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Posts Tagged ‘cost savings targets’

Today I have an update to my last entry which I titled Biggest Flop 2010.  Quite honestly I am hardly surprised to see the latest development based on my earlier observation.  Since the disaster in securing top management buy-in, the organization is now put in a very vulnerable situation.  The business lines are all taking a bite off the procurement department, and its head is constantly kept in a defensive mode.  He is often summoned by other department heads to provide quick fixes that are hardly strategic or measurable.  The middle to upper management team is always called for ad hoc customer meetings where they have little idea how to respond, and whether or not to make certain commitments due to limited departmental resources.  The organization is in a complete state of chaos.

Based on the unfavorable circumstances, I can offer a few recommendations which can hopefully improve morale and make the situation slightly more bearable.

1. Salvage the situation

For the immediate period, nothing much can be done in terms of changing the corporate management’s views.  The best tactic is to embrace it gracefully, while striving to develop success cases from the ground up.  Having top-down mandate is ideal, but it’s not the end of the world even with its absence.  This is how true leadership emerges and shines.  Pick the best people to put in front of selected customers where there is the highest hope to succeed both in terms of quality assurance, savings potential and improved efficiency.  Convince the customers upfront that you are not expecting anything from them other than their cooperation.  Work from the bottom up.  Take care of all the paperwork, liaise with legal, compliance, finance and investigation, represent the clients well in front of suppliers, and make the customer experience a pleasant one. 

All this is needed to be put into the credits bank so that when the right moment comes, these customers are going to root for you in front of top management.  The best salesmanship technique is to have your customers sell for you, instead of doing so yourself.

2. Renegotiate goals

Now is the golden time to renegotiate goals.  Since a substantial spend area is taken away, the cost savings expectation should be adjusted.  In every case, link addressable spend with potential savings as tightly as possible, even if we know it may not always be a directly proportional relationship.  Merely negotiating terms and conditions without having the power to affect sourcing decisions will not bring in cost savings.  The moment top management is convinced and concerned over lost savings, they will change their minds and come knocking.

3. Retreat

For the spend area that is taken away (in this case above-the-line marketing), retreat completely.  Follow exactly the order of top management.  I am more than happy to be a good corporate citizen all along, but since my contribution is now deemed useless by corporate, I won’t be uttering a word.  In my many years of corporate experience, there will be plenty of crisis situations soon enough (knock on wood) where marketing will come screaming for help.  Their major supplier is asking for a 50% price increase and they are left with no alternatives.  The supplier is claiming structural damages compensation for incidents that need mediation.  The company is undergoing corruption and antitrust investigations by the local authorities.  Marketing is being criticized by internal and external auditors for their approval and authorization inadequacies.  When they come knocking – sorry, I can’t comment since I was not involved in the first place.

This isn’t meant as petty revenge, but no one will appreciate the criticality of a function (procurement) until they are bombed with crisis situations.  Let these risks speak for themselves.

4. Energize the team

No matter how one keeps the recent top management discussions in closed wraps, everyone in the procurement team will hear about it in less than 2 hours.  Words spread fast, especially bad news.  The team is going to view it as failure of the leader, and all these rumors are devastating. 

Leaders should address the team in plain language, and advocate that this is all just a transitional phase.  Unity is crucial.  The function’s credibility should never be tainted.  And leaders are working on renegotiating the goals with top management only as a tactic to regain power. 

When team members understand the leaders’ plan of attack, there will be better hopes of instilling confidence and morale.

5. Contain the virus

Keep your ground and don’t let the same happens with other business units or spend areas.  There is a likelihood that other business leaders will follow suit and take a shot of procurement.  Visit these leaders and explain to them of this exceptional and transitional development.  If they have concerns, ask them to come to you instead of escalating straight to the COO.  Depending on the party, different tactics may need to be deployed, ranging from “be your buddy” to scare tactics.  You just cannot afford to have more spend areas fall through.  Otherwise, you may as well propose to have the whole function redesigned as a purely operational cost center with no cost savings responsibility.  The function can then be outsourced to India, Philippines, or China!

Well, these are the top 5 steps that I can think of almost immediately.  Will they adopt any of that in the near future?  That’s what I am eager to find out soon.

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I was chatting with a few ex-colleagues the other day over their attempt of securing top management buy-in for procurement’s engagement in the above-the-line marketing spend arena, in the last month of 2010.  The idea was noble and worthwhile, but the outcome turned out to be a complete flop.  Not only did the company President say it out loud, in front of all business leaders, that procurement has no place at the strategic marketing sourcing table, he had asked my ex-colleagues to support only from the terms and conditions perspective.  Great, they now have to clean up other people’s mess with no decision-making power whatsoever.  They can now kiss goodbye to any potential savings in the area, and most unfortunately, the whole reputation of the department.  Procurement has now sunken to a new low in that organization, and it is utterly demoralizing for anyone to work in that environment.

So what went wrong?  I probed a bit more into how that meeting was conducted from an attendee, and could summarize into the following few points, just for sharing.

1. Missing Strategy

The procurement presentation team, which included a Senior VP, a VP and a Director clearly knew what they wanted to accomplish by the end of that top management meeting.  They were supposed to showcase the success stories of how they had helped the company in reducing costs, driving quality, improving efficiency, and ensuring compliance.  The President and other heads of business were supposed to recognize the importance of that team, and sign on to a pledge to request the cooperation and support of fellow businesses in engaging procurement from day one.  They would set harsh goals for the department to help the company save even more money, but at the same time ensuring businesses come first.  Procurement needs to be flexible and responsive.  The game plan should now be changed. 

Unfortunately, the procurement presentation team failed to come up with a workable strategy in meeting this achievable goal.  They had not touched base with the affected businesses beforehand.  They had not discussed offline with fellow heads of businesses, even on a causal basis, to gauge the climate of the top management’s circuit and recruit alliances.    They were simply struck by surprise of the President’s reaction, and once the comment was made by the latter, there was simply no turnaround at all.

As I have said repeatedly before, procurement leaders need to treat internal selling as their life-long mission.  They have to keep themselves abreast of the company’s latest priorities and pains.  Sitting behind a desk never gets the work done.  If the leaders have spoken with their comrades before the meeting, they could have changed the strategy entirely.  If I had known that the President isn’t my biggest fan, I would choose to work my way up from below and leverage on my successes with the business leaders and use them to sell for me.  Such top management meeting should then be avoided in the fist place.

2. Poor Homework

I was told that the presentation team was not well prepared in terms of success stories.  Instead of showcasing past results and customer feedback, they played the cop card.  This is always risky.  When you want to be assertive, you better get all your bases covered so that you know there are absolutely no holes to your story, and that nothing can backfire.  Of course, from my tone so far you can guess that didn’t happen with my ex-colleagues.  They illustrated a case where procurement was wrongly bypassed.  The accused was dismissive and immediately called the person in charge as rebuttal.  They then confirmed right on the spot that the procurement VP in fact signed on the authorization form.  Crap.  How can anyone not get the story and facts straight before tabling it up as a “weapon”?  Again, if you are ready to fire, you better make sure your bullet-proof vest is secure and tested.

And how “non-strategic” is it to use the threat tactic?  My threat tactic, on the other hand, is to bring forward how the uncooperative departments will lose out from not getting my expert advice and services, from those who see my value in supporting their business goals.  Level it up, guys.

3. Absence of a Fallback Option

Just because the team was caught by complete surprise, they had never contemplated a plan B.  Instead of re-negotiating the cost savings target, or tabling other measurement metrics now that sourcing is out of the question, the team ended with even more laborious tasks that the team may have trouble shouldering.  At the end of the meeting, the cost savings target remained to be sky-high, sourcing power was stripped, and more headcount would be required in areas where procurement’s efforts cannot be quantified.

If there is a case study where everything went completely wrong, this would be it.  The morale of the story however is that all of it is completely avoidable in the first place.  I am interested in following up further on how the scenario progresses, and shall provide coverage in this space.  Fascinating learning material it is!

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Get Off Your Butt!

Setting cost savings targets for the team is a daunting task.  It is always a stretched goal but it has to be realistic and attainable at the same time.  Although it is often the collective hard work of a team or even the entire regional organization, the company will always convince you that your personal bonus is tied to how well you are achieving your cost savings targets. 

Very well.  Let’s be realistic for a moment.  Even though there are plenty of other measurement metrics like customer satisfaction, employee retention, training & development, or policy & regulatory compliance to report, the single biggest and most representative proof of why we are worth our paychecks is how much cost savings we are delivering to the company.  Finance is all about numbers, and we know the rules of the game from day one.

So how to come up with the target is an art by itself.  The more experienced your boss is, the easier and more straightforward that conversation will go.  I have had this past experience that my boss had absolutely no idea what addressable spend is, nor what pass-through costs mean.  There are also financial controllers who mix all things up in one pot, which I can understand since they only care about the bottom line and not the details.  I just cannot imagine some senior procurement executives simply put a percentage of total spend as savings target.  They usually have relatively less experience with services buying and the outsourcing arena.

The key to having a civilized discussion with your boss on target setting is to be entirely fact based.  Get the top 80% spend supplier list ready.  Go through each one and identify what is negotiable and what not.   And with that, check if there is any room for negotiations in the coming year.   Next go through businesses one by one.  Discuss what each of their priorities are next year.  What are their budget plans?  How can we get in and help?   Finally go through the areas which are not attacked so far and explore tactics to engage.  Who should do it and how?  What are the carrots we can provide?  Do we have enough resources for it and does it make sense?

With a bottoms-up approach the conversation usually can turn more comfortable.  Don’t skip the details including inflation and currency appreciation factors.  Your boss may not find it welcoming to hear so many bad news at once, but we have to acknowledge collectively that it’s no longer an easy job for anyone.  I don’t want to be penalized at the later end of the year that I have not provisioned for the risks of the target.  So I make sure I document all my points with as much facts and evidence as possible, in case there are colleagues who have forgetful minds.

My other advice is to set accountability right from the start.  Some accountability are totally within the team in terms of project execution and quality, but a few dependencies are entirely top-down.  Someone needs to get management buy-in, and to what level that buy-in will require depends on the company and/or business line culture.  We all need to get off our butts to knock on stakeholders’ doors to get new businesses.   I have done my very good share of going to people 3 or 4 levels above my rank for new businesses, so I get quite irritated if I see a leader not doing just that when all of us have exhausted our abilities to get roadblocks removed solely due to a lack of seniority on the corporate ladder.

I have seen tons of organizations with low morale mostly due to unattainable savings targets.  Leaders who alienate themselves from team members because they don’t want to know the details or have no intention to dive in to play his or her part only makes the matter much much worse.   That’s usually how companies lose their brightest people, and it’s one mistake no company can afford to bear.

 

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