Effective Procurement - Doyle Club Feb 2014

Effective Procurement in Facilities Management

Simon Dodson & Ian MorrisonConsultant Partners

Today’s Agenda• Changing Face of Procurement• The Importance of Procurement to Finance• Common perceptions and misconceptions

about procurement• Creating a Cost Conscious Culture• Opportunities and strategies for savings• What to do next

Who are Expense Reduction Analysts?The world’s largest specialist cost reduction and procurement consultancyOffices in 40+ countries and expanding - established in UK in 1992 150 + consultants in UKExpertise in 125+ cost categories1500+ UK clients – currently 7000+ projects in processCurrently managing in excess of £600m client spend, delivering unrivalled market intelligence and buying influence with suppliersAchieve an average 19.7% saving across all expense categories for any size/sector of client

The Changing Face of Procurement

Value for Money

Quality

Delivery

Service

Price

What is Value for Money?

=effective procurement

Getting Value for Money

The importance of effective procurement on everyday organisational costs

Profit

Staff

DirectCosts

In-DirectCosts

100 100

5

45

30

20

7

45

30

18 - 10%

+ 40%

In-direct

Direct costs

Staff

Profit

Outgoings

If staff & direct costs remain the same a 10% reduction of in-direct spend is equal to 40% increase in Profit!

Other improvements that would result in the same increase would be:A reduction in Staff by 5%A reduction in Direct costs by 7%An increase in New Business

The importance ofEffective Procurement to Finance

CFO’s Surveyed by CFO Magazine said:

ERA research – conducted 2 surveys in 2013

• ‘The Psychology of Procurement’ research uncovered the following with Finance Directors/Board Level Directors– A lack of understanding at board-level of the strategic

value of procurement – in fact almost half discussed procurement at board level only once a year or never

– A lack of internal procurement skills – untrained, ill equipped staff to deal with an array of purchasing needs

– Resistance to internal procurement by internal departments

– Inefficient and unmanaged supply chain partnerships

• The 2nd research piece focussed on ‘purchasers’ and their attitudes towards procurement– 4 out of 5 organisations didn’t have a specialist

procurement team or individual – Only 21% viewed their suppliers as partners– Decisions are dictated around price and poor service,

59% would not review unless there is a problem– Lack of companywide controls and formal training,

and value placed on the procurement function

ERA research – conducted 2 surveys in 2013

What’s your perspective on Effective Procurement

• Are you getting value from your suppliers? Where is the evidence?

• When did you last benchmark?• When did you last review and test the market?• Is cost management part of your financial

strategy?

Common Misconceptions

• Pricing from suppliers is applied evenly to similar customers

• Your expertise in procurement across one cost category will produce similar results in another

• National pricing agreements are always better than local or regional agreements with the same company

• Loyalty to a supplier automatically translates into best pricing and service

Common Misconceptions

Common MisconceptionsBuying consortia • Working in your interests or their own?  

• Their commission model changes incentives completely

• Cosy relationship with certain suppliers - rarely research the whole market

• No troubleshooting, personal service, consultancy advice or collaborative partnership

• The preselected range of products/services do not fit every user circumstance

• Compliance is all but who is monitoring it?

Cost Management Challenges

Cost Management Challenges• Multiple suppliers and order points

• No internal benchmark data on purchases

• Staff and management have limited time and resources to address non-strategic costs and to monitor if savings are being actually and consistently achieved

• No real culture or importance attached to reducing costs and improving value from suppliers

• Employees with limited purchasing experience are making buying decisions

• Lead from the top

• Publish success

• Involve all the stakeholders

• Provide training and support

Create a Cost Conscious Culture

More than just Cost Management

• Understanding needs

• Supplier selection

• Professional tender management

• Implement savings

• Making sure people buy right

• From the right suppliers (avoid maverick spend)

• To the agreed buying policy i.e. Contract lists

• Provide knowledge transfer to make employees better buyers

• Monitor supplier performance on-going

• Professional supplier relationship management

• Challenge any price or service issues

• Manage risk on-going

Setting your strategy• Identify components of non-core operating expenses starting

with your General Ledger and a comprehensive supplier analysis

• Establish an overall strategy for cost reduction & agree goals

• Develop a goal over a minimum threshold for each expense category

• Set a timeline for results

• Establish expectations for each person who will participate in the process, employees must have a true stake in the performance of the company

• Audit actual savings vs forecast on an ongoing basis

• Provide as much information about your buying patterns & usage as possible

• Forecast future needs (growth if realistic)

• Minimise the suppliers risk

• Create a competitive environment

Make your account as attractive as possible to the supplier

• Set up reporting and management information

• Review KPI’s at a high level

• Track supplier performance

• Go back to market at least annually

• Monitor internal buying habits

• Get hard evidence on any price change

Don’t just get the best deal, maintain it

Coffee Break

Effective Procurement in Facilities Management

Opportunities forImmediate Savings

Questions you should ask to find savings in six common expense categories…

30

Facilities Management

Facilities ManagementTypical situation:

• A large number of fairly small services with differing

requirements and service levels

• Legal compliance is a great concern

• It’s a significant cost

• Contractor in place for many years

• Client believes they are receiving good service/value

• No recent market test to validate this view

• Client fearful of introducing service risks

Facilities ManagementCharacterised by:

• Opaque and one sided contracts (if any at all)

• Lack of pricing transparency, KPIs and agreed

service levels

• Reactive works are difficult to quantify and

measure, with multi-layers of charges

• Contract creep occurs frequently

• Contract fatigue over time

• Client bears all of the risk!

Facilities Management

Huge opportunity to:

• Renegotiate contracts, even mid term

• Revise specification to ensure compliance where

required but not over do it (PAT now risk based)

• Ensure Planned Maintenance meets site requirements

• Bundle services together to drive efficiencies

• Significantly reduce costs

• Improve service levels by implementing SLA/KPI’s

• Engage suppliers to proactively improve value

34

Energy Management

Energy – efficient procurementBe pro-active• Due to the volatile nature of energy markets, there may be opportunities to

renew contracts well in advance of a current contract end date.

• Adopting a pro-active approach helps avoid rushed decisions and potentially punitive out of contract energy rates being charged from your incumbent supplier.

• Delaying tenders until the last minute increases the risk of punitive out of contract rates being applied.

• To gain maximum bulk purchase benefits all contract end dates per fuel need to be aligned, meaning fewer tenders and enhanced ability to budget.

• A single supplier per fuel will minimise invoice processing costs.

• Appropriate contract term requires consideration of budgetary requirements, actual tender results and market projections.

Energy – efficient procurement

• Beware of T&Cs – take or pay contracts• Extra charges if you use more or less than you contract• Do you have accurate consumption data?• Is it based on estimated or actual meter reads?

Consider renewables?• Solar panels• Better control and management of energy• Evaluation of boiler efficiency?

Energy – efficient procurementReducing energy costs can only be achieved through effective consumption management:

• control what is used – turn lights off

• make use of free energy (heat & light)

• recycle water (rainwater harvesting)

• use alternative fuels

Better control and management of energy through effective measurement

Managing energy costs is complex, evaluating any energy proposal is even more complex!

Contract Cleaning

Contract Cleaning

Characterised by:

• Opaque and one sided contracts

• Lack of pricing transparency, KPIs and agreed service levels

• Contract fatigue over time

• Supplier slow to update materials & equipment

Contract Cleaning

Typical situation:

• It’s a significant cost

• Contractor in place for several years

• Client believes they are receiving good service/value

• No recent market test to validate this view

Contract Cleaning

Huge opportunity to:

• Renegotiate and rebalance contracts, even mid term

• Significantly reduce costs

• Improve service levels

• But be aware of TUPE regulations

Photocopier charges & costs

Photocopiers

Typical situation

• World-class opacity of contracts

• Increasing costs for declining machine reliability

• Beware of renewing contracts before expiry

• Different contract end dates. And do you know them?

• Who tracks and reports on the reliability of machines against service contracts?

• Do your team know which printer is best for which jobs or are they printing by convenience (the nearest device)?

• Who specifies what type of machine you need – you or the supplier? Are they under or over specified?

Photocopiers

Opportunity to:• Review/future proof fleet size and location• Monitor copy volumes to make informed decisions before

renewing• Reduce page costs by up to 70% networking machines

as printers• Remove some desktop printers with attendant toner

savings• Ensure colour machines are default set to mono – up to

90% page cost saving• Negotiate hard – it’s a competitive market!

Photocopiers

46

Office Supplies

Office Supplies• Are you buying your office supplies (including ink/toner and

break-room supplies) from one supplier (who)?

• Do you have purchasing policies for office supplies including minimum order size, contract item list, who can order items not on the contract list?

• How do you control product price increases

• How do you audit office supply transactions to ensure there are no overcharges or substitutions without your approval?

• Are you receiving incentives/rebates for electronic ordering, average order size or your annual volume?

48

Insurance& RiskManagement

Insurance & Risk Management

• Is your organisation maximising the return on its insurance expenditures? Are you transferring risk appropriately?

• Have you completed a risk assessment/gap analysis and determined any gaps in coverage or overlapping/duplicative coverage's?

• Is your broker or agent being compensated in a manner that puts them on your side of the table?

• Has the incentive of higher commissions been neutralised?

• Do you know the types of coverage similar companies are carrying and the premiums they are paying?

Review of Points Covered• Changing face of Procurement• Importance of Procurement to Finance• Common misconceptions and challenges in

procurement• Importance of a cost conscious culture• Cost, Purchase & Supplier Management• Opportunities for immediate savings

20% cost reduction = 40% increase in Net Profit

How Expense Reduction Analysts can help YOUR Company…

Expense Reduction Analysts Service

• Independent and forensic analysis of category expenses, service

levels, product quality and contract detail

• Additional supplier selection

• Full tender and analysis process

• Submission of options to client

• Administration of implementation of chosen option

• Regular audits, supplier monitoring and management information

and over 1,500 others

Over 150 full time specialist procurement advisors in UK

Over 1,000 years combined procurement experience

Specialists in

plus 100+ other areas

Print

Travel

Freight

Waste

Packaging

Communications

Chemicals

Vehicle fleets

Banking fees

Utilities

Stationery

Catering

IT

Fuel

Cleaning

Business Rates

Workwear

Labour hire

Managed Services

Procurement processes

With Typical Savings of …

Current Average Saving = 19.7%

Printing 25% Telecoms 30% Insurance 18%

Freight 15% Waste 22% Food 10%

Workwear 15% Maintenance 16% Consumables 15%

Stationery 28% Banking fees 22% Rates 14%

Cleaning 20% Security 16% Travel 10%

Profile

£10m+ t/o and £15k+ spend per category review

Savings

ERA find savings in 92%+ of engagements

Average saving is 19.7%, often 30%+, highest 150%

Timescale

Projects take 8 - 10 weeks from agreement to implementation

Structure

Client confidentiality safeguarded

Incumbent supplier retained in over 60% of projects

Quality of product/service not compromised

Client Experience

Real Examples - From Clients’ Perspective

“Expense Reduction Analysts have been very impressive. Not only

have they saved us a significant amount of money, but they have

also ensured that other vital factors – such as standards of service

and our Corporate Social Responsibility – were kept clearly in

mind when recommending changes”

Client Success

Over £200,000

savings pa

“Expense Reduction Analysts has helped to save the

company hundreds of thousands of pounds, and

they’ve also become a trusted partner, providing

advice on a range of process, compliance and general

business issues”

Over £250,000

savings pa

Over £50,000

savings pa

“Altering contracts to ensure they were fit for purpose in this

way has realised immediate and significant savings for the

company, however, there were complex negotiations involved,

requiring a degree of market knowledge that was not available

within the business.”

Client Outline• The client is in the Health Care sector, total spend £5m across 322 homes

focused on Senior Care and Mental Health• Property Maintenance consists of Property Services Manager, Helpdesk (3.5

FTE), Maintenance Officers (30), supported by 37 Sub-Contractors (spend £3.5m)

Project Process• Project objective defined by client; “Can you sort this mess out for me?”• The project is broken down into Restructure Maintenance programme,

contract review, maintenance specification, help desk & maintenance officers review, tender all maintenance contracts both in ‘as is’ and as per new structure.

• Benchmark “Best in Class” contracts, survey equipment and services to create Maintenance Specification & Asset register, audit current Helpdesk structure & processes (4 days on site), audit Maintenance Officers role.

• Fully understanding client’s “Well Formed Outcome” & Benchmark current costs, service levels, PPM, Reactive Maintenance and any hidden items.

• Issue tenders both for consolidated and separate services.

Project Outcome - Recommendation report produced including

• New specification that meets client’s requirements & tender format that preserves the specification & contract.

• Clear direction for Help Desk & processes with integration into suppliers and their finance function

• Recommendations for Maintenance Officers

Savings

• Planned Preventative Maintenance 21.5% saving £400k Spend

• Reactive Maintenance 13% saving £1.2m Spend

• Minor Project 13% savings £1.9m Spend

Phase 2 (Consultancy)

• Help Desk function 30% to 60% saving

• Integration of MO’s into contractors Approx. £0.5m savings

Challenges

• Winning the confidence of the senior management team & finding ‘hidden stakeholders’. Internal politics & change management

• Analysing the mass of data and current contracts (1600)

What next?

Thank you

Any Questions?

[email protected]@erauk.net

www.expense-reduction.co.uk