measuring cost savings and benefits realisationyrd.com.au/iag presentations/consol...

MEASURING COST SAVINGS AND BENEFITS REALISATION

Greg Edmonds - Project Procure

www.projectprocure.com.au

http://www.projectprocure.com.au


Overview

Introduction

Cost Savings

Measuring Savings

Benefits Realisation

Q & A

1

2

3

4

5


Introduction


Cost Savings - Cost Avoidance

A saving is an outcome that can reduce budgets. Outcomes are only savings if they are realised and are quantifiable.

Cost avoidance is an outcome that attempts to thwart price increases and to keep within budget. Cost avoidance is not a saving;

What are savings? Few Examples

Agreeing a straightforward reduction in price

Sourcing or developing a lower quality item (that still meets the purpose) at a reduced cost

Negotiating retrospective rebates, improved payment terms etc.

Negotiating improved terms and conditions, improved service levels etc.

Source: CIPS



A Typical Savings and Benefits Measurement

1 Define the scope

Define the units of comparison

Baseline the current costs

Predict-the future costs

Compare: what are the savings and benefits? (Budgetary Non-Budgetary)

Ongoing Measurement

2

3

4

5



Savings and Category Types

A study by KPMG across direct and indirect categories in various sectors reveals:

Procurement generally influences less than 60% of spend across both direct and indirect categories.

Centralised and centre-led functions report the highest levels of cost reduction and spend under management.

Savings Achieved~3-5% on direct categories and ~3-10% on indirect categories

Source: KPMG 2012



Savings and Asset Types

Visible in cost flow

Atypical

Amortised/Depreciated

Long-term assets

P&L Impact: Over time

Savings on Capital Expenses

Visible in P&L

Typically recurring

Expended

Selling, general and

administrative expense

P&L Impact: Immediate

Savings on Operational Expenses

Capex

$$$$$$$$$$

Opex



What is the most important metric for measuring procurement s performance in your company?

Identified SavingsImplemented SavingsBooked SavingsCost AvoidanceSpend Under Management



What Do Best in Class Organisations Achieve?

Check your maturity class..

Leakage

Identified SavingsIdentified Savings Negotiated Savings Implemented Savings Bottom Line Savings

Analysis Sourcing Project Payment

Procurement Finance



Savings - Challenges

Savings means something different to different roles in organisation

Sourcing/Buying Manager: Savings can mean incremental discounts I negotiated from the supplier s first quote or otherwise benchmarked market process across anticipated purchase volumes

Finance Manager: I may look at savings as the direct costs or expense reductions reflected as a positive variance or working capital improvement in my budget

CFO, Controller or Treasurer: Savings is something that impacts earnings or cash-flows plans including financing and global exchange implications

Procurement savings get lost in translation

Lack of common standardsLack of consistencyLack of breadth in definition

Procurement savings has traditionally lacked credibility

Procurement in the past has been guilty ofCarrying over savings from previous yearsInconsistencies in establishing market benchmarksAssumption with high inflation ratesMishandling of changes in unit price and quantityOverestimating savings assumptions due to process change

Baseline determination

Determination of baselineProcess standardisation

Reinvesting the savings

Savings in government sectorSavings against the baseline spend

CultureSavings in government sectorSavings against the baseline spend

Supplier Relationship

Miscommunicating the value delivered by a service provider Savings against the baseline spendImpairing the relationship between the client/company and the service provider

Challenges



Where Could Savings Be Lost?

Issue(Examples) Category How can it happen How can it be avoided

Price non compliance Marketing Rate cards are not being adhered toCost tracking

Standardised reporting

Category management

Cross referencing with periodic

spend analysis

Supplier performance

management

Vendor non compliance General professional services Sourcing from non approved agencies, suppliers

Volume non compliance MROSKU s have been changed. Spend is up, volume on negotiated SKU s is low

Delays Packaging Negotiated SKU s are not entered into ER delaying savings inflow

Clear process ownership during sourcing transition

Change of scope/requirements IT Hardware change, scope change during the implementation

Proper needs gathering and approved checks for decision impacting savings

Contract governance TransportationFreight savings diminished due to unstructured accessorial changeswith carriers

Regular spend analysis

Category management

Commodities Direct No proper index/indices used for price adjustments

Proper mechanisms for price escalations



Making It Count Critical Components For Benefits Realisation

Process Outline ownership and method of savings, tracking and compliance

Category & Contract Management

Strategy for category management, contract management and monitoring supplier performance management etc.

Technology Technology adoption for tracking savings identified vs realised

Collaboration Collaborate closely with finance, stake holders and suppliers

BenefitRealisation

Process

Category & Contract Management

Technology

Collaboration



Process

Analysis

Opportunity

Identify

Prioritise

Implement

Monitor

Stabilise

Execute

Keep Control

Realisation

Plannin

gTrackin

g

Savings

Budget



Quick Poll

How are you tracking your savings?

Excel SpreadsheetAutomated ToolSoftwareOthers



Maximise Savings Through Technology Adoption

Technology adoption and metrics monitoring

Will offer decision makers the ability to monitor and measure KPIsrelated to cost reductions and cost avoidance.

Identified SavingsNegotiated SavingsImplemented SavingsBottom-line Savings

Technology Adoption within Procurement



Maximise Savings Through Category and Contract Management

Negotiated Savings from

Sourcing (100%) Realised

Savings(76-86%)

Lost Savings via Leakage (14-24%)

Average Savings Leakage 21%

Contract Compliance

Implementation Process

Contract Negotiation

Source: Aberdeen

Effective contract management is one critical element for the successful realisation of benefits

Time



Quick Poll

What are the biggest challenges when sharing savings information within your organisation?

Lack of TimeEase of UseScalabilityAbility to Demonstrate Savings



Collaborate

Involvement in validation of spend and baseline determinationOngoing cost tracking, compliance measurement, non-compliance reportingAgreement on savings tracking and reporting methodologies (Templates & Frequency)

The below table reflects direct opportunities gained by increased internal collaboration.

Suppliers

Finance

Stakeholders

Spend Analysis Sourcing

SavingsTracking



Q&A



Thank You


BrisbaneLevel 9144 Edward Street BRISBANE QLD 4000 t : +61 (0) 7 3211 0275f : +61 (0) 7 3211 0266

SydneyLevel 860 York StreetSYDNEY NSW 2000t : +61 (0) 2 9279 1117f : +61 (0) 7 3211 0266

Visit us at Booth 19

Project Procure is part of the Charles

Kendall Group of companies



measuring cost savings and benefits realisationyrd.com.au/iag presentations/consol...

Documents