Maximizing ROI in a Tight Economy

I think we can all agree that the global economic conditions we have
been dealing with for the past year are unprecedented. The unexpected
impact of the systematic collapse of the banking industry has reached
across the globe, resulting in economic slowdowns and a recession that
has blanketed the United States, Japan and all of the European Union. Even China, the manufacturing poster child of the global economy, is
reporting rapidly deteriorating economic conditions. Chinese factories
are scaling down production to combat the rising inventories global
businesses are now carrying due to lower consumer demand. But China is
not alone – enterprises across the globe are resorting to plant
closures and layoffs to ward off this precarious situation and ride out
the turbulent economic tidal wave.

While nobody is delighting in the economic pain caused by this global
recession, there is one positive note. Organizations now have a
significant opportunity in this economy to realign and improve their
spend management practices. By doing so, they can achieve sustainable
savings that can ensure the health of their business long after the
recession ends.

Over the past several months, my conversations with procurement and
finance professionals around the globe have been centered on addressing
their needs to reduce costs and improve efficiencies. My analysis is
that the manufacturing plant closures and layoffs we are seeing now are
really just short-term reactions to uncertain market conditions. Spend
management, on the other hand, is a continuous, dynamic process that
can be refined and improved to meet and exceed an organization’s
drastically changing business challenges.
The technicalities of spend management are not as important as
understanding a few best practices that can maximize spend – not only
during tough economic times, but at any time. These best practices,
when
implemented properly, can help businesses fuel growth and increase the
bottom line, even in struggling economic conditions. Visibility is Vital
For many companies, the vital missing piece to spend management is
visibility into an enterprise’s overall spend. This may sound
trivial, but it’s not. It is fundamental to any organization’s
spend management strategy.  Let’s use business travel spend as an example. Travel requirements
vary across organizations, but for most companies travel is a
considerable cost of doing business. This spend may look insignificant
across one region or department and thus easily ignored. Why? Because
many companies have multiple points where they track ticketing and
payment, and often these costs are budgeted across several cost
centers.

However, if a company creates visibility into this significant overhead
that has been distributed across the enterprise, a centralized process
can be created to reduce the burden. This enhanced visibility will
reduce the department’s overall spend and proactively prevent
overruns.

Over the years, I have observed several situations in which companies
adopted sub-optimal processes and solutions to manage their analysis
exercises. Most of these involved a manual approach that is
time-consuming and costly – something you would think is obviously
not the most optimal way of allocating resources. This labor-intensive approach essentially counters the whole objective
of ROI (return on investment), essentially becoming a cost center of
its own. It doesn’t have to be that way. Spend analysis can help
global organizations with everything from sourcing to contract
compliance:
* Savings to the tune of 92 percent from sourcing activities
* Increase in total spend under management of 39.4 percent
* Increase in contract compliance of 30.6 percent
Significant numbers! But the most important point to note is that many
of these companies reported an ROI in the region of 40 percent. This
underscores the success and urgency associated with leveraging
processes and technologies that embrace the best practices of spend
analysis.

Leading the Way in Good Times and Bad
Another common challenge I have observed is the ability of
organizations to leverage executive and enterprise support to maximize
user adoption of spend management initiatives and tools. This is why
best practices are so critical – they should be reviewed and refined
to ensure they are applicable to each individual enterprise. And the
technology solutions chosen for spend management should be aligned so
they mirror the goals and objectives outlined in the best practices.
It’s easy to see why executive alignment and support are critical to
the ongoing success of an enterprise’s spend management strategy.
Combined with the best practices that have proven successful at other
companies, this holistic approach ensures that a company achieves its
short-term and long-term objectives. I have found that taking this
holistic approach to spend management across the enterprise works much
better than placing sole ownership within one department, such as
procurement.

Here’s an example: A typical Global 1000 enterprise that has not used
spend analysis usually can end up identifying on average wasteful
expenditures that account for several million dollars. If we take a
10-year period, factor in the inflationary trend and higher input
costs, these expenses soar into the hundreds of millions.  Surprisingly, the impact of this may go unnoticed as the overall
performance of the company – top line and bottom line – may have
also improved during a period of rapid economic growth. But being
prepared by putting an effective spend management program in place
would potentially lessen the effects and minimize the impact of an
enterprise during tough economic times like we are facing now. And even
when the economic times are flush, these kinds of savings can improve
shareholder value and provide a competitive advantage.
Fundamentals Form the Foundation
As I mentioned earlier, the essential first steps toward an effective
spend management strategy is to achieve visibility and thorough
analysis for all cost centers throughout the enterprise. Why? Aberdeen
Group’s research of companies that implemented spend management
strategies found that the ROI from other ongoing spend management
initiatives becomes easier to achieve if these fundamentals form the
foundation on the front end.

Sure, the market conditions will continue to require some immediate and
short-term actions such as plant closings and layoffs. However, it is
the long-term strategy focused on managing your spend that will provide
the most bang for your bucks both in the short term and over the long
term.  It is imperative that companies take note of this fact and
empower the CPO to undertake spend management initiatives. At this
juncture, the cost-benefit ratio far exceeds the cost of not taking
action to see exactly where your spend lies.
And when the world recovers from the slowdown – and some countries
from the recession – the market dynamics will have changed
substantially, making spend management even more essential to corporate
success. That’s why it’s in every company’s best interest to
prepare now by advancing their spend management initiatives in these
trying times.
***

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About msetyadi

I am an IT Strategic
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