implement working capital management strategies that account for the fact that there is not a one-size-fits-all strategy for either suppliers who need access to working capital, or buyers who must balance their own working capital requirements, DPOs and discounts. Even working capital management deployments that deploy just basic capabilities can still drive significant savings. Take the case of one organization that offers a flat rate early payment discount based off a 12 percent APR. This company has had over 2,000 of its suppliers taking advantage of the discount option on a periodic basis and through this rather simple approach, has achieved an 8-10x return in short-term liquidity compared with other near-term investment vehicles. More sophisticated deployments are often engineered with greater flexibility from the start, creating additional opportunities for savings or working capital improvements. As part of a working capital management strategy, a global retail company decided to offer standard payment terms to global suppliers with a sliding scale discount model for early payment. Given the need for capital in large parts of the developing market in the past quarter, many suppliers leaped at the opportunity to receive early payment, even at an average APR of 22 percent. While this retailer has profited significantly from its payables by reaping a 20+ percent APR for early payment, given its suppliers’ willingness to accept early discounts, it has also realized the side benefit of maintaining continuity of supply, reducing supply risk. Owing to the inability of many of its suppliers to tap traditional lending sources to fund their own working capital requirements as the recession has taken hold, the retailer has, in effect, become a new type of bank for suppliers, capable of keeping suppliers in business. But not all buying organizations are looking to profit from taking early payment discounts – or reduce supply risk. By deploying a working capital management solution set that incorporates third-party financing elements, another retailer has been able to increase its DPOs by over 90 days to an average of 198 days – with some suppliers at 360-day terms. Through this initiative, this organization has been able to unlock nearly $900 million in working capital to invest in new initiatives and drive better shareholder returns.

2. Sourcing sacred cows One of the ironies of procurement and supply management organizations when it comes to sourcing over the past decade is how much influence versus control they’ve been able to exert over business spending habits. In certain spend areas such as white-collar MRO and more basic direct materials (e.g., stampings, forgings, printed circuit boards), a large number of procurement organizations have not only identified tens or hundreds of millions of dollars in savings – they’ve also worked with the spend owners in the business to get a majority of the identified savings to drop to the bottom line. But achieving savings that business owners want to implement in certain categories is often easier spoken than accomplished in both flat and rising economies. No more. In just a few quarters of declining economic growth, it’s now possible for procurement organizations to tackle those sacred spend cows such as legal, marketing, professional

4

Copyright © 2009 Ariba, Inc. All rights reserved.

Using the Downturn to Your Advantage

services, employee benefits and IT which, under normal market conditions, would make it difficult to convince the actual spend owners to place under a competitive strategic sourcing process. Take the case of legal spend. By segmenting the various components that comprise a typical corporate legal spend portfolio – including the balance of internal versus external resources – companies can achieve significant savings without sacrificing the quality of work. Granted, in some legal spend areas such as bankruptcy or securities law, it is unlikely that most CFOs and general counsels would want to introduce significant change. But in other areas such as patent, contract and standard legal services, an increasing number of procurement organizations are getting involved, introducing strategic sourcing and competitive negotiation elements into the legal sourcing process. In addition, a handful of organizations are beginning to look at optimizing their legal resources, reducing internal staff headcount in favor of more flexible legal outsourcing arrangements and working with firms who are increasingly happy entering into nontraditional fee arrangements such as contingent labor/contractor models for significantly less than standard firm rates.

Another sacred category cow that is becoming less holy as the recession takes hold is marketing spend. We have observed that in many areas of marketing spend, 20-25 percent savings off of previously negotiated contracts is often a possibility. A number of organizations are beginning to find that benchmarking current pricing is a relatively quick and non-confrontational way to achieve savings while preserving incumbent relationships. Other companies are taking even more aggressive strategic sourcing approaches, identifying significant opportunities to aggressively source such categories as print, conference, tradeshow and related marketing spend areas. But in most cases, certain marketing categories such as agency and media spend still remain off the table given the challenge of winning over multiple constituents to a new type of competitive process. Organizations are also using the economy to source a range of additional services and professional services categories including accounting, audit, management / IT consulting and temporary labor. Across these areas, our current experience suggests that even in cases where an organization has gone through a formal sourcing process

Copyright © 2009 Ariba, Inc. All rights reserved.

5

Using the Downturn to Your Advantage

before, an incremental five percent savings is possible given the current economy. IT spend is also creating significant saving opportunities in the current environment – double-digit saving percentages that CIOs cannot afford to ignore. For example, PCs and laptops, two categories where historically companies would often average 10-15 percent savings, can now yield savings of 20 percent or more in the current environment. And these percentage saving levels are just the beginning. Saving levels can rise further when companies agree to tackle equipment and service-level standardization as part of the sourcing process. Sourcing now does not just make sense given the high probability of above-average savings levels. It also makes sense because of the rapid impact it can have on the business. Significant category savings can help organizations avoid layoffs and staff redundancies. But perhaps as important from a customer and shareholder perspective, sourcing now can also reduce supply risk by creating a more transparent process to identify, monitor and engage the healthiest set of suppliers. One global diversified manufacturer pegged the cost of an average supplier bankruptcy to their business at $5 million per occurrence. Not only can sourcing processes help vet and weed out suppliers that are unlikely to maintain a solid balance sheet – it can also help companies avoid other types of risk-related embarrassments stemming from poor supplier quality or lagging performance. Whether it involves tainted peanut butter, leaded toys, radioactive stainless steel or dangerous milk, supply risk is real. And a formal sourcing process is, perhaps, the best possible way to reduce all forms of risk from the start. Source: Ariba SupplyWatch. See also: Q109, Page 29; Marketing: “7-15% savings … in difficult financial times, many companies are cutting back on marketing expenses. Agencies have latent capacity and will price their services aggressively.”

3. Commodity-driven strategies that can benefit both companies and their suppliers In the early stages of the downturn, commodity price deflation has led to lower prices for both buyers and suppliers. But going forward – and as January’s economic numbers already show to some degree – it is likely that inflation will begin to pick up thanks to the loose monetary policy that nearly all of the world governments and central banks have deployed to combat the downturn. Given both the existing deflation across many commodities in the market as well as the inflation that will at some point take hold, procurement organizations should work with other internal stakeholders as well as their suppliers to deploy new strategies to create additional savings and lock-in potential downside risk as commodity markets rebound. Perhaps the most common type of commodity strategy that companies are deploying in this area is using price indexes as a standard contract component. By pegging the raw material input of a contract to a price index, both buyers and suppliers gain greater transparency into pricing, allowing suppliers to compete more effectively on the value-added portion of what they are providing, while mitigating potential downside risk for both groups and eliminating the opportunity for suppliers to overcharge by failing to pass along price reductions or raising pricing too quickly or too much.

6

Copyright © 2009 Ariba, Inc. All rights reserved.

Using the Downturn to Your Advantage

Companies are also deploying additional basic commodity strategies in the current environment that include forward buying (either directly or on behalf of suppliers) and commodity hedging via options contracts (which do not require physical delivery of goods). Some more advanced organizations are also deploying rebate or co-op buying programs on behalf of their supply base, especially where large volumes can increase negotiating leverage or deliver enhanced service levels and other benefits (e.g., extended payment terms, vendor managed inventory, just-in-time programs, etc.). Sourcing platforms can play a key underlying role in enabling these types of strategies from an information exchange, negotiation and collaboration perspective. And downstream contract management, procure-to-pay and performance management systems can help insure that an organization is able to fully implement, monitor and manage the savings opportunities that it has identified through new, commodity driven approaches.

4. Making Software as a Service (SaaS) Pay For the majority of companies, the recession has brought with it a reduced capital spending environment. By extension, many organizations now face lower IT budgets as well. This is forcing procurement, finance and technology executives to often consider two options for deploying new solutions for the first time. First, they must now consider SaaS licensing models, even when internal or external special interests push back on such concepts (like lobbyists with their own agenda in the public sector). But unlike certain government policy, it is difficult to make a convincing argument against SaaS. SaaS solutions provide a range of benefits that include lower or eliminated up-front licensing costs, fewer internal and external resources to get up and running and continuous upgrades and support without additional fees. Outside of SaaS models, companies can also consider traditional licensing approaches from enterprise software companies that are now, at least in some cases, including “free” modules to entice potential buyers. But even free has a cost and will nearly always result in a higher total cost of ownership when factoring in soft and hard dollar costs over multiple years compared with SaaS. For example, free enterprise software tools take a significant amount of resources from an ERP or third-party consulting firm to get up and running. Moreover, enterprise software models typically create information and process silos and add significant costs to connect with suppliers externally. Perhaps most important in this regard, these shortcomings for “free” or low-cost enterprise solutions do not just create hidden costs – they limit the potential returns that a company will get from its investments. The current environment is helping cost-conscience CIOs and other executives toss the total cost of ownership (TCO) mindset into the IT rubbish bin for good. These technology leaders realize that their companies and customers are not looking to reduce the costs of systems – they are looking for their systems to deliver meaningful, implemented savings. Software feature / function checklists are irrelevant in this regard. What matters are business results and, of course, a low cost of ownership, something that should be a given. One way to achieve these results is to divert funding from longer-term enterprise software and ERP initiatives to SaaS technology deployments

Copyright © 2009 Ariba, Inc. All rights reserved.

7

Using the Downturn to Your Advantage

that can deliver more rapid and higher returns without the upfront capital requirements (paid to vendors, consultants, and other technology providers as part of traditional licensing arrangements). C-level executives should apply 12-month litmus tests to all procurement technology investments today, which is to say that if a solution does not deliver ROI within 12 months from contract signing or first payment, they should put such a program on the backburner. Perhaps even more important, technology, procurement and finance executives should focus on getting their business capabilities to best-in-class levels, focusing on technology enablement and value versus first prioritizing attempts to lower system costs.

Translating Ideas and Actions into Results In Washington, politicians on both sides of the aisle like to put their mark on their initial term by creating near-term plans and promises. These efforts usually involve placing multiple bets and investments across different policies and programs. Just as there is argument in political circles about balancing capital and infrastructure investment with tax cuts, it is impossible to know which specific procurement and cost reduction programs will have the best and most rapid results before trying them. This is why it’s important to take a portfolio approach to initiatives from the start. Regardless, one thing politicians are always aware of is the need to create good news and momentum out of the gate. Indeed, the PR factor of initiatives – especially those that involve significant collaboration between different groups – can be as important a catalyst for change and results as the underlying program itself. This is a lesson that companies should take to heart when it comes to building momentum for programs that would otherwise be unpalatable to the corporate cost tongue under normal operating conditions. Still, success begets success and the most reliable means of ensuring further investments in initiatives that require additional stakeholder involvement and commitment is to measure and show the returns of those initiatives that are underway. When it comes to driving success in the downturn, having the right team and commitments in place internally is critical to success. Alignment between the CEO, CFO and procurement leaders must exist as a foundational element to push through the types of programs we have examined in this analysis. But the right outside technology and solution providers can also play a critical role in helping companies to use the downturn to their advantage. Whether it is identifying what initiatives to pursue (and in what order), helping to align different stakeholders with underlying technology, processes and information to make better decisions or simply providing a helping, expert hand where needed to get programs underway, outside partners can quickly prove themselves – and their products – to be an essential member of the team. At Ariba, we have helped hundreds of companies for more than a decade to identify and implement billions of dollars of cost savings opportunities. Our category and process expertise is unparalleled and companies have battle-tested our solutions under the most demanding circumstances, including those rapid but decisive skirmishes where there is no time to bring out slow-moving, heavy IT artillery.

8

Copyright © 2009 Ariba, Inc. All rights reserved.

Using the Downturn to Your Advantage

In conclusion, we urge you to take a contrarian view on the market and rather than succumb to the negativity in the air, to follow the path of astute politicians, using the downturn to your advantage. Working with Ariba, you will find that savings-focused partnership opportunities exist at all levels of involvement and scale. We can help you get past the pessimism that these times foster, helping your company to breathe a bit easier – not to mention getting over the trepidation of breathing in deeply when pursuing new types of initiatives for the first time.

Copyright © 2009 Ariba, Inc. All rights reserved.

9