insights and opportunities to improve control, maximise ...€¦ · travel & entertainment...

Insights and opportunities to improve control, maximise visibility and drive efficiencies in indirect spend

Katrina Cliffe,Vice President & General Manager,Global Commercial Card,American Express September 21st 2011

Agenda

American Express in Public Sector

Economic Outlook

Indirect Spend

Example: Making IT spend more efficient, transparent and accountable

3

American Express

! Founded in 1850! Issued first travellers cheque in

1891! First credit card issued in 1958

! 65,000 Employees! 55% outside US! 30% in Europe! 60% revenues outside US

! Global Card Spend of $640bn! Avg Annual Corporate Card Spend

of over $11k in UK

Public Sector ExperienceLargest Card spend

A Long History in PaymentsAn International Organisation

! 435 Public Sector partners globally! £881m public sector payments

annually

American Express is one of the world’s leading payments companies, with over 235,000 corporate payments customers globally. American Express combines

deep expertise, best-in-class service and industry leading products to understand public sector organisations and deliver process efficiency and

monetary savings on public sector payments across the globe.

Agenda


Economic Outlook

Indirect Spend


UK Economic OutlookThe UK economic situation remains weak" GDP in Q2 grew by 0.2%, excluding one-off factors the

growth would have been 0.7%" UK Inflationary pressure remains high, August saw an

increase of the CPI to 4.5% (from 4.4% in July) and is expected to rise to 5% before year end. RPI also saw an increase from 5.0% to 5.2%

" Retail sales growth slowed to 0.2% in July driven by inflation, unemployment and limited wage rises

" Inflationary pressures and overall concern around the economy have eased calls for a BoE rate change – rise not expected in 2011

" Unemployment rose by 80,000 in August to 7.9%, its sixth consecutive monthly increase. Private sector job increases are not sufficient to cover cuts in the public sector

" The 2012 economic outlook for the UK remains uncertain, with latest growth estimates ranging from 1.1% to 1.4%.

" The OECD forecast the GDP exit growth rate for Q4 will be 0.3%

" Consumer and business confidence is down, with client expectations of growth next year low

Source: EIU August 2011 Market Report

Your View of the UK’s Economic Prospects

Total (%)

Substantial economic expansion 1

Modest economic expansion 22

No change in economic prospects 22

Modest economic contraction 35

Substantial economic contraction 20

Not stated 1

Q1: ‘In your opinion, what are the economic prospectsfor the country over the next 12 months?’

Total (%)

Strongly agree 30

Agree 52

Neutral 12

Disagree 5

Strongly disagree 1

Not stated 1

Q2: Do you agree or disagree with the following statement?"Over the next two years, the businessenvironment will be more volatile/variable than during the period before the downturn."

Agenda


Economic Outlook

Indirect Spend


Organisations look ahead for profitable growth opportunities and long-term efficiencies

Organisations look ahead for profitable growth opportunities and long-term efficiencies

Organisations adjust to the ‘new normal’and invest selectively for growth

Organisations adjust to the ‘new normal’and invest selectively for growth

Broader expenditurereductions in all areas of businesses

Broader expenditurereductions in all areas of businesses

Short-term expenditure reductions adapt to changing economic conditions

Short-term expenditure reductions adapt to changing economic conditions

Why focus on Indirect Spend Management?

Financial Crisis

Financial Crisis

Slowing Recovery

Uncertain Outlook

2008 2009 2010 2011+

Increased focus on control and compliance

As the economic situation changes - we can see that organisations have the opportunity to drive savings from Indirect Spend within their business.

Travel & Entertainment Other Indirect Business Expenses$100B

$1Trillion

$230B

$770B

European Indirect Business Expenses Landscape

Based on recent research, American Express estimates the 2011 European Indirect Business Expenses landscape to be just over $1 Trillion

European Indirect Spend Market Estimate: €1,300 billion ($1,700 billion) was calculated as the total GDP for Europe multiplied by 9% of total revenue.

European Indirect Spend still represents a considerable opportunity for applying expenditure management practices

1. Improving control 2. Maximising visibility3. Driving efficiencies

Indirect Spend represents a far more complex mix of categories

Finance and procurement environments are growing increasingly complex, with organisations looking to balance three key goals

1. Driving growth2. Achieving cost savings 3. Meeting regulatory requirements

Progress has been made in many organisations to gain greater T&S

visibility and control – GPC has been a good tool for this

European Indirect Business Expenses Landscape

Study responses

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Total number of respondents and total revenueTo

tal R

even

ue (i

n €

billio

ns) 247

217

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Top 10 industries represented

" Chemicals, Oil and Gas

" Professional Services

" Engineering

" Telecommunications

" Medical Equipment

" Financial Institutions

" Food and Nutrition

" Construction

" High-Tech

" Pharmaceuticals

Organisation Segment Classification: Large: Revenue >= €572 million, Employees >= 500, Mid-sized: Revenue >= €2.3 million and < €572 million, Employees < 500

Total respondents: 162 94 68

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The study reveals 3 particularly striking opportunities...

Summary of key findings

Findings

1. Compliance is a major challenge for organisations

2. Organisations have poor spend visibility and accuracy to support effective sourcing

3. There is very limited evidence that pure automation improves processing efficiency

Opportunities

‘Money is left on the table’

The organisations that took part in this Study could save up to €900 million

Major opportunity for improving efficiency by better practices

Improving Control

Driving Efficiencies

Maximising Visibility

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On average, more than 70% of the organisations use preferred suppliers lists across indirect categories

Percentage of organisations that have preferred supplier lists

By organisation size By customer / non-customer

80%

64%76%

67%

Improving Control

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However, on average, only approximately two thirds of the total Indirect Spend complies to preferred supplier lists

Percentage of spend that complies to preferred supplier list

67%63%

71% 68%64%

54%

67%

56%63%

60%

70% 69% 70% 73%

61% 62%

Amex customers Non-customer

71% of the total indirect spend for companies in the UK is compliant to preferred supplier lists as compared to 66% companies in the survey

Improving Control

15

On average, more than 60% of the organisations have contracted rates across indirect categories

Percentage of organisations that have contracted rates


66% 63% 59%

Improving Control

58%

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However, on average only approximately two thirds of the total Indirect Spend is known to comply to contractedrates

Percentage of spend that complies to contracted rates

64% 63%

80%73%

54% 57%63%

56% 55% 52%

72% 75%71% 71%

56% 55%

Amex customer Non-customer

62% of the total indirect spend for companies in the UK is compliant to contracted rates as compared to 64% for all companies in the survey

Improving Control

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Approximately half of the organisations in the survey did not have controls in place to manage non compliance

Reasons for non-compliance to preferred supplier lists

Reasons for non-compliance to contracted rates

80%

64%38%

39%

55%

% of organisations that agree

Buyers have poor visibility

Adding new suppliers is easy

Controls to identify non-compliance are not in place

41%

69%

49%


Buyers have poor visibility

Buyer have noincentives to comply

Controls to identify non-compliance are not in place

Improving Control

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Overall, more than 40% of the organisations did not have adequate item level visibility of their Indirect Spend

Percentage of organisations with poor item level spend visibility

39%

50%

80%73%

48%

65%

38%

50%53%

68%

34% 35% 33%

44% 42%

50%

26%

38%

Amex customer Non-customer

67% of companies in the UK have high item level visibility as compared to average of 58% for all companies in the survey


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Of the organisations who have good item level spend visibility, one-third believed that their spend information is unreliable

Percentage of organisations that have poor item level spend accuracy


30%

37%

31%

39%


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Two in three organisations do not capture item level details on specifications and price that is required for effective sourcing

Reasons for poor item level spend visibility and accuracy

64%

58%

57%


Poor compliance to procurement policy

Not all transactions are captured on the systems

Not all item level transaction details are captured

66%

Multiple systems within the organisations that do not integrate well

“Capturing line item data is becoming more and more important to us, as we recognise that this data helps us to better understand our future cost drivers.”

Michael Flueck, Assistant Vice President, ABB ManagementServices Ltd.


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The organisations that took part in this Study could save up to €900 million

Approach used for estimating size of the opportunity

€45 billion

€18 billion


Total Indirect Spend for organisations in the survey

Savings opportunity

According to A.T. Kearney, Assessment of Excellence in Procurement study, effective procurement practices could yield up to 5% savings for addressable spend.

Applying 5% savings estimate to the €18 billion Indirect Spend that has poor spend visibility gives€900 million.

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Unsurprisingly, organisations tend to have a higher usage of electronic purchase orders as compared to electronic invoices

Usage of electronic purchase orders and electronic invoices

José Luis Sebastian Fernandez, Purchasing Manager, Codere SA

“Most invoices from large suppliers are electronic, enabling them to be easily processed. For small suppliers who provide their invoices on paper, we often find it difficult to assign costs to projects accurately, which means it can take up to four weeks to settle them..”

51%

26%


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Organisations that have implemented a high proportion of electronic invoices have reduced cycle times

Breakdown of the invoice receipt to approval cycle times (average number of days)

26%

5.3Organisations where less than 60% of the total invoices are electronic

Organisations where 60% or more of the total invoices are electronic

5.2 11.3

3.1 3.4 4.1

21.8

10.6

Input invoicesReconcile invoicesManagement time


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However, there is limited correlation between automation and resource requirements

Correlation between usage of electronic purchase orders / invoices and FTE requirements

Large organisations

80%

64%

Ave

rage

FTE

s in

volv

ed

% of electronic purchase orders / invoices

Mid-sized organisations

80%

64%

Ave

rage

FTE

s in

volv

ed

% of electronic purchase orders / invoices

Average FTEs involved in raising POs

Average FTEs involved processing invoices


Average FTEs involved in raising POs

Average FTEs involved processing invoices

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Making progress necessitates striking the right balance...

Key recommendations

1. Deploy ‘before the event’ controls without making it too bureaucratic

Behaviour

2. Create a feedback loop to make lack of compliance and its costs visible to users

3. Drive efficiency by following a top down, risk-based approach

Shift behaviour by creating the right environment

Controls Efficiency

Feedback loop

Agenda


Economic Outlook

Indirect Spend


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Q: Please rank the importance to your organisation of each of the following areas over the next 12 months

Mean scores Total

Negotiating better deals with suppliers

4.2

Increasing visibility of all costs incurred

3.9

Improve administrative process efficiency(streamline/automate finance, accounts payable, procurement and other processes, etc.)

3.8

Increasing visibility of indirect expenses

3.5

Awarding contracts to more SME organisations

2.7

Mean scores Total

Travel and subsistence 0.8

IT -0.1

Temporary workforce 0.4

Stationery 0.3

Telecoms -0.1

Public Relations (Including Marketing and Advertising)

0.1

Consultancy 0.2

Business Cards 0.1

Q: ‘To what extent do you believe your department has visibility and control of the following indirect expenses?’

Q: Over the next 12 months, does your department plan to spend more, the same amount, or less in each of the following categories?

Mean scores Total

Transportation/logistics services -0.8

Computer hardware (PCs, servers, mobile technology)

-0.6

Enterprise-level IT systems -0.6

Labour/headcount -0.9

Business and professional services -0.8

Travel and entertainment -0.9

Advertising and marketing/PR services

-0.9

Depreciable assets (including real estate, facilities, and Property, Plant and Equipment)

-0.8

Production inputs (raw materials, intermediate goods, etc.)

-0.8

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IT Commodity Spend: Price Volatility

Source: Mercato IT Benchmark Index

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IT Commodity Spend

Lack of Visibility of

Spend

Desire to Reduce Spend

Highly volatile, complex pricing

ecosystem

A very challenging environment to control and reduce spend...

++ ++

==

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Part Number: CB494A#B19

Framework Pricing Price

HP Local Government Buying Solutions (CITHS) IPG £244.12

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HP Defence Catalist IPG £244.12HP HealthBuying Solutions (CITHS) IPG £244.12

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Real life example

Market Pricing £228.43

2,183 stock (+146)

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Example: PROBRAND / American Express approach

ERP

eAuction"Aggregation of total order"Aggregation of all other system users

Full supply chain access:"Frameworks"Market Price"Other “special pricing” deals

DepartmentSpend Analytics

Full overview of purchase at line

item detail

Spend: £6,852.90

(30 printers at Market Price)

eAuction:

1.5% discount

Spend: £6,750.11

Supplier Order:£6,750.11

Rebate (0.5%)£33.75

Totals

Spend: £6,750.11

Rebate: £33.75

Net Spend: £6,716.36

Net Saving:6.13%

Economics through the

Process

Supplier 1

Level 3Data

AutomatedPayment

Level 3Data

Central Data Warehouse

Full overview of purchase at line

item detail

1.Lowest available price

2.Spot aggregation and eAuction saving

3.Payment of financial rebate under GPCIII contract

1.Process savings1. Complete automation of buy side process

2. Complete automation of payment process

2.Time savings

1.Total spend control & compliance

2.Complete visibility of spend

3.Good PR

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Benefits

Soft Savings: Process Efficiencies

Control & Compliance

Hard Savings and Additional Income££! Driving efficiencies

Indirect Spend Management Drivers

! Maximising visibility

! Improving control

! Driving efficiencies

! Improving control

1. Economic environment is, and will remain challenging

2. There are some clear lessons to be drawn from the management of indirect spend

3. Companies like American Express will seek to help where there is an opportunity

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SUMMARY

insights and opportunities to improve control, maximise ...€¦ · travel & entertainment...

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