Managing Indirect Spend - Joe Payne

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comes in handy when reporting back to end users, developing RFPs or other bid documentation, and comparing proposals later on during the initiative. It is also used to calculate any savings achieved during the initiative.

      The baseline document converts your data into four types of information:

      1 Pricing information (including an analysis of line‐item detail)

      2 Service‐level information

      3 Contractual requirements

      4 Go‐forward strategy

      Pricing Information

      When dealing with pricing information, start from the highest summary level you can and break the data down from there. The baseline price analysis should start with a recap of total spend (by supplier) for the category. If you have multiple suppliers, demonstrate the spend by each supplier separately and then provide a total.

      Then, review the spend and see if it can be categorized by product or service type. For example, in a services baseline (such as maintenance for your HVAC systems), you might break out the spend to show how much represents scheduled maintenance and how much represents service calls. If your organization has multiple facilities, you may want to break out the spend by location as well.

      The pricing analysis also includes a summary of ancillary or other incurred fees, such as minimum order penalties, fuel surcharges, and overtime charges. It is important to note not just what these charges are, but how often they are incurred and the reasons why they are incurred.

      Finally, provide a spreadsheet showing usage history and price point paid. Analyze the data to demonstrate ordering patterns, high volume items, and which products or services represent the most spend. All of this information will be used later on to develop a sourcing strategy. It can also help relay requirements to alternate vendors.

      Service‐Level Details

      The service‐level section of the baseline should provide a clear recap of service‐level requirements. These include requirements that are listed in a contract or pricing agreement as well as those identified by end users. Review these service levels to determine which are true necessities for your organization (needs) versus value‐adds that may not be necessary (wants). If it appears that you are paying for more service than is required, your assessment should make a clear distinction between minimum requirements and options that are nice to have but not required.

      Contractual Requirements

      The baseline report should also summarize any contractual considerations related to the spend category. This section should detail existing obligations, provide insight into the current agreement termination date, and identify clauses dealing with termination before that date. It should also provide an assessment of specific requirements regarding the scope of work, insurance, liability, and other important contract clauses. Finally, this section of the report should provide some context for how these obligations will be addressed during the sourcing process.

      Go‐Forward Strategy

      By now, you have developed a full analysis of your current supplier's cost structure, service levels, and contractual requirements. This has helped you turn data into useful information that you can now use to develop a preliminary sourcing strategy.

      A preliminary sourcing strategy describes the course of action to take after completing the Data Collection phase. It defines the type of research to perform, the types of suppliers to contact, and the rationale for these decisions. Some factors to consider include the following:

       How many suppliers do we currently utilize?

       Are there other suppliers in the marketplace that provide this product or service?

       Do we have a contractual obligation with our current supplier? What happens if that obligation is not fulfilled?

       When was the last time we negotiated this contract?

       How integrated are we with the current supplier(s)? Will there be a high cost of change?

      Does it make sense to aggregate all the spend in this category together or to look at components of it separately?

      At this point in the process, you have probably developed a basic understanding of the marketplace, but you are by no means an expert. As you move into the research phase, you might find that your preliminary sourcing strategy was missing steps, or you might find that a different approach altogether is more appropriate. This is okay—the preliminary strategy is essentially a draft concept. The research process helps further refine and develop the strategy.

      Presenting the Baseline

      Now that you have created the baseline report, it is time to present this information to your team. As we discussed earlier in the chapter, your team includes both stakeholders (those with direct involvement in managing the spend or working with the suppliers) and the executive(s) sponsoring the project. Oftentimes, supplier relationships are subjective, especially to those who work closest with the suppliers. Providing an objective assessment of the current supply situation (and having stakeholders agree with it) is the first step in the consensus‐building process, critical to future assessments. If the stakeholders do not agree on your starting point, it will be more difficult for them to accept change later on.

      Executives also need to be briefed on your baseline, but for a different reason. For the executive team and other sponsors, understanding the process undertaken to collect data and build the initial baseline assessment provides context for the project scope and a basic knowledge of your starting point. This makes bringing them up to speed much easier if their assistance is needed later on in the process. It also demonstrates credibility, in that you started the project in an objective way that they could agree with.

      Remember, at this stage in the process it is not clear if changing suppliers or altering processes will be necessary, but in a Strategic Sourcing initiative, those events should always be considered as possibilities. Change management is not always easy, but a project that is done inside a bubble with no involvement from others will typically fail if change becomes necessary. Reviewing and agreeing to a baseline with those involved often seems like an unnecessary step. After all, why would you present to them what they already know? But this initial step creates an easy win by demonstrating that you understand the category and that the process you are about to undertake will be an objective one.

      Once you have obtained team agreement on a starting point, the Research phase of the project can begin.

      Organizations typically realize cost savings through three primary methods: leveraging data intelligence, making process improvements, and choosing new products or services.

      Organizations most often act on cost‐savings opportunities by using the

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