The Cost Reduction Challenge


The Cost Reduction Challenge

Dublin Chamber of Commerce
April 23, 2009
April 23, 2009

Market Challenge
The Market
• Credit crunch
• Recession
• Declining revenues
• Tighter margins
• Fixed cost base
• Negative returns for shareholders
• Cash flow
The Challenge
• Increase revenue/margin
• Reduce cost
• Generate cash
April 23, 2009

PricewaterhouseCoopers Slide 2
PwC CEO Pulse Survey 2009
• Cost is the top challenge for CEO’s, followed by growing market share and
financing the business
• The turmoil has impacted investment plans and access to finance the most
• Survey reveals that businesses will have taken decisive action by the end of
2009 (this combines action taken in 2008 and planned action in 2009):
April 23, 2009

Market Challenge – Cost Reduction
PwC Points of View:
The current global environment creates a new imperative for companies in

all sectors to embed sustainable cost reduction programmes
• Cost management is now the priority issue for the foreseeable future - fundamental re-
thinking regarding business strategies, operating models and cost structures will all be
necessary
• The baseline for cost analysis must be aligned to current forecast revenues
• An understanding of the true profitability of each business is essential
• The cost focus must be enterprise wide
• Many organizations confuse “cost postponement” with total cost management
• A well organized end-to-end program is needed
• Consistent investment in cost control is required
• The tone at the top is key
• An executive dashboard is required to monitor results
April 23, 2009
Cost Reduction Cost Control Culture
Agenda Strategy
KPIs’ / Metrics
Role of Finance
Profit & Loss
Balance Sheet
Revenue
Funding
Cost of Sales Sourcing
Receivables
Margin structures
Payables
Procurement
Inventory
Op Ex
VAT
Tax
End-to-end processes
IT Systems
April 23, 2009

Key Challenges
• Revenue / Margin
• People Costs
• Supply Chain
• Procurement Spend
• Finance
• Cash Management
• IT
• Structures
• Metrics
• Project Management
April 23, 2009

Key Challenges
REVENUE / MARGIN:
Limited cross selling across organisations;
Rebate issues – not consistent in chasing recoverability;
No visibility of margins end to end;
Ownership and accountability of management, sales & buyers.
What Others are Doing:

 Developing activity based models to better understand margin by product;
service; customer; channel; etc
 Revisiting bonus / commission schemes
 Mapping order-to-cash value chain for effective business management
April 23, 2009
Key Challenges
PEOPLE COSTS:
Incentives not aligned to strategic objectives;
Skill-sets not appropriate to role requirements;
Tackling non base-pay costs;
Overcapacity and inefficient work practices.
April 23, 2009

Tackling Non Base-Pay Costs
Review staff related cost areas: Assess headcount levels:

• Overtime
• Review roles to ensure they are value add roles –
• can the amount of overtime be reduced
essential activity
• can the uplift % be reduced
• can overtime be compensated by time-in-lieu • Carry out a process review – map end-to-end
• Leverage a flexible cost base – processes with swim lanes for responsibilities and
• outsource or centralise non core services identify duplication, looking to release capacity
• adopt a mix of permanent & temporary staff • Review part time working, unpaid leave, leave of
• Salary freeze absence, job share, sick leave
• Review incentives / bonuses
• align to benefit delivered
Pay Cuts / Redundancy:
• align to key strategic objectives
• Review pension benefits / structures • Consider pay cuts first
• Reassess fringe benefits • Where redundancy is required, better to have a
• Review utilisation within shifts targeted redundancy approach, clearly defining
scope with HR department
• New hires approval – need business case
• Minimise external cover for absenteeism • Leverage cost efficient redundancy packages –
options to structure packages to yield most to
• Performance management – look at
underperformance and address issues employee at least cost to employer
April 23, 2009

Inefficient Work Practices
1. Order to Cash Review

1 2 3 4 5 6 7 8 9 10 11
Customer Establish Process Pick & Stock Deliver Issue Collect Credit Manage Manage
Set-up Credit Order Pack Management Goods Invoice Cash Monitoring Promotions Customer
Limit Shipment Service
2. Procure to Pay
1. Supplier 2. Raise 3. Receive 4. Receive 5. Pay 6. Manage 7. Pay
Set-up requisition Goods Invoice Invoice Supplier Expenses
3. Record to Report
1. Financial 2. Record & 3. Journalise 4. Run period 5. Prepare
Data Mgt Validate Data transactions end procedures Financial &
MI reports
6. Bank 7. Budgeting 8. Forecasting 9. Fixed

reconciliation Asset Mgt
April 23, 2009

Process Flow
Lean project example
ASD gathers PI sends

PI reviews PID request
Information No back to ASD
PID request Meets PID
And requests initiation requesting to
a complete required
Requirements?
PID be opened information
Via email 15 minutes
60 minutes Yes 1 minute
Pi sends email PID is reviewed

Meet Friday To PAP board ASD Capacity Weekly
Pi Creates PID At Weekly Analyst PAP meeting
In Milestone
10 minutes
Process
Work Time
NoTime
Deadline? Yes
Wait
To add new PID
To PAP meeting
agenda
4 days
Tuesday
PAP meeting
10 minutes
assigned
And reviews
ASD request
7 days
Review of ASD
Capacity Review
10 minutes
Pi deletes
PID in
Milestone
and notifies
client
5 minutes
1213
hours
days26
Cancel
PID
2 hours
minutes
7 days
Yes
No
Direction given
By
PAP Board
PAP Board
Review PID
No ASD Capacity
Review
Complete?
Approval? Yes
Pi submits Yes
PID is reviewed PID status
ASD Capacity PID to local CIT
Updates Board for At Weekly PID approved? Changed to
CIT Board Approved in
Demand plan review
meeting Milestone
55 minutes
minutes No
5 minutes 2 days
5 minutes
PID Cancel PID
Update PID to be
Returned to
PI for updated Or
Requested cancelled?
updates
April 23, 2009
PricewaterhouseCoopers 15 minutes Slide 11
New Process Flow
ASD gathers
Time Removed
PI reviews PID request PI sends
Information No back to ASD
And requests PID request Meets PID
initiation requesting to ---11
18
20 Days
Days
4 Days
a complete required
Requirements?
PID be opened information
Via email 15 minutes - -26
36min
15
16 min
60 minutes Yes 1 minute
Pi sends email PID is reviewed

Meet Friday To PAP board ASD Capacity Weekly
Pi Creates PID At Weekly Analyst PAP meeting
Deadline? Yes To add new PID
In Milestone Tuesday assigned Review of ASD
To PAP meeting PAP meeting
agenda And reviews Capacity Review
No ASD request
10 minutes 10 minutes
Wait 4 days 10 minutes
Pi deletes 7 days
PID in Cancel
Milestone 7 days Direction given Review PID
PID
and notifies By
PAP Board No ASD Capacity
client
No Review
5 minutes Complete?
Yes PAP Board
Approval? Yes
Pi submits Yes
PID is reviewed PID status
ASD Capacity PID to local CIT
Updates Board for At Weekly PID approved? Changed to
CIT Board Approved in
Demand plan review
meeting Milestone
5 minutes No
5 minutes 2 days
5 minutes
PID Cancel PID
Update PID to be
Returned to
PI for updated Or
Requested cancelled?
updates
April 23, 2009
PricewaterhouseCoopers 15 minutes Slide 12
New Process Flow
Pi submits Yes PID status

Pi open PID to local CIT PID approved? Changed to
PID Board for Approved in
review Milestone
No 5 minutes
PID
Returned to to be
PI for updated Or
Requested
updates Time Saved
Update PID cancelled?
15 minutes Cancel PID

Up to 20 days and 36 minutes
Pi deletes
PID in ASD Capacity
Updates
Milestone
and notifies Demand plan
client
5 minutes
5 minutes
April 23, 2009

Key Challenges
SUPPLY CHAIN:
No clear visibility of the value chain – sales to cost of sales to inventory to margin;
Inventory forecasting deficiencies;
Not rationalising product ranges and promoting slow moving stock;
Logistics – optimising minimum order quantities; route management; etc.

 Mapping the value chain for efficiency & effectiveness
 Re-configuring logistics approach
 Applying operational disciplines
April 23, 2009

Key Challenges
PROCUREMENT / SPEND:
Rationalising the supplier base and leveraging consolidated demand to improve

supplier prices and terms;
Regular review, negotiation and appropriateness of supplier contracts;
Tackling spend categories - usage & price.

 Establishing ‘Procurement Projects’ to leverage best value in
- price;
- terms;
- usage.
 Optimising the Procure-to-Pay process
April 23, 2009
Optimising Procure-to-Pay Process
Management effort and resources I must develop my

What value own local practices to
can overcome limitations
procurement of central
add? procurement
No external
benchmarking
Procurement of practices or
Conflicting does not costs
priorities in the Procurement
follow best
business activities are
practice
not aligned
How do we
manage
Strategy People Process Systems procurement
more
efficiently?
A lot of effort is
being drained …
• Strategy/vision is not • No alignment of • No formal supplier • Procurement processes
aligned with overall Procurement assessment are supported by
business accountabilities • Lack of consistent manual, paper based
• Limited strategic • Central procurement processes across the systems
partnerships with initiatives are not business • Procurement not
suppliers supported locally • No formal receipting of integrated with other
• No leverage of group • Limited capabilities for goods or services to business systems
purchasing power procurement best support invoice matching • Procurement system
• Procurement has low practice • Large supplier base (for does not provide access
to key data
profile, viewed as safety) including ‘one-time Procurement
tactical vendors’
Efficiency
April 23, 2009

Key Challenges
FINANCE:
Inefficient month end close process;
Lack of cost transparency – visibility of profitability; value for spend; hidden cost?;
Opportunities to leverage shared services and/or outsourcing;
Poorly integrated internal systems;
Manual processes – excel hell; paying suppliers by cheque.

 Re-configuring Finance Function to meet needs of business
 Investing in people and systems to improve processes
April 23, 2009
Objectives: Demands Focussed on Three Areas
Finance objectives have to be balanced between the

requirements for Insight & Action, Compliance &
Control and Efficiency.
Compliance and Control: The accountability of CFOs Insight

Current view
means compliance and improving control have been
top of the agenda in recent years. The future finance Aspirational
function needs to optimise compliance and control to
establish a sustainable cost effective control
environment which meets today’s requirements as well
as being flexible for future changes in regulations.
Efficiency in finance means performing tasks in a

timely and cost effective manner to achieve the defined
quality by making use of Leading Practice approaches,
Tools and Sourcing. Also the finance function must be
more robust and scaleable to support future business
growth.
Insight is at the heart of the vision of the future finance

function. It can take the form of corporate performance Compliance Efficiency
management (CPM), business analytics, corporate
information logistics and straightforward management & Control
information.
April 23, 2009

Developing Role of Finance Function
To bring a greater focus on delivering insight to the business the roles that are undertaken by a high
performing Finance function are changing from that of Scorekeeper to Caretaker and from Commentator to
Business Partner
Business Skills
Commentator Value adding activities
Business Partner
eg Shift from reconciliation to insightful analysis

eg Earn place at the decision making table
Reactive Proactive
eg Automate &
Seek process efficiency eg Monitor Service Level Agreements
Score Keeper Accounting Skills Caretaker

Mandatory activities
Current Profile
Target Profile
April 23, 2009
Key Challenges
CASH MANAGEMENT:
Order to cash inefficiencies, especially invoicing, credit notes & rebates;
Cash management – visibility; forecasting; and centrally controlled;
Management of Working Capital – lack of ownership.

 Moving from monthly to weekly cash forecasting
 Identifying and eliminating sources of inefficiency in receivables & inventory mgt
 Establishing and driving targets for DSO; DSI; DPO
 Aligning working capital management targets to personal performance metrics
April 23, 2009

Key Challenges
IT:
Inadequate IT skills match to business requirements;
Lack of systems integration;
Poor management information systems.

 Re-investing in systems to improve efficiency and effectiveness
 Restructuring IT to meet needs of business
 Automating manual activities
April 23, 2009

Key Challenges
STRUCTURES:
Shared services or outsourcing opportunities not being leveraged;
Terms of outsourcing contracts not being challenged.
April 23, 2009

SSC Value Chain
•Deploy IT Systems
• Create Center of
Excellence •Retain Capability to
Meet Business Needs
• Eliminate Duplicate Job
Activities •Enhance Control
Environment
• Leverage Scale
Centralize Standardize •Provide Consistent &
• Allow Business to Accurate Information
Focus on More
Strategic Needs •Strengthen Business
Colleague Continuity Plan
Engagement
People & Satisfaction
• Value added
Realize the Implement
• Increase Automation
Reporting Benefits Best Practices • Utilize Benchmarking
• Enhance Customer Focus
• Deploy desk
• Share Support for Technology/ Tools
Mergers & Acquisitions
• Implement Major
• Provide Risk Mitigation Process Improvements
• Flawless Control • Leverage Multiple
Environment Locations
April 23, 2009
Why choose Outsourcing?
Exploit External Reduce Operating Costs

Management Expertise
Focus Increased transparency

Improve Company s Co
Focus es of costs
si n
st
Increased control
Bu
During turbulent economic
Share Risks conditions
Agility
Function May Be
Difficult
To Manage
rce
Se
Access To World-Class
vi c
ou
Improve Services Capabilities
s
r
e Re
Transparent
Service Standards
Resources Not
Available Internally
April 23, 2009

Key Challenges
METRICS:
Lack of relevant KPIs to support corporate performance management;
Metrics not aligned or inappropriate relative to strategy
Lack of performance reports / desktop reports;

 Defining a small number of key metrics, which link business activities and
promote ownership, responsibility and accountability
 Investing in the development of integrated KPI dashboards
April 23, 2009

How Companies are Communicating Performance
Dynamic?
- indicators to guide the reader
- focussed rather than full detail
- simple graphics
April 23, 2009

Key Challenges
PROJECT MANAGEMENT:
Multiple projects, minimal resources
Projects not being delivered within timeline and/or budget
Benefits not being realised

 Establishing Project Offices within their business to:
- Train staff in the disciplines of project management
- Prioritise projects and assign resources
- Plan & design each project – ownership; delivery milestones; benefits
- Monitor progress of each project and support as appropriate
- Ensure benefits proposed are delivered April 23, 2009
Cost Control Culture
• Lead from the top
• Policies & Procedures
• Zero based budgeting
• Short interval control
• Involve everyone
• No ‘sacred cows’
• Spend every dollar as if it were your last – get value from money spent
April 23, 2009

Questions?
Thank You!
Garrett Cronin
01 792 8807
garrett.cronin@ie.pwc.com
April 23, 2009


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

April 23, 2009

April 23, 2009

April 23, 2009

PwC Points of View:

The current global environment creates a new imperative for companies in

April 23, 2009

April 23, 2009

Limited cross selling across organisations;

Rebate issues – not consistent in chasing recoverability;

No visibility of margins end to end;

Ownership and accountability of management, sales & buyers.

What Others are Doing:

Incentives not aligned to strategic objectives;

Skill-sets not appropriate to role requirements;

Tackling non base-pay costs;

Overcapacity and inefficient work practices.

April 23, 2009

Review staff related cost areas: Assess headcount levels:

April 23, 2009

1. Order to Cash Review

6. Bank 7. Budgeting 8. Forecasting 9. Fixed

April 23, 2009

ASD gathers PI sends

Pi sends email PID is reviewed

Pi sends email PID is reviewed

Pi submits Yes PID status

15 minutes Cancel PID

April 23, 2009

Inventory forecasting deficiencies;

Not rationalising product ranges and promoting slow moving stock;

Logistics – optimising minimum order quantities; route management; etc.

What Others are Doing:

April 23, 2009

Rationalising the supplier base and leveraging consolidated demand to improve

Regular review, negotiation and appropriateness of supplier contracts;

Tackling spend categories - usage & price.

What Others are Doing:

Management effort and resources I must develop my

April 23, 2009

Inefficient month end close process;

Opportunities to leverage shared services and/or outsourcing;

Poorly integrated internal systems;

Manual processes – excel hell; paying suppliers by cheque.

What Others are Doing:

Finance objectives have to be balanced between the

Compliance and Control: The accountability of CFOs Insight

Efficiency in finance means performing tasks in a

Insight is at the heart of the vision of the future finance

April 23, 2009

eg Shift from reconciliation to insightful analysis

Score Keeper Accounting Skills Caretaker

Order to cash inefficiencies, especially invoicing, credit notes & rebates;

Cash management – visibility; forecasting; and centrally controlled;

Management of Working Capital – lack of ownership.

What Others are Doing:

April 23, 2009

Inadequate IT skills match to business requirements;

Lack of systems integration;

Poor management information systems.

What Others are Doing:

April 23, 2009

Shared services or outsourcing opportunities not being leveraged;