Managing Costs in aTurbulent Economy
Recently, we have seen unprecedentedevents in the global financial markets that will have a profound impact on
“main street” organizations. Companies will need to take proactive measures to mitigate the risk of coming under
severe financial pressure themselves. But is traditional “cost cutting” really the answer? Cost reduction is a promising solution to sustain profitability for nearly all organizations. However, the key to success is finding creative ways to prevent costs.
& Value Optimization
Strategic Action vs. Reacting to the Storm
Consulting, Technology & Outsourcingthe way we see it Creative cost management solutions allow companies to improve their understanding of the key drivers of profitability and enable them to develop a cost redistribution program that will ensure long-term financial viability. It is critical to identify the areas where cost can be prevented or reduced and to create and implement a formal cost review process. Corporations are feeling the pressure as customers’ disposable income decreases while trying to keep up with higher costs of living.
T O G E T H E R . F R E E Y O U R E N E R G I E S
In addition, preferences are shifting towards new methods of consumption and customers have new expectations of traditional industries. Looking at how recent events are affecting individual sectors provides deeper insights into identifying areas to prevent costs:
Telecommunicationcompanies are rapidly expanding wireless services to gain customer share while price competition is steadily increasing. As broadband penetration increases, customers are using more bandwidth per capita. Yet to stay competitive, prices are constantly dropping. Broadband customers are also changing their usage habits, trying to control their own service experience, and pushing for more variety and flexibility of offerings.1
Entertainmentcompanies are seeing increased competition from nontraditional media sources, a shift in television viewer demographics, and a leveling off of theatrical ticket sales, all combining to create a difficult time to preserve profits. All the while, CD and DVD media sales are flat or declining with an increased consumer preference for online distribution methods. Corporations can no longer depend on consumer demand, they must continue to innovate and compete on new levels while lowering internal costs to keep revenues up. The Life Sciences industry (Pharmaceuticals, Biotech, and Medical Devices) continues to undergo increased pressures relative to more demanding FDA regulations and state and federal legistlation to disclose payments to physicians and other healthcare organizations. In addition, pharma’s current commercial model is product focused, but they’re building more knowledge around customer groups such as providers, payers, patients, funders (government and employers), and third party organizations (quality assurance and patient advocacy groups).
The High Tech sector is no exception. Consumer and corporate investment into new hardware and software may level off as they begin realizing the impact of the slowed economy. By supporting infrastructure activities, Web 2.0 technologies, application management, application development and RightShore® cost management can provide the business strategies needed to move through difficult times. By leveraging these techniques, organizations can reduce IT costs by up to 30%. With rising raw material prices, regulatory changes, and an increased focus on sustainability, Consumer Products organizations are under enormous pressure to lower cost
Each cost management option requires a different magnitude of change to occur, which is directly related to the investment one must make in their company. This investment can be directed more as a strategic play by investing in the future, or a tactical one focused on a specific area of concern.In many cases, cost management measures are inefficient simply due to a lack of centralized insight into which suppliers are providing work to each business unit. Capgemini can provide the insight needed to find opportunities to consolidate vendors who could deliver the same work with less cost based on volume discounting. This is a quick win that would take a minimum amount of investment in time and capital to achieve. Most corporations will find that there is inconsistent accountability tracking of whether suppliers are meeting deliverables within negotiated Service Level Agreements. This again can lead to excess costs. Organizations may lack an understanding of the contractual cost drivers that would otherwise give the client clear insight as to what “levers” can be pulled to reduce costs. Effectively managing these areas not only decreases costs, but can improve vendor service levels.
1Chetham, Andrew, and Jopling, Elroy, and Willis, David A. “Market Trends: Reshaping Consumer Communications Service Markets, Worldwide, 2008-2009.”
Gartner 8 May, 2008.
Consulting, Technology & Outsourcingthe way we see it would originate. Now one must take a fresh look at cost management techniques to remain competitive and profitable in today’s market.
Value Optimization to Overcome Tumultuous Conditions
Some of the most impactful cost management methods that any company enduring a soft market must consider are Process Optimization, Supplier Relationship and Contract Management, Business Process Outsourcing, Shared Services, Green IT, Tax Process Optimization, Applications Development Management and Rightshore.® Whether one or all of the available options are used, a dramatic and rapid cost reduction can be achieved while streamlining and future-proofing a business. Each of the these areas has specific advantages that cater well to different business structures and organizations, so one or a combination is chosen on a case-by-case basis. Capgemini has the expertise and experience to work with a corporation to decide which of these options will be the most beneficial now and in the near and long term. of goods sold while delighting the consumer. A key way of doing this is through rethinking the entire supply chain and focusing on cost to serve. By collaborating with retail customers and suppliers, leading consumer goods organizations can achieve operational efficiencies while continuing to differentiate on unique product assortment at the right price. We’ve seen the Retail industry immediately impacted over the last year, now bracing itself for the most challenging holiday season in recent history. As with other industries, continuing to innovate on the consumer experience while transforming supply chains to leverage joint investments with suppliers will be absolutely necessary to “weather the storm.” Over the last several years, cost management strategies have become the focus of executive management due to global economic challenges. These external drivers of cost management include:
■Increased Marketplace Competition – competitors providing similar products at lower prices
■Fear of Recession – less cash flow in the marketplace
■Rising Costs of Production – increasing cost of energy and material
■Inflation – declining value of currency and/or rising prices of goods and services
■Increased Pressure from Investors and Boards of Directors – missed revenue targets, mergers and acquisitions. The 1990’s saw many corporations embarking on reengineering efforts focused on removing “excess cost.” This was achieved primarily through headcount reduction. However, as the new decade unfolded, corporations experienced difficulty in identifying where the next saving opportunities
Figure 1: Real-World Example – Prioritization Matrix
Cost Management & Value Optimization3
Certainly the selection of one or more cost management options depends on a variety of factors, not the least of which is the initial investment—time, resources, and money. Each cost management option requires a different magnitude of change to occur, which is directly related to the investment one must make in their company. This investment can be directed more as a strategic play by investing in the future, or a tactical one focused on a specific area of concern. Whichever way it is viewed, an investment into one’s company by implementing one or more of these cost management options is the most important move to make in uneasy economic times.
Integrated Cost Framework: Prioritizing Saving Sources
Corporations have a multitude of options in addressing savings opportunities. The initial and critical step is to ensure a logical prioritization of these options and Capgemini offers a simple and elegant tool for this. Upon an initial analysis, a matrix measuring the cost reduction opportunities and benefits against the cost of implementation will help clarify which initiatives should be tackled first and which will cause the most change management effort (Figure 1). Leveraging Capgemini’s integrated cost framework, corporations can identify and prioritize savings opportunities that would be a best fit for their company in the areas of: Process Optimization, Supplier Relationship and Contract Management, Business Process Outsourcing, Shared Services, Green IT, Tax Process Optimization, Applications Development Management, and Rightshore.®
1. Process Optimization
Process optimization assessments across people and process have become a basic focus of cost management. Capgemini’s approach begins with focused interviews to help spotlight costs that do not align with value. Benchmarking, competitive analysis, and other techniques are then leveraged to identify bottom up savings opportunities measured against a corporation’s current state processes. After working closely with the client to understand their current and future initiatives, a transformation roadmap is created. This roadmap is based on a series of prioritized project plans including expected delivery dates for each capability per period, a high level view of the transformation agenda, a detailed timeline, key milestones and responsibilities. A business case is created to support and substantiate the transformation roadmap as well. This map is then used to prioritize future initiatives and plan the implementation phase.
2. Strategic Sourcing
Strategic sourcing is a procurement streamlining process that can realize immediate as well as long-term savings. The foundation of a strategic sourcing implementation is business and executive alignment to achieve a clear and concise view of a corporation’s future. Future sourcing decisions are made at all levels with adherence to this corporate vision. Since communication is one of the key factors for strategic sourcing projects to succeed, compliance and reporting management are essential to ensure quality and feedback when necessary. In addition, a common set of performance objectives is created for all business units. With these goals in mind, the current sourcing strategy is evaluated and alternative options and contract negotiations are explored. A roadmap for future activities and goals is then created to continue the ongoing savings of the strategic sourcing implementation. Capgemini’s approach assesses several areas of opportunity for savings. Using a combination of purchase demand management, supply base management, and total cost management, Capgemini caters to each company’s unique and specific needs. There is no “one size fits all” approach to strategic sourcing. Our accelerated sourcing methodology (Figure 2) supports the end-to-end sourcing process with consideration to the procurement organization’s design and alignment methodology.
3. Business Process Outsourcing: Analysis & Design
BPO has been a successful strategy for cutting costs as well as adding value in today’s ever more competitive global market. A far-sighted, enterprising business can use BPO to gain a clear and sustainable advantage through improved operational performance. Four main values can be achieved through BPO:
■Dramatic cost reduction is achieved through deploying technology enablers such as work management and scanning, standardization of business processes, distributed delivery methods, and the implementation of best practice process methodologies.
■Business flexibility is realized with the ability to rapidly scale up or down. During the implementation, a mature change management process is installed which can be further utilized in ongoing projects. a company to start at a smaller scale, incorporating less complex processes to evaluate the benefits of a shared services approach. This method naturally scales to larger and more complex processes in the future, allowing for further cost reduction and increased efficiency across divisions, regions, and even business units. After evaluating the savings realized in the first phase of a shared services approach, corporations can then choose to continue with the future state plan and take on a more broad and aggressive implementation which will yield even greater savings and reduced operating complexity.
5. Green IT – Active Power Management
Every IT organization can substantially improve its environmental performance, while reducing certain costs through behavioral changes and preventing others through increased energy efficiency. “Greening” the IT environment begins with improving efficiency throughout the data center.Consulting, Technology & Outsourcing the way we see it Cost Management & Value Optimization 5 Also, an access network of global BPO service delivery centers is established along with multi-platform and multiclient capabilities.
■Managing risk exposure allows a corporation to achieve SAS70 controls for audit and reporting purposes and Sarbanes-Oxley compliance support. Implementing key performance metrics and utilizing multiple BPO centers in diverse geographic regions also manages risk.
■Operational excellence is achieved by implementing best practice process methodologies and technology enhancement and enablement. Obtaining a high quality staff focused on continuous improvement and deploying the Capgemini transition and transformation methodologies contributes to operational excellence as well.
4. Shared Services
Shared services provides corporations with continuous improvement by leveraging existing intellectual and capital assets resulting in reduced duplication and therefore, reduced cost. This approach entails consolidating similar departments within a large corporation into a smaller and more specialized unit with better Service Level Agreement (SLA) performance. This eliminates duplication of staff and/or systems for similar roles and reduces overhead costs, while leveraging existing technology and people investments. This allows a company to focus its resources on core competency areas rather than those with overhead functions. Departments such as Human Resources, Finance, and IT are great candidates for a shared services approach. Shared services centers can be organized by geography, function, or business unit while managing increasing degrees of risk. This allows
Figure 2: Methodologies from Assessment and Analysis Through Implementation
6. Tax Process Optimization
Tax Process Optimization can help organizations through cost reduction when moving from traditional Excelbased models to more transparent and organized solutions. The time and money wasted to correct mistakes and other roadblocks without an SAP or comparable solution can cause a bottleneck in the process and lead to a practice that is inadequate in today’s market. With a real-time solution, organizations can have better insight and reduce the risk for error that will diminish the need for third party tax organizations to question entries, freeing up employees for productive business. In addition, when working with many legal entities having a single solution can help expedite the work load, reducing costs. When several organizations need to use the common data, but in different forms, a single organization solution will always be advantageous. and intelligence. The business priorities determine when, where and how to power off servers with no hard-wiring. Active Power Management knows when and how applications must be systematically powered off and on and also has application inter-dependencies across multiple servers. Lastly, it has the ability to monitor in real time internal and external factors of the environment while making systematic, decisions based on data (i.e. the ability to monitor temperature and decrease server usage based on cooling needs). As enterprises are able to transform towards a more Green IT environment, they will be able to gain:
■Significant savings on energy cost to power the solution
■Tax and energy incentives
■Shorter-term ROI on solutions
■More money to invest in innovation
■A first step on utility data centers or SAAS
■Marketability to the board, customers and stockholders Every company has probably faced, at one time or another, a data center melt-down when cooling failed, taking days to restore a data center after an unplanned outage, delayed application roll-outs due to capacity constraints, and building new data centers due to exceeding power/cooling capacities. Groups who have dealt with these issues at hand realize the significant cost inefficiencies that come with it. To take on this initiative and adopt the technology, Capgemini has developed an Active Power Management approach—using more efficient equipment with more efficient operations. Active Power Management works with existing programs (i.e. HVAC and server efficiencies, virtualization, and server consolidation) to allow companies to “go green” without completly replacing their IT infrastructure. This policy-based, application-aware, hardware and software independent approach allows real-time modeling Figure 3: Three Levels of Business Process Outsourcing – Execute, Control, and Direct Source: Capgemini
6In-house application development teams act more as the software integrator, providing business expertise rather than programming skills. By leveraging this in-house team, they can conduct interviews with external service providers (ESP) to ensure the right fit for the software needing to be developed. Simply using the ESP with the lowest costs will not always be the most advantageous for an organization.
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