Breakout Session # 2104 Thomas Pfeiffer, Sr. Associate, Booz Allen Hamilton Rajendra Rathod, Associate, Booz Allen Ham

1. Taking Spend Analysis to the Next Level Breakout Session # 2104 Thomas Pfeiffer, Sr. Associate, Booz Allen Hamilton Rajendra Rathod, Associate, Booz Allen Hamilton April 24, 2007 10:45 am – 11:45 am

2. Key Learning Objectives • Defining a process to achieve an enterprise wide view of spending to leverage in the strategic sourcing process • Creating an integration layer to facilitate increased spend visibility and data transformation, both upstream and downstream • Impacting the enterprise through increased contract compliance, cost savings tracking and spend reporting Manual Spend Analysis Fully Automated Spend Spend Analysis Continuum Manual spend analysis Automated spend analysis • Requires organizations to identify, compile and scrub data when requirements change • Data analysis currently segregated by Procurement, Finance, Human Resources, CIO, etc., reporting • Manual mapping of data into appropriate taxonomy • Avoids risk of buying an immature SW solution in a SW market that is consolidating and changing • Organizations refresh data and dashboards on a regimented time interval while changes to schedule add costs • Repeatable, automated solution enables near real-time spend analysis • Improved support of enforcement and compliance activities • Automated mapping into spend taxonomy • Comprehensive and accurate spend database leveraging third party data to increase intelligence of analysis • Design dashboards to provide enterprise level visibility

3. How does spend analytics impact my organization and why is it important? • OMB has recently mandated all government agencies adopt strategic sourcing – but they have provided little direction on “how” to do it • Agency chief acquisition officers are required to report the cost reductions and agency improvements achieved through strategic sourcing to OMB’s Office of Federal Procurement Policy. • Some of the agencies and services have experimented in sourcing – with little consistency in practices GSA has awarded a Strategic Sourcing BPAto provide a vehicle that agencies can utilize to secure sourcing and spend analytics support

4. Spend analytics is important because it is key to everything from commodity analysis to contract compliance

5. Today programmatic spend management is growing in importance as organizations want to find ways to do more with less Scope of the CPO Agenda Mission Vision Results “What are we trying to achieve?” “What are we actually achieving?” What it means “How do we plan to achieve our mission?” Procurement Processes Financial Management • Objectives, e.g., • Capture cost savings • Support of agency wide initiatives • Provide safe and reliable operations to all stakeholders • Alignment to Federal goals and intiatives • Budgetary objectives • Mission support and readiness • Individual organizational goals • Performance • Management • Metrics • Management Process • Strategic Sourcing • Contract Mngt. • Executional • Client relations • Supplier management • Organizational efficiency • Budgeting • Track savings • Performance reporting What it comprises Technology • Systems functionality • Accessibility / Usability

6. Enterprise wide spend visibility is the catalyst for successfully impacting downstream activities Objectives • Defining a process to achieve an enterprise wide view of spend across the organization to leverage in the strategic sourcing and contracting processes Spend Visibility • Creation of an integration layer to facilitate spend visibility and data transformation, both upstream and/or downstream Data & System Integration • Leveraging the increased spend visibility through the development of an Opportunity Assessment to build a Strategic Sourcing Roadmap Pathway to Cost Savings • Development of a closed loop process to build in robust compliance monitoring and cost savings performance Compliance & Reporting

7. Understanding the primary challenges to obtaining increased breadth and depth of spend visibility is the first step to achieving it

8. Unique approaches such as Net-Centric Transformation creates increased data accessibility and usability Net-Centricity is the realization of a robust, globally interconnected network environment that includes infrastructure, systems, processes, and people in which data is shared in a timely and seamless manner among users, applications, and platforms. Net-centricity will ensure that users of information at any level can both take what they need and contribute what they know. Post Netcentric Transformation Current State • Data analysis was time consuming and may have required numerous resources • Existence of a lack of trust in data • Data resided in multiple systems and in inconsistent formats • Data querying required knowledge of SQL • Dissemination and reporting of data was limited • Reactive decision making • Increased data accessibility and reporting and analysis capabilities • More reliable data and information • Data resides in a data warehouse and in a common format • User-friendly querying at varying levels of detail within the organization • Data can be viewed and shared over the Internet • Proactive decision making

9. Portal • Web Services A Net-Centric approach creates a virtual data warehouse as a backbone facilitating compliance, reporting and strategic sourcing… Financial System 1 (Oracle) • Analytics • Organizational • Commodity • Procurement • Customer Multidimensional Cube • OLAP • Ad-hoc Reports Data Warehouse Financial System 2 (Peoplesoft) • Metrics & KPI’s • Number of Awards by Buyer • Number of Requisitions Rejected • Length of Time from One Stage to the Next in Cycle Extract – Transform – Load (ETL) Accounting System (Access) • Balance Scorecards • Dashboards • Interactive Reports • Static Reports • Data Mining Procurement System (PRISM) External Systems (FPDS, P Card, CCR)

10. …ultimately building an enterprise wide spend cube aids in identifying who you are buying from and what you are buying Creation of an Enterprise Wide Spend Cube Opportunity for Strategic Sourcing IT Services Telecom Office Supplies Facilities Printing Optimization of the Supply Base 1 Who do you buy from? Categorization of spend 3 How is it being Sourced? 2 What are you buying?

11. Increased visibility will immediately aid in highlighting areas of opportunity that were not identified previously… • Primary issues driving a large delta between Actual and Perceived spend includes a lack of detailed transactional data, incorrect categorization and/or incorrectly identified corporate family spend • Utilization of a common spend taxonomy (e.g UNSPSC) and unique supplier ID (e.g. DUNS No.) will help to correctly set an accurate spend baseline Rationalizing the Supplier Spend Baseline and • Actual Spend • Perceived Spend US$ Millions Spend by Supplier

12. …and creates an inherent transparency at the enterprise level Developing Accurate and Actionable Dashboards Demonstrated Best Practices • Build spend categories utilizing an industry accepted taxonomy • Leverage third party data to increase intelligence of analysis • Refresh data and dashboards on a regimented time interval • Design dashboards to provide enterprise level visibility • Compliance should be integrated across the dashboard views

13. The task of increasing spend visibility means evaluating process changes, tools and analytics Objectives • Defining a process to achieve an enterprise wide view of spend across the organization to leverage in the strategic sourcing and contracting processes Spend Visibility • Creation of an integration layer to facilitate spend visibility and data transformation, both upstream and/or downstream Data & System Integration • Leveraging the increased spend visibility through the development of an Opportunity Assessment to build a Strategic Sourcing Roadmap Pathway to Cost Savings • Development of a closed loop process to build in robust compliance monitoring and cost savings performance Compliance & Reporting

14. Organizations vary significantly as to current state and technology can play an essential role in incremental impacts Increasing Sophistication

15. The landscape of offerings and vendors is complex with many areas of overlap from contract management to reporting Source Contract Procure Pay Monitor & Report • eSourcing • Spend Analysis • Supplier Discovery • eRFx/Reverse Auction • Sourcing Decision • Sourcing Activity Mgmt • Supplier Assessment • Bid Optimization • eSourcing • Ariba • Emptoris • Verticalnet • Frictionless Commerce (SAP) • Oracle • Global eProcure • Procuri • Contract LifeCycle Mgmt (CLCM) • Creation • Negotiation • Optimization • Approval Support • Fulfillment Tracking • Repository • CLCM • diCarta • I-many • Upside Software • Ariba • Nextance • Hummingbird • Procuri • Oracle • eRequisitioning • eCatalog/Order Management • Receipt and Acceptance Tracking • ERP vendors • SAP • Oracle • Peoplesoft • Pure-play procurement software vendors (e.g., Ariba, i2, Emptoris) • Invoice Management • Accounts Payable • Three-Way (PO/R&A/Invoice) Match • ERP vendors • SAP • Oracle • Peoplesoft • Business Intelligence (BI) for contract compliance & supplier performance mgmt, spend data analysis, and mgmt reporting • Spend Data Enhancement/ Enrichment • BI • Hyperion • Business Objects • SAS Spend Data Enhancement/ Enrichment • D&B • Zycus • Austin Tetra • Key Systems Issues: • Lack of systems integration • Disparate data sources • Redundant data stores • Incongruent naming conventions • Lead To: • Limited spend data • Lack of contract visibility/compliance • Unauthorized, duplicate payments Tools /Functionality Selected Vendors

16. Understanding product positioning and total cost/benefits requires a structured and disciplined approach to the evaluation process Vendor Positions Vendor Ratings Framework • Market Leaders • Ariba and Emptoris are leaders with strong spend analysis and sourcing decision capabilities • Strong Competitors • Global eProcure, Synertrade and Verticalnet have strong current offerings although face competition from suite vendors • Challengers • Suite vendors like SAP, Oracle and Peoplesoft

17. As an alternative to selecting a new technology platform organizations are creating an integration layer… Solution Overview Integrate Existing Technologies Corporate Head-Quarters Global Procurement Technology Spend Analysis eSourcing Contract Mngt. Integration Layer Legacy SAP Oracle Locations Location Unit-1 Location Unit-2 Location Unit-3

18. …depending upon the level of integration both upstream and downstream options exist for tools and data Data Cleansing View Enterprise View Corporate Head-Quarters Spend Analysis Tool Global Procurement Technology Integration Layer Supplier Data Transactional Data Supplier Data Transactional Data Upstream Integration (Tools, Data Normalization) Sourcing Data Sourcing Data Legacy SAP Oracle Downstream Integration (Bolt-on, Data Normalization) Locations Direct Data Transformed Data Direct Data Transformed Data Locations Unit-1 Locations Unit-2 Locations Unit-3

19. Leveraging the increased spend visibility naturally translates into developing a Sourcing Opportunity Assessment Objectives • Defining a process to achieve an enterprise wide view of spend across the organization to leverage in the strategic sourcing and contracting processes Spend Visibility • Creation of an integration layer to facilitate spend visibility and data transformation, both upstream and/or downstream Data & System Integration • Leveraging the increased spend visibility through the development of an Opportunity Assessment to build a Strategic Sourcing Roadmap Pathway to Cost Savings • Development of a closed loop process to build in robust compliance monitoring and cost savings performance Compliance & Reporting

20. The evolution of spend transformation will be an enabler to identifying and executing against sourcing opportunities… Procurement Value Levers PriceLevers CostLevers DemandLevers ValueLevers • Increase coverage of spend • Basic cost insights • Credible threat to switch supplier • “Designed-in” competition • Consistent messages • Tenders / auctions • Multi-year target commitments • Timing of the buy for traded commodities • Rationalise supplier base • Switch to cost advantaged suppliers • Manage drivers of total cost of ownership, to reduce Internal costs • Reduce internal process burden to manage supply and transaction flow • Streamline logistics at supplier interface • Reduce consumption • Reduce specification • Standardise according to overall product architecture • Use industry standards instead of custom designed parts • Switch to substitute technologies with desired functionality • Leverage supplier innovation capabilities • Find appropriate make/buy/ outsource balance across supply chain tiers • Source and compete for business at tier 2 of supplier base • Supplier base restructuring • Influence product mix/regional preferences to favour products with greater supplier base leverage Strategic Sourcing Impact Procurement function delivers Sourcing function enables 3-5% opportunity± commodity pricemovements + value of growth 8-25% opportunityover 6-24 month time horizon

21. …and developing Savings Hypotheses which can aid the organization in meeting its socio-economic goals 2

22. Identifying high priority opportunities and gaining buy-in to the process requires organizational involvement… Identify opportunities, quantify and qualify Initial long list of hypotheses Segment higher priority opportunities Develop actionable opportunities 2 1 3 Booz Allen Commodity Workbooks Sourcing Opportunity Framework Interviews

23. …and employing a quantitative approach to run hypotheses to ground is a practical approach to building consensus EXAMPLE Relative Ranking Based on Opportunity Criteria Average Of Absolute Rankings • Commodity Complexity • Value chain transparency • Number of specifications • Complexity of drawings • Organizational Impact • Budgetary impact in current fiscal year • Make vs. buy • Switching Costs • Transition plan • Risk mitigation • Knowledge transfer Total Opportunity A Opportunity B Opportunity C 50% 40% 30% 20% 10% 0% +10% +20% +30% +40% +50% Disadvantaged Parity Advantaged

24. Finding the right sourcing approach to apply to the opportunity depends on the criticality and the complexity of the category Sourcing Approach Framework High Collaborative Sourcing addressing the entire value chain Strategic sourcing focusing on supply and demand side levers Mutual willingness to participate is a prerequisite for collaboration. Incremental value vs. effort to capture value Strategic importance Medium Rapid sourcing focusing on supply side levers • Level of criticalness for own business, e.g. total cost impact and operational impact Low Low Medium High • Multiple dimensions driving high value chain complexity, e.g. tough requirements on delivery times, large variety of products, short product life-cycles, high level on built-in structural costs Complexity of value chain/ benefits capture

25. Striking the right balance between collaboration and competition is key to successfully executing against the sourcing opportunity Achieving Balanced Sourcing Collaboration Competition Building and Sustaining Supplier Relationships Maintaining Competition Among Suppliers • Defined and clearly communicated supplier roles • Supplier and internal process improvement targets • Investment in supplier development • Supplier commitment to competitiveness and continued cost reductions • External benchmarking • Exit clauses Balance Relationship Enablers Integrating Value Chain Measuring Economic Viability of Relationship • Working a joint improvement agenda • Aggregate capacity planning • Benefit sharing • Communication and info sharing • Investment in infrastructure • E-procurement • Performance measurement • Performance monitoring • Corrective action plans • Ongoing competitive assessment Relationship Processes

26. Engineering in a robust compliance and reporting process is key to the measurement of progress made against organizational goals… Objectives • Defining a process to achieve an enterprise wide view of spend across the organization to leverage in the strategic sourcing and contracting processes Spend Visibility • Creation of an integration layer to facilitate spend visibility and data transformation, both upstream and/or downstream Data & System Integration • Leveraging the increased spend visibility through the development of an Opportunity Assessment to build a Strategic Sourcing Roadmap Pathway to Cost Savings • Development of a closed loop process to build in robust compliance monitoring and cost savings performance Compliance & Reporting

27. …yet spend compliance is the leading challenge for organizations today and addressing the “spend compliance gap” is critical

28. Savings leakage can be attributed to a number of issues related to transparency and the alignment of the organization to common goals Chief Reasons for Savings Leakage • Lack of clear responsibilities, procedures and controls for ensuring spend and performance compliance • Insufficient infrastructure to communicate negotiated terms to all relevant stakeholders • Limited involvement of internal functions or stakeholders in sourcing requirements development, supplier discovery, and sourcing award decision making activities • No executive mandate or support for compliance with negotiated agreements

29. Alignment begins with an executive mandate and vertical integration of organizational metrics to establish a performance baseline ALIGN KPIs & TARGETS PERFORMANCE MANAGEMENT Sr. Mgmt Metrics METRICS • Align KPIs and targets with interfacing functions • Complement financial KPIs with strategic KPIs to align with organizational strategies • Report higher order KPIs for the function as a whole • Maintain category and specific KPIs for contract performance and management Indicator Metrics Indicator Metric Indicator Metric Detailed Metric Detailed Metric Detailed Metric Detailed Metric Detailed Metric ... ... ... ... ... DATA

30. Ultimately, technology can play the role of enabler but it is clearly the role of management to define organizational performance and build processes to measure against it Integrating Compliance Enterprise View Corporate Head-Quarters Procurement Technology Supplier Data Transactional Data Upstream Integration (Tools, Data Normalization) Legacy SAP Oracle Downstream Integration (Bolt-on, Data Normalization) Locations Locations Unit-1 Locations Unit-2 Locations Unit-3

31. Summary Manual Spend Analysis Fully Automated Spend Spend Analysis Continuum • Automated enterprise wide spend analysis, provides the strongest foundation for programmatic sourcing, benefit capture, performance alignment and compliance • Incremental increases in investment, to capture greater spend visibility, through a Net-Centric Data Strategy, can provide significant value through increased cost savings identification and capture • Development of a spend integration layer, and the deployment of upstream spend tools and processes, will aid downstream value capture and increased levels of compliance • Utilization of commercial best practices, tools and processes, in developing spend analytics and sourcing strategies, will directly impact the learning curve and the results achieved