Accenture: Pulling Down Overheads - Kris Timmermans

With raw materials prices rising and the oncoming of a tougher economic climate, cutting overheads has become a priority. But to do so successfully means rethinking the approach to sourcing and procurement. Kris Timmermans, global managing partner of Accenture’s sourcing and procurement practice, discusses this challenge with FDE.

Squeezed between rising input costs and a slowing global economy, many organisations are looking to get tighter control of selling, general and administrative (SG&A) costs. Typical procurement approaches, however, may not get the best results. The key could lie in closer collaboration between procurement and finance.

‘I’ve seen a lot of interest in cutting overhead costs, particularly to compensate for rapidly rising raw material and energy costs. It is very complex to reduce these direct variable costs without reconfiguring products or manufacturing processes, which could take years,’ says Kris Timmermans.

‘Increasingly, CFOs see SG&A costs as a way to compensate, devising techniques to reduce the non-labour component, which means focusing on what they spend with suppliers. It is key, therefore, that procurement cooperates with finance.’

Typically, procurement defines spend categories to which it applies strategic sourcing techniques – reviewing historical spend, requirements, market forces and best practices to negotiate better contracts with suppliers.

‘This looks nice on paper, but often business functions don't see it coming through the bottom line. It is complex to implement and compliance is hard to control. There are many problems with traditional procurement-led efforts to control SG&A. They must go back to the start and ask whether procurement-driven strategic sourcing is the right way,’ remarks Timmermans.

Instead, he advocates strategic cost management, where finance and procurement collaborate to improve visibility of costs by defining SG&A in company-wide ‘packages’ – such as travel, and ‘sub-packages’ – such as air travel.

‘Then, with the support of the CEO, someone on the management team must take responsibility for each package. For instance, someone should become ‘Mr. Travel’; he would receive the extra accountability to guard costs in that area.

Smart practices

Smart policies and a strategic perspective, he believes, can cut 10-12% of SG&A costs and noticeably impact the bottom line even if a company has a mature procurement function. Further value lies in package owners changing their approach to budgeting.

‘Take mobile phones. It is better not to put in a value for the budget. Simply say how many people need a company phone, challenge this number, then get procurement to provide the best price. The budget equals the number of phones multiplied by that price. Budgeting is then based on a variable you can identify.’

The overall concept of strategic cost management truly creates a mentality of cost ownership. The most important change the procurement function sees is that they do not have to sell their services to the business anymore, but the business – through the package owners – pulls procurement into cost reduction project: so from push to pull.

‘Despite the pull from the business, procurement still needs to get their act together in terms of operational control in order to make sure that all business users can tap into the right contracts, buying channels and Procure-to-Pay procedures', says Timmermans.

‘The installation of a so-called middle-office – between the category front office and the financial back-office, is a way for our clients to truly start getting procurement spend under control and drive compliance to the contracts and ordering channels, laid out by procurement’, says Timmermans.

‘For one of our consumer goods clients, this off-shored middle-office holds services like spot buying, PO follow-up, procurement analytics support. By putting in place clear responsibilities for procurement at a site, middle-office and category management level, supported by an end-to-end Requisition to Pay process-system, this company is now enjoying procurement control of 86% of external SG&A spend with a 97% process and contract compliance level,’ adds Timmermans.

Companies can opt to build all these concepts in-house or tap into a procurement outsourcing provider. Using this model, Accenture has over $30 billion spend under direct control and its success attracts more each day.