Using the Downturn to

Your Advantage

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Using the Downturn to Your Advantage
Driving Results: Lessons We Can Apply to a Downturn
In Washington, politicians are already using the economic downturn as an opportunity to
push through legislation that might otherwise not get past committee discussions during
more normal economic cycles. Along the same lines, especially in the financial services
sector, companies are engaging in M&A activity that under usual market conditions
would face significant regulatory and anti-trust scrutiny. What can we learn from these
examples? Just as legislators and dealmakers are using the economy as a guise to
implement programs and goals that might prove difficult under normal operating
conditions, procurement organizations can take advantage of the downturn as well,
pushing forward their own “legislative” agenda to improve business performance. The
timing for such action could not be better. ISM’s manufacturing and non-manufacturing
indexes continue to show a contracting economy. More people are staying on the
unemployment benefit rolls for an extra week or longer than at anytime in the past 40
years. And unprecedented volumes of public companies are releasing dismal earnings
reports and projections for 2009. Now is not only a good time to push through cost
saving agendas that cut across the business, it is perhaps the best possible period in
more than a lifetime to implement such initiatives.
For politicians, there are numerous legislative ironies involved with getting things
accomplished in a recession. Besides the obvious (i.e., using the downturn to push
through what might be unpalatable under normal circumstances), there are other
benefits to taking action in a downturn. One, of course, is bi-partisan support. But the
concept of bi-partisanship should extend beyond the political. Just as in Washington,
recessions can enable potentially strange bedfellows in companies to join in support
under the simple rationale that “we’re all in this together”. Indeed, the parallels that
procurement, finance and other organizations have when it comes to implementing cost
reduction programs amidst the same economic backdrop are similar in a number of
ways. Our recent customer experiences suggest that the recession affords an excellent
opportunity for companies to tackle cost reduction projects that would otherwise be too
controversial or require too much change management to undertake in a business-as-
usual environment. In this analysis we will explore a number of these initiatives, offering
pragmatic suggestions for how companies can use the downturn to drive new rounds of
cost savings opportunities throughout the business. While what you are about to read
may not result in a filibuster-proof majority inside your company, it will most certainly
point the way to building savings-driven consensus.
Using the Downturn to Your Advantage

Four Strategies for Success – Taking Advantage of the Downturn

1. Using working capital management to “work” out of the downturn together

Working capital management strategies that integrate procurement and finance –
specifically A/P, treasury and supplier management teams – can help companies to both
preserve and profit from their working capital, which has become all the more precious
amidst the credit crunch. One of the largest effects of the downturn on both companies
and their suppliers has been the challenge of securing operating credit. But when
traditional credit and banking channels pull in their credit ropes, it creates an opportunity
for buyers and suppliers to collaborate, enabling a new source of capital and potential
liquidity. For most companies, the disintermediation of bank funding does not happen
overnight. Perhaps the largest inhibitor to creating new sources of liquidity and potential
capital is the paper-driven process that plagues most A/P organizations. Paper not only
limits visibility for both buyers and suppliers – it also creates latency throughout the
requisitioning, approval and payables process. Whether a buying organization is looking
to achieve savings through offering fixed or variable discounts to suppliers or, on the flip
side, is looking to extend its days payables outstanding (DPOs) – or a combination of
both strategies, depending on the circumstances and opportunities – automating and
digitizing the A/P process is an essential first step to create flexibility in working capital
management strategies.

After implementing basic process enhancements and invoice automation capabilities,

companies must next deploy the appropriate set of internal and external workflows to
drive flexible working capital management strategies. This broader process, known as
Electronic Invoice Presentment and Payment (EIPP), puts in place workflows that
support and enhance existing ERP payment capabilities, but that are not available from
these providers today. The most pragmatic EIPP infrastructure approaches include
such capabilities as dynamic discounting, supply chain financing and direct-connection
to suppliers (beyond basic EDI and connection portals) with a key emphasis on

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 Using the Downturn to Your Advantage

enabling the majority of the supply base rather than simply a handful of targeted
suppliers. With these types of foundational capabilities in place, buying organizations
can begin to implement working capital management strategies that account for the
fact that there is not a one-size-fits-all strategy for either suppliers who need access to
working capital, or buyers who must balance their own working capital requirements,
DPOs and discounts.

Even working capital management deployments that deploy just basic capabilities can
still drive significant savings. Take the case of one organization that offers a flat rate
early payment discount based off a 12 percent APR. This company has had over 2,000
of its suppliers taking advantage of the discount option on a periodic basis and through
this rather simple approach, has achieved an 8-10x return in short-term liquidity
compared with other near-term investment vehicles. More sophisticated deployments
are often engineered with greater flexibility from the start, creating additional
opportunities for savings or working capital improvements. As part of a working capital
management strategy, a global retail company decided to offer standard payment terms
to global suppliers with a sliding scale discount model for early payment. Given the
need for capital in large parts of the developing market in the past quarter, many
suppliers leaped at the opportunity to receive early payment, even at an average APR
of 22 percent. While this retailer has profited significantly from its payables by reaping
a 20+ percent APR for early payment, given its suppliers’ willingness to accept early
discounts, it has also realized the side benefit of maintaining continuity of supply,
reducing supply risk. Owing to the inability of many of its suppliers to tap traditional
lending sources to fund their own working capital requirements as the recession has
taken hold, the retailer has, in effect, become a new type of bank for suppliers, capable
of keeping suppliers in business. But not all buying organizations are looking to profit
from taking early payment discounts – or reduce supply risk. By deploying a working
capital management solution set that incorporates third-party financing elements,
another retailer has been able to increase its DPOs by over 90 days to an average of
198 days – with some suppliers at 360-day terms. Through this initiative, this
organization has been able to unlock nearly $900 million in working capital to invest in
new initiatives and drive better shareholder returns.

2. Sourcing sacred cows

One of the ironies of procurement and supply management organizations when it comes
to sourcing over the past decade is how much influence versus control they’ve been
able to exert over business spending habits. In certain spend areas such as white-collar
MRO and more basic direct materials (e.g., stampings, forgings, printed circuit boards),
a large number of procurement organizations have not only identified tens or hundreds
of millions of dollars in savings – they’ve also worked with the spend owners in the
business to get a majority of the identified savings to drop to the bottom line. But
achieving savings that business owners want to implement in certain categories is often
easier spoken than accomplished in both flat and rising economies. No more. In just a
few quarters of declining economic growth, it’s now possible for procurement
organizations to tackle those sacred spend cows such as legal, marketing, professional

4 Copyright © 2009 Ariba, Inc. All rights reserved.

Using the Downturn to Your Advantage

services, employee benefits and IT which, under normal market conditions, would make
it difficult to convince the actual spend owners to place under a competitive strategic
sourcing process.

Take the case of legal spend. By segmenting the various components that comprise a
typical corporate legal spend portfolio – including the balance of internal versus external
resources – companies can achieve significant savings without sacrificing the quality of
work. Granted, in some legal spend areas such as bankruptcy or securities law, it is
unlikely that most CFOs and general counsels would want to introduce significant
change. But in other areas such as patent, contract and standard legal services, an
increasing number of procurement organizations are getting involved, introducing
strategic sourcing and competitive negotiation elements into the legal sourcing process.
In addition, a handful of organizations are beginning to look at optimizing their legal
resources, reducing internal staff headcount in favor of more flexible legal outsourcing
arrangements and working with firms who are increasingly happy entering into non-
traditional fee arrangements such as contingent labor/contractor models for significantly
less than standard firm rates.

Another sacred category cow that is becoming less holy as the recession takes hold is
marketing spend. We have observed that in many areas of marketing spend, 20-25
percent savings off of previously negotiated contracts is often a possibility. A number of
organizations are beginning to find that benchmarking current pricing is a relatively
quick and non-confrontational way to achieve savings while preserving incumbent
relationships. Other companies are taking even more aggressive strategic sourcing
approaches, identifying significant opportunities to aggressively source such categories
as print, conference, tradeshow and related marketing spend areas. But in most cases,
certain marketing categories such as agency and media spend still remain off the table
given the challenge of winning over multiple constituents to a new type of competitive
process. Organizations are also using the economy to source a range of additional
services and professional services categories including accounting, audit, management /
IT consulting and temporary labor. Across these areas, our current experience suggests
that even in cases where an organization has gone through a formal sourcing process

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 Using the Downturn to Your Advantage

before, an incremental five percent savings is possible given the current economy. IT
spend is also creating significant saving opportunities in the current environment –
double-digit saving percentages that CIOs cannot afford to ignore. For example, PCs
and laptops, two categories where historically companies would often average 10-15
percent savings, can now yield savings of 20 percent or more in the current
environment. And these percentage saving levels are just the beginning. Saving levels
can rise further when companies agree to tackle equipment and service-level
standardization as part of the sourcing process.

Sourcing now does not just make sense given the high probability of above-average
savings levels. It also makes sense because of the rapid impact it can have on the
business. Significant category savings can help organizations avoid layoffs and staff
redundancies. But perhaps as important from a customer and shareholder perspective,
sourcing now can also reduce supply risk by creating a more transparent process to
identify, monitor and engage the healthiest set of suppliers. One global diversified
manufacturer pegged the cost of an average supplier bankruptcy to their business at $5
million per occurrence. Not only can sourcing processes help vet and weed out
suppliers that are unlikely to maintain a solid balance sheet – it can also help
companies avoid other types of risk-related embarrassments stemming from poor
supplier quality or lagging performance. Whether it involves tainted peanut butter,
leaded toys, radioactive stainless steel or dangerous milk, supply risk is real. And a
formal sourcing process is, perhaps, the best possible way to reduce all forms of risk
from the start.

Source: Ariba SupplyWatch. See also: Q109, Page 29; Marketing: “7-15% savings … in
difficult financial times, many companies are cutting back on marketing expenses.
Agencies have latent capacity and will price their services aggressively.”

3. Commodity-driven strategies that can benefit both companies and

their suppliers
In the early stages of the downturn, commodity price deflation has led to lower prices for
both buyers and suppliers. But going forward – and as January’s economic numbers
already show to some degree – it is likely that inflation will begin to pick up thanks to the
loose monetary policy that nearly all of the world governments and central banks have
deployed to combat the downturn. Given both the existing deflation across many
commodities in the market as well as the inflation that will at some point take hold,
procurement organizations should work with other internal stakeholders as well as their
suppliers to deploy new strategies to create additional savings and lock-in potential
downside risk as commodity markets rebound. Perhaps the most common type of
commodity strategy that companies are deploying in this area is using price indexes as
a standard contract component. By pegging the raw material input of a contract to a
price index, both buyers and suppliers gain greater transparency into pricing, allowing
suppliers to compete more effectively on the value-added portion of what they are
providing, while mitigating potential downside risk for both groups and eliminating the
opportunity for suppliers to overcharge by failing to pass along price reductions or
raising pricing too quickly or too much.

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Using the Downturn to Your Advantage

Companies are also deploying additional basic commodity strategies in the current
environment that include forward buying (either directly or on behalf of suppliers) and
commodity hedging via options contracts (which do not require physical delivery of
goods). Some more advanced organizations are also deploying rebate or co-op
buying programs on behalf of their supply base, especially where large volumes can
increase negotiating leverage or deliver enhanced service levels and other benefits
(e.g., extended payment terms, vendor managed inventory, just-in-time programs,
etc.). Sourcing platforms can play a key underlying role in enabling these types of
strategies from an information exchange, negotiation and collaboration perspective.
And downstream contract management, procure-to-pay and performance
management systems can help insure that an organization is able to fully implement,
monitor and manage the savings opportunities that it has identified through new,
commodity driven approaches.

4. Making Software as a Service (SaaS) Pay

For the majority of companies, the recession has brought with it a reduced capital
spending environment. By extension, many organizations now face lower IT budgets as
well. This is forcing procurement, finance and technology executives to often consider
two options for deploying new solutions for the first time. First, they must now consider
SaaS licensing models, even when internal or external special interests push back on
such concepts (like lobbyists with their own agenda in the public sector). But unlike
certain government policy, it is difficult to make a convincing argument against SaaS.
SaaS solutions provide a range of benefits that include lower or eliminated up-front
licensing costs, fewer internal and external resources to get up and running and
continuous upgrades and support without additional fees. Outside of SaaS models,
companies can also consider traditional licensing approaches from enterprise software
companies that are now, at least in some cases, including “free” modules to entice
potential buyers. But even free has a cost and will nearly always result in a higher
total cost of ownership when factoring in soft and hard dollar costs over multiple years
compared with SaaS. For example, free enterprise software tools take a significant
amount of resources from an ERP or third-party consulting firm to get up and running.
Moreover, enterprise software models typically create information and process silos
and add significant costs to connect with suppliers externally. Perhaps most important
in this regard, these shortcomings for “free” or low-cost enterprise solutions do not
just create hidden costs – they limit the potential returns that a company will get from
its investments.

The current environment is helping cost-conscience CIOs and other executives toss the
total cost of ownership (TCO) mindset into the IT rubbish bin for good. These
technology leaders realize that their companies and customers are not looking to reduce
the costs of systems – they are looking for their systems to deliver meaningful,
implemented savings. Software feature / function checklists are irrelevant in this regard.
What matters are business results and, of course, a low cost of ownership, something
that should be a given. One way to achieve these results is to divert funding from
longer-term enterprise software and ERP initiatives to SaaS technology deployments

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 Using the Downturn to Your Advantage

that can deliver more rapid and higher returns without the upfront capital requirements
(paid to vendors, consultants, and other technology providers as part of traditional
licensing arrangements). C-level executives should apply 12-month litmus tests to all
procurement technology investments today, which is to say that if a solution does not
deliver ROI within 12 months from contract signing or first payment, they should put
such a program on the backburner. Perhaps even more important, technology,
procurement and finance executives should focus on getting their business capabilities
to best-in-class levels, focusing on technology enablement and value versus first
prioritizing attempts to lower system costs.

Translating Ideas and Actions into Results

In Washington, politicians on both sides of the aisle like to put their mark on their initial
term by creating near-term plans and promises. These efforts usually involve placing
multiple bets and investments across different policies and programs. Just as there is
argument in political circles about balancing capital and infrastructure investment with
tax cuts, it is impossible to know which specific procurement and cost reduction
programs will have the best and most rapid results before trying them. This is why it’s
important to take a portfolio approach to initiatives from the start. Regardless, one thing
politicians are always aware of is the need to create good news and momentum out of
the gate. Indeed, the PR factor of initiatives – especially those that involve significant
collaboration between different groups – can be as important a catalyst for change and
results as the underlying program itself. This is a lesson that companies should take to
heart when it comes to building momentum for programs that would otherwise be
unpalatable to the corporate cost tongue under normal operating conditions. Still,
success begets success and the most reliable means of ensuring further investments in
initiatives that require additional stakeholder involvement and commitment is to measure
and show the returns of those initiatives that are underway.

When it comes to driving success in the downturn, having the right team and
commitments in place internally is critical to success. Alignment between the CEO, CFO
and procurement leaders must exist as a foundational element to push through the
types of programs we have examined in this analysis. But the right outside technology
and solution providers can also play a critical role in helping companies to use the
downturn to their advantage. Whether it is identifying what initiatives to pursue (and in
what order), helping to align different stakeholders with underlying technology,
processes and information to make better decisions or simply providing a helping,
expert hand where needed to get programs underway, outside partners can quickly
prove themselves – and their products – to be an essential member of the team. At
Ariba, we have helped hundreds of companies for more than a decade to identify and
implement billions of dollars of cost savings opportunities. Our category and process
expertise is unparalleled and companies have battle-tested our solutions under the most
demanding circumstances, including those rapid but decisive skirmishes where there is
no time to bring out slow-moving, heavy IT artillery.

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Using the Downturn to Your Advantage

In conclusion, we urge you to take a contrarian view on the market and rather than
succumb to the negativity in the air, to follow the path of astute politicians, using the
downturn to your advantage. Working with Ariba, you will find that savings-focused
partnership opportunities exist at all levels of involvement and scale. We can help you
get past the pessimism that these times foster, helping your company to breathe a bit
easier – not to mention getting over the trepidation of breathing in deeply when pursuing
new types of initiatives for the first time.

Copyright © 2009 Ariba, Inc. All rights reserved. 9