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Intelligent Cost Reduction
Developing & executing a program to reduce cost & create a
sustainable operating platform
Informational presentation for our client teams
July 2008
Strictly private and confidential
PwC
Contents
Section
Page
1
Purpose & background
3
2
Point of view
5
3
Anatomy of a successful total cost management program
9
4
Beginning with the business & front office
13
5
Opportunities in the support units
19
6
Some lessons learned
22
7
PwC qualifications to help
24
Appendix 1
Methodology summary
29
Purpose & background
Purpose & background
• The purpose of this document is to provide our teams a framework and compendium of specific ideas and
information regarding one of the, if not the key issue facing our clients: how they manage their cost structure in the
current environment while creating a sustainable operating platform for the longer term.
• We have concentrated on concrete, actionable areas where our teams have a track record of delivering for our
clients versus generic documents regarding cost cutting.
• We have attempted where possible to paint a picture of where key industry participants are in terms of a number of
these areas. This will allow the teams to not only provide useful information to our clients, but allow our clients to
compare themselves to the competition.
• The thought is that our teams will be able to leverage this information and firm experts to share PwC’s point of view
with key clients and, if appropriate, committees and boards.
• The primary opportunity for the firm is likely to be around providing insights and advice to our clients to establish the
type of credibility in the subject areas while positioning ourselves to assist in the cost reduction efforts.
• We are developing more detailed cost reduction decks in a number of areas, including back and middle office
operations, risk management, technology & key initiatives, sourcing and the like.
• Portions of this deck have been presented to clients and can be used as such by our teams provided that client
names are not included. Relevant updates will be circulated as appropriate.
• Please contact John Garvey or Miles Everson with any questions or to access the appropriate firm expertise.
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4
Intelligent Cost Reduction
Point of view
Point of view
• Cost management is a key issue today and for the foreseeable future – The market is experiencing a severe
liquidity crunch and the explosion of a global asset bubble well beyond sub-prime. At the root of this crisis is not only
asset values, but the amount of capital in the financial system today versus the size and liquidity of the balance
sheets (and off-balance sheet commitments) of financial institutions. This situation is not likely to reverse itself for a
number of years. In the environment of de-leveraging and scarcity of capital, we believe fundamental re-thinking
regarding business strategies, operating models and cost structures will be necessary.
• A pre-securitization baseline may be the appropriate mindset – If one assumes that the securitization markets
have significantly contracted in a permanent fashion, then the appropriate way to think about the business may be
in a pre-securitization baseline, adjusted for key acquisitions/divestitures, etc. This means that the proper mindset
to consider in the business strategy and budgeting area may be a pre-2004 or 2005 operating model and
cost structure.
• An understanding true profitability of each business is essential – Many institutions are in the midst of
re-thinking their fundamental business strategies. Many have expanded into proprietary trading activities, made
acquisitions and/or started new businesses (or kept old businesses) due to the overall attractiveness of the markets
and availability of inexpensive capital. Many do not understand the true profitability of those businesses today at the
proper level of granularity (e.g., desk level, product, etc.). To make the right decisions regarding the business
platform going forward, a fundamental understanding of where the institution does and doesn’t make money is now
more important than ever. Of particular importance is the need to understand the interrelationships between different
businesses, products and geographies and the overall impact of curtailing or exiting certain activities on the
broader franchise.
• Focusing on operational costs only will not be sufficient – Organizations have focused most previous cost
cutting efforts largely on back office operating costs. Areas such as front office costs, the costs of risk management
failures and funding costs will have to be considered in new ways to achieve a cost baseline that is acceptable in
today’s markets. Operating costs will also have be re-examined as well, of course, and perhaps in different ways.
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Intelligent Cost Reduction
Point of view (continued)
• Many organizations confuse “cost postponement” with total cost management – Many financial institutions
simply stop investing in new projects and people during difficult times in the market. Further, many simply reduce
their support teams, etc., and hire them back when the markets bounce back. There is often a price to pay for these
moves in terms of customer loyalty, heightened risk and future profitability. We consider many of these actions cost
postponement as opposed to true cost reduction. We recommend that our clients measure the quality of their efforts
through analyzing the types of reductions they are making and how they impact the platform and the company
longer term.
• A well organized end-to-end program is needed – Many organizations have a cost cutting “czar” or team, but lack
an organizational-wide approach to the issue. This leads to sub-optimal execution, missed targets and worse.
Avoiding these pitfalls requires an overall program structure with a clear executive mandate, defined targets, a
management organization for the effort and strong engagement from each of the business units and support areas.
• Consistent investment is required – Building a sustainable competitive cost platform requires consistent
investment, even in times of financial stress. Given the markets today, managing the program in a way that creates
investment funds through tactical, short-term savings to fund medium to longer term savings is critical.
• The tone at the top is key – The overall objectives, targets and business decisions made at the executive
management level are more important than ever to achieving sustainable improvement.
• Create an executive dashboard to monitor results – Implementing an executive dashboard with key metrics and
reporting will help management to view and gauge the overall effectiveness of their program over time.
• This is a survival issue on an institution by institution basis – We believe that traditional cost reduction
approaches are not going to be sufficient to ensure the survivability of many institutions during this market downturn.
Further, we believe that the markets are going to be very focused on this issue and discriminate between institutions
that are well managed in this regard versus those that are not. Therefore, how organizations manage this may well
be the difference between survival, takeover or worse.
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Intelligent Cost Reduction
Point of view (continued)
Other than game-changing strategic decisions, we see companies generally taking three approaches to cost reduction.
Slash and Burn
Strategic
‘Business as usual’ but at less cost - by
reducing plans by set target (e.g. 10% cost
reduction)
‘Top-down’ review of the business – typically A bottom-up detailed analysis across all
organization and process changes required departments to identify potential
opportunities
•
•
•
•
Overall target set by CEO or CFO
•
Target differentiated at Dept or
Process level
•
Function heads responsible for execution
Reasons for failure:
- Reactive and focused on survival
•
- Short-term cost cutting and focus on
one-off savings (e.g. travel)
- Based on arbitrary targets; lacks
sufficient analysis
- Savings difficult to manage and track
- Negative impact on morale
and culture
Boil the Ocean
Cost team frames “available” population
of costs and strategic options
Cost Team and Department Leads
responsible for analysis to identify
potential opportunities (e.g., organization
alignment, re-allocation of work, etc)
Reasons for failure:
- Organization focus and betting on a
“silver-bullet” (e.g. shared services,
off-shoring)
- Little consideration to the
management decisions driving costs
- Complexities of reducing costs and
existing behaviors are not changed
•
•
•
•
Cost Team frames “available” population
of costs
Cost team or department performs
extensive interviewing, process analysis
& benchmarking to enhance process
efficiency and leverage technology
Completely integrated and
coordinated execution
Reasons for failure:
- Timeframe constraint and lack
of urgency
- Greater investment required
- Typically loses momentum
and focus
- Negative impact on morale
and culture
Sustainable cost reduction combines immediate cost reduction, improvements to cost management and control
processes, and performance measurement and management to drive continuous improvement and sustainability.
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Intelligent Cost Reduction
Anatomy of a successful total cost
management program
Anatomy of a successful total cost management program
It all starts with the strategic decisions made at the executive management level combined with outstanding execution
and constant monitoring of results:
Business strategy, cost
platform, targets, divestitures,
implementation oversight, executive
sponsor selection
Executive
Management
Selection of enterprise team, overall
plan preparation and monitoring,
liaison with business and support
function teams, reporting to executive
management
Business unit and support function
plan preparation, reporting to the
project management office
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Executive Sponsor & Enterprise
Cost Reduction Team
Business Unit & Support Function Teams
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Intelligent Cost Reduction
Anatomy of a successful total cost management program
How we look at it: The cost reduction component focuses on quickly delivering tangible saving opportunities that are
owned by management.
1
2
3
4
5
Set environment
for cost control
Spend analysis
and challenge
Functional headcount
benchmarking
Contracts review
Rebuild financial plans
6
Present results
7
8
Eliminate waste
Track results
The cost management and control component focuses on addressing weaknesses in the way costs are managed to
drive continuous improvement and sustainability.
1
2
3
4
Review historical
cost reduction
programs
Understand cost
ownership
& structure
Cost management
framework interviews
Third party spend
management
5
Finalize gap
analysis
6
Present results
7
Finalize Recommendations
Roadmap
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Intelligent Cost Reduction
Anatomy of a successful total cost management program
Plan
Mobilize
Implement
Monitor
Executive Management
• Determine overall
• Review and agree on
• Make decisions
business strategy &
mobilization plan,
regarding key
business baseline
including allocation of
issues/opportunities
key
resources
that arise
• Set specific cost
reduction targets
• Prepare communication • Drive ongoing
communication plans
• Agree executive sponsor plan to key stakeholders
(board, employees,
to key stakeholders
investors, analysts, etc.)
• Review overall progress
vs. goals & targets
• Monitor enterprise
cost reduction
team performance
Enterprise Cost
Reduction Team
• Identify team members
• Engage key
and assistance needed
team members
• Determine business
• Establish project
level “quick hits”
management office
(“PMO”) & liaison
• Analyze business
with business
performance
units/support functions
& profitability
• Develop target business • Agree business
unit and support
and cost baseline
function plans
• Continuously monitor &
liaise with business
units/support functions
• Debate & resolve key
issues raised by the
business units
• Consolidate & report
results to executive mgt
• Continuously monitor &
liaise with business
units/support functions
• Debate & resolve key
issues raised by the
business units
• Consolidate & report
results to executive mgt
Business Units &
Support Functions
• Develop plan for
“quick hits”
• Translate targets
into business unit &
support objectives
• Engage business
leaders and HR in
developing overall
strategies &
communication plans
• Execute “quick hits” and • Monitor progress &
longer term cost
key activities within
reduction plans in
each business unit &
accordance with goals
support function
and targets
• Take corrective actions
• Provide feedback & key
as appropriate
information to the
enterprise cost reduction
team PMO
• Surface key
implementation issues
to central team
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• Determine key
team members in
business units and
support functions
• Develop detailed
execution plans based
upon the strategic
decisions, baselines
and targets established
• Determine assistance
needed
12
Intelligent Cost Reduction
Beginning with the business & front office
Beginning with the business & front office
• The decisions regarding the “front office” set the tone for the total cost management effort – The decisions
made regarding the business have the potential to either set the stage for success or failure in the program.
Divesting businesses, merging sales forces, changing the incentive compensation structure, eliminating products
and reducing country footprints are all key “front office” decisions that have a immense impact on the total cost of
the business.
• Many organizations need to re-examine and/or establish the ground rules of organization control – Basic
agreement around organizational control and alignment is key. We recommend that financial institutions examine
their existing structures and the assumptions around who makes what decisions. In times of cost cutting, authority
may have to temporarily taken away from individual business units and geographies to arrive at the right answer for
the organization as a whole. For example, the decisions regarding the compensation structure of multiple sales
forces may be need to made at the most senior level vs. at the business unit levels. Decisions about the ability of
businesses to determine their support structures would be another example where authority is temporarily moved
“up” in the organization.
• Fact-based discussions and decision-making is often missing – We often see key business decisions being
made based upon “gut feeling” and limited conversations and data as opposed to solid facts and analysis. In other
cases, the information is simply not detailed enough to make the most well-informed decisions for the organization.
• A solid grounding in business, product and geographic level profitability is required – Getting this information
is the key to having the quality discussions and making the right decisions.
• Once the organization has the information, it must act upon it – A number of organizations have most, if not all
of the information they need to make quality decisions, but fail to act upon it for various reasons. The markets will not
reward those that fail to act decisively in the front office and make some key decisions regarding the business,
strategy and operating platform.
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Intelligent Cost Reduction
Beginning with the business & front office (continued)
• Business structure
- Country footprint with a bias towards reduction
- Overly complicated legal entity structures (many times after mergers and/or proliferation of tax-driven structures)
with a move towards simplification
- Organizational layers with a view to de-layering
- Analyzing strategic investments and joint ventures (value vs. cost to manage)
• Business units/products
- Combining like units and eliminating redundancies
- Identifying unprofitable/marginally profitable products and businesses with a view towards divesture or creating
scale through acquisition
- Reducing or eliminating cross-product subsidization
- Analyzing and correcting inconsistent/sub-optimal pricing
- Cost of funds for business units
- Inaccurate margining practices (if one uses a prime broker/correspondent clearing firm)
• Marketing & sales
- Identifying the linkage of marketing spend to strategy
- Analyzing the effectiveness of overall spend
- Reviewing management structures and client coverage models with a view to reduce duplication
- Overhauling incentive compensation structures to better link pay with business performance
- Use of the web to reduce the cost of customer acquisition.
• Business linkage of support structures
- Review the appropriateness of administrative function, operations and technology structures with a view to
eliminate duplication
- Analyze sourcing/captives with goal of identifying best internal/external sourcing options
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Intelligent Cost Reduction
Beginning with the business & front office (continued)
Understanding true profitability of a business can drive better decision-making and significantly impact front office
compensation, a key element in the cost structure of financial institutions:
Periodic Measure
Measurement Rationale
Gross Revenue
35,000,000
Includes both realized and unrealized gains
Cost of Funds
15,500,000
Allocated funding costs based upon short term funding rates vs.
matched rate, no liquidity premium
Net Revenue
19,500,000
Operating Expenses
Direct
1,500,000
Directly allocable costs excluding salaries
Allocated
6,000,000
Based upon cost allocation models (office space, technology, risk,
etc.), no adjustment for operational complexity
Pre-Tax Profit and Loss
12,000,000
Capital
Daily Average Assets
500,000,000
Capital to Asset Ratio
8%
Amount of Capital
Sourced from Risk and Risk Capital Group
Capital charge not properly calibrated for credit, market & operational
risks associated with the business
40,000,000
Performance Measures
Pre-tax Return on Capital
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30.0%
Key determinant in investment decisions and compensation of for the
business/front office
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Intelligent Cost Reduction
Beginning with the business & front office (continued)
More accurate measurement can lead to very different investment results and compensation expenses:
Periodic Measure
Measurement Rationale
Gross Revenue
35,000,000
Cost of Funds
18,600,000
Net Revenue
16,400,000
Allocated funding costs matched rate to duration of trade, liquidity
premium added = +20% greater cost of funds
Operating Expenses
Direct
1,500,000
Allocated
7,000,000
Pre-Tax Profit and Loss
7,900,000
Specific adjustment for increased operational personnel to support
structured transactions = +$1,000,000 in cost
Capital
Daily Average Assets
500,000,000
Capital to Asset Ratio
8.5%
Amount of Capital
Capital charge adjust 0.5% for increased operational risks
in business
42,500,000
Performance Measures
Pre-tax Return on Capital
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18.6%
Moving from a 30% to 18.6% return will likely reduce compensation
costs in the business and may impact investment decisions
17
Intelligent Cost Reduction
Opportunities in the support units
Opportunities in the support units
• Middle and back office operations costs can be significantly reduced without impacting the business –
This is historically been one of the key target areas for cost cutting. To date, the overwhelming bias in many financial
institutions has been to reduce costs, but to keep these activities in-house. We believe that in many cases this bias
will be challenged and that there will be a rapid rise in financial institutions “white labeling” their middle and back
office processes for the benefits of other institutions. Another area of “re-thinking” that is emerging is to better
understand the cost of operational errors and breakdowns. A number of our clients are beginning to understand that
the costs of errors is significant and needs to be an area of focus and consideration. With better operating loss
statistics, organizations are now equipped to address this area. Specific opportunities exist to further outsource basic
technology and operations to either third parties or best in class internal providers, reviewing “off-market” service
provider contracts, automating basic reconciliation and operational processes, reducing operational error rates and
better automating spreadsheet intensive operations. In terms of specific process and technology areas, replacement
or enhancement (often with additional workflow) of antiquated and manual systems in such areas as underwriting,
policy administration, loan origination, custody and servicing with rules engines and more efficient technology and
operational platforms reduce cost and drive efficiency. We are typically finding a minimum of 15-20% cost reduction
opportunities in these areas.
• Risk management and compliance costs can be reduced while increasing effectiveness – This may seem
counterintuitive, but rationalizing the organizational structures, eliminating duplication and applying common sense
generally leads to more effective risk management and compliance functions at a lower cost. Organizational
consolidation and creation of a single risk universe, common risk assessment process, reasonable policy framework
and a shared testing program and reporting infrastructure can significantly reduce not only the most visible risk and
compliance costs, but also the more substantial hidden costs that are buried in the business, operations and
technology functions. In our experience, there are opportunities depending upon the organization to reduce up to
25-30% in this area while improving effectiveness.
• Technology and other initiative-oriented spending can be reduced by better aligning key project efforts with
business strategy – Projects, once started, tend to take on a life of their own. When markets and business
assumptions change, most organizations do not revalidate project/initiative assumptions. We have consistently found
$10s of million cost reduction opportunities by re-validating existing projects and initiatives. This process often
extends beyond technology to other capital spending projects and initiatives.
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Intelligent Cost Reduction
Opportunities in the support units (continued)
• Due to historical underinvestment, finance functions are often prime targets for process improvement and
longer term cost reduction – Some short-term cost reductions are often possible by simply rationalizing the
organization, but longer term improvement usually lies in greater standardization (e.g., technology, charts of
accounts, management information). This standardization and the investment required to realize the benefits will
likely be critical to sustaining a cost effective platform in the future as the finance function is placed under the
increasing strain of ever more complex accounting standards and, for US institutions, the looming shadow of IFRS.
• Sourcing remains an opportunity for savings – A number of organizations have too many captives and/or
external sourcing providers. This is often a result of decentralization of decision-making to individual business units
and regions. Consolidation of captives and creation true centers of excellence is potentially a source of significant
cost savings and organizational benefit. As noted earlier, further sourcing of business processes and technology
work to those captives and third parties represents opportunities for further cost rationalization. Again, we typically
find cost reduction opportunities in the 10-20% range depending upon the organization.
• A number of other opportunities exist – We continue to see significant opportunities in such areas as legal costs,
corporate real estate, travel and entertainment costs, food service and other areas that, for a number of institutions,
can yield 20+% cost savings without adversely impacting the business.
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Intelligent Cost Reduction
Some lessons learned
Some lessons learned
Many recent and current programs are lacking critical elements to drive sustained improvement in the cost structure.
Examples of recent/current programs
Our Advice
Financial institution #1
Financial institution #2
Financial institution #3
• Clear goals & metrics set at executive level &
communicated, reconsideration of business
platform and structure
• One-time overall goals communicated to
investors, no goals by business line beyond
outsourcing targets, no fundamental
business re-think
• Multi-year overall goal/communicated
to investors, targets set by business
under “one-firm” initiative, some limited
business re-think
• Continuous program with targets/goals
by business/support functions,
communicated regularly & as part
of transactions, market events
• Inclusion of total costs in consideration
• Back office only, reluctance to tackle
front/middle office costs
• Back/middle office, some business
combinations/reductions considered
• Front to back office costs included although
mostly focused on back office
• Senior executive sponsor on
management team, cost reduction team
working with business
• Senior executive sponsor, limited central team,
most power in business units
• Cost cutting “czar” with central team, veto
over business with regard back and middle
office decisions
• Senior executive sponsor with buy-in from
business heads. Middle to back in COO team.
Front office CEO-led.
• Continuous & comprehensive reporting
• Sporadic beyond one or two specific targets
• One-firm reporting significant, more
limited post-program
• Integrated into budgeting/reporting,
transaction-specific
• Front office – “everything on the table”
• Not included
• Some focus on combining businesses
across geographies
• Constant review & rationalization regardless
of markets
• Middle/back office – service providers,
“outsourcing”, automation
• Focus on off-shoring, cutting consultants,
projects, vendor concessions. No
rationalization of software/hardware platforms
• Same as #1 with creation of shared services in
technology infrastructure areas.
• Same as #1 plus rationalization of many back
office services and technology platforms into
common utilities w/in company.
• Risk management – organization & efficiency,
not just heads
• Some headcount reduction, limited re-think or
rationalization of functions , approaches, etc.
• Limited headcount reduction, no re-think or
rationalizations of functions, approaches,
testing, etc
• Limited headcount reduction, some
re-think/rationalization of functions,
approaches, testing
• Finance & admin – efficient factory, common
technology/MI
• Creating common financial systems platform &
MI, some technology & people consolidation in
all areas
• Created common systems and processes,
some people consolidation in all areas
• Created common factories, technology, etc,
consolidated central groups with business
unit support.
• Align key projects to business &
investment strategy
• Poor alignment of key projects. Limited to
no investment funds for medium to long
term improvements
• Good alignment of key projects in certain
businesses & support units. Some investment
funds to drive longer term platform savings
• Excellent alignment of key projects.
Investment funds available if cost/benefit
analysis justifies expenses.
• Operational errors – quantify & reduce
• Not included
• Not included
• Included indirectly in business cases
• Same as #1
• Unknown
Overall
Areas of Focus
• Capital & funding – consider real cost of capital • Pricing capital to desks in a way that more
in cost allocation to businesses
resembles cost of funds, type of transaction,
operational costs
Bottom Line Results
• Short-to-medium term success
• Some limited targets met, negative impact on
analysts & shareholders
• Public targets met, some fundamental
organizational changes
• Known in the market as strong total cost
manager, rewarded by shareholders
• Sustainable platform
• Significant opportunities for improvement
• Some progress, opportunities for improvement
• Strong foundation, continuous improvement
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Intelligent Cost Reduction
PwC qualifications to help
PwC qualifications to help
• Overall program assessment and support – Leverage of our global Financial Services team to assess of the
program end-to-end and support in terms of program management and execution.
• Specific experience in the front office – Business financial analysis, divestiture and acquisition assistance:
- Analysis of global equity derivatives desks of a major investment bank to determine true profitability and whether
to keep/close the business as well as to increase/decrease investment. Resulted in several desk closures and
re-calibration of investment in the business
- Due diligence and integration assistance for the acquisition of two wealth management businesses for a major
financial institution, resulting in 50+% reduction in costs in key support areas in the acquired businesses
- Analysis of the banking and capital markets business of a global financial institution that resulted in
identification $10s of million of potential savings as a result of proposed changes in legal entity, technology and
support functions.
• Deep experience in middle & back office operations – Track record in assisting our clients in balancing the need
to reduce cost while continuing to operate the business:
- For an introducing broker, developed and executed upon a plan to replace current corresponding clearing
provider, reducing cost by 80% and improving service levels and product coverage
- For a major global financial institution, introduced automation and reconciliation tools into several operational
processes, significantly reducing manual intervention and headcount in the area
- For a major global financial institution, re-mediated and re-engineered key elements of a poor customer onboarding to reduce operational errors and nearly eliminate a multi-billion dollar IRS fine
- For a top 10 hedge fund, implemented a margin calculation engine to compare prime broker margin calls versus
internal calculations, resulting in an average of several hundred million dollars of additional available collateral per
day for the fund
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Intelligent Cost Reduction
PwC qualifications to help (continued)
• Risk & compliance cost reduction – Ability and reputation to advise and execute on cost reduction efforts in this
sensitive area with regulators, boards and other stakeholders:
- Organizational consolidation and rationalization of existing risk and compliance functions of major financial
institution, providing a roadmap to reducing overlap and compliance/risk department costs by 25-30% while
significantly reducing costs in the business units
- Consolidation and automation of risk reporting for various business units and geographies for a major global
financial institution, creating a single automated reporting process and framework, reducing efforts in this area by
up to 50% and improving senior executive decision-making and use of time
- Assisting a major global financial institution in the consolidation of multiple risk control self-assessment (RCSA)
processes and technology into a single, efficient platform, thereby significantly reducing cost and business efforts
to comply with the RCSA program
• Ability to help better align initiatives & project spend with project strategy – A structured methodology and
process combined independent view:
- International expansion strategy review led to 1) consolidation of common spend across business units and 2)
reduction of spending as a result of greater country focus, saving the organization $40 – 60m in planned spend.
- Review of technology initiatives vs. business strategy led to the identification of $40+m of cost reduction
• Creating & operating an efficient finance function – Combining knowledge and experience in accounting and tax
with the necessary process and technology expertise to deliver an end-to-end solution:
- Providing significant assistance to a major money center bank in the execution of its global finance transformation
program, creating a common technology basis, tools, data structures and management information needed for a
sustainable cost effective finance platform
- Executing a project to re-engineer fund accounting and reporting processes and technology for a major
private equity firm, creating the ability to reduce costs and better scale the finance function to efficiently support
future growth.
- Assisted a major global insurer in the analysis and execution of its IFRS conversion efforts, helping create an
efficient and sustainable accounting and financial reporting platform
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Intelligent Cost Reduction
PwC qualifications to help (continued)
• Independent, global view of best sourcing options – Ability to assess the best options for the client without bias
towards a solution provided by PwC:
- Assisted major money center bank in analysis to determine best in-sourced provider(s) of anti-money laundering
services and assisted them in the movement to 4 global hubs, creating significant cost synergies and more
consistent, higher quality alert investigation & reporting processes
- Analyzed and delivered cost savings of 10-20% for a number of financial institutions in the market data area
through a combination of waste elimination, cost effective product substitution and vendor negotiation.
- Advised a major hedge fund in its effort to establish a cost-effective sourcing relationship in India, setting the
stage for a 20%+ reduction in technology costs
- Assisted a major insurer in the ITO of all of their non-core applications
• Other areas – Diverse skill sets that can be leveraged to attack costs in a number of other areas:
- Specialists from our hospitality and leisure team have assisted a number of financial and non-financial institutions
with cost reduction efforts in the food service and travel areas.
- Our real estate professional have assisted a number of clients with cost reduction efforts in this area
- PwC procurement teams are constantly working with our financial services and non-financial service clients to
implement best-in-class processes and technology to reduce costs
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Intelligent Cost Reduction
PwC qualifications to help (continued)
We’ve been most successful when we focus on cost reduction and cost management and control processes in parallel
to set the stage for, and perhaps self fund, more transformational activities.
Cost Reduction
• Operations spend savings from cost driver and activity
level definition and challenge
• Discretionary spend savings from non-critical, contingency
or unsupported balances challenge
• Headcount reduction savings from functional
benchmarking analysis
• Contract leakage and other invoice control savings from
forensic contract analysis
Transformation
• Organizational, capability, and
behavioral changes
• Performance measurement and
management process improvements
• Waste elimination
Cost Management and Control
• Strong budget ownership, discipline, and accountability from
the budget challenge
• Outline of critical cost management and control deficiencies
through a gap analysis
Value Delivered
• On average, we find $5-20 of cost savings for every $1
spent in fees
• Forensic contract reviews uncover an average of 5 to
10% in cost reduction opportunities for selected contracts
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27
• Typical cost reductions range from 20% to 30% of
the in-scope cost base resulting from productivity
improvements, cycle time and lead time
reductions, working capital reductions, etc.
Intelligent Cost Reduction
Appendix 1 – Methodology summary
Appendix 1 – Methodology summary
PwC’s four step process to sustainable cost reduction
I. Spend Analysis, Cost Reduction and Cost
Management Roadmap
1. Spend analysis to define operational
cost drivers & baseline activity levels
as well as discretionary spend
2. Headcount benchmarking analysis
3. Cost management and control
framework gap analysis
4. Forensic contracts review to identify
potential leakage opportunities
5. Build go-forward sustainable cost
management roadmap
II. Design Initiatives and Develop the
Business Improvement Plan (BIP)
1. Stabilization
• Execute the “immediate actions” to
stabilize the key cost controls and
mitigate exposure
2. Create the Business Improvement Plan
• Using the roadmap from the
Assessment phase, build the
design of each prioritized initiatives
• Generate an overall Business
Improvement Plan incorporating
all initiatives
• Refine the cost and
benefit analyses
IV. Implement Company-Wide Cost Strategy
and Sustain Benefits
1. Rollout company-wide cost strategy
2. Continuous Improvement
3. Corporate Performance
Management (CPM)
4. Establish incentive mechanisms to
drive sustainable improvement
III. Construct the Business Improvement Plan
(BIP) Pilots
1. Construct and execute the Business
Improvement Plan pilots
2. Incorporate learning into the plan
3. Finalize the company-wide rollout plan
PricewaterhouseCoopers
29
Intelligent Cost Reduction
Appendix 1 – Methodology summary
What a typical assessment looks like
Work stream Activities
Planning Stage
Fieldwork Stage
•
Information gathering
and preliminary
analytical review
Communicate process
to management
Confirm team
and approach
•
•
•
Kick-off call with
sponsors
Submission and
receipt of information
request
Scheduling
of interviews
Selection of contracts
•
•
•
•
Project sponsors
Leadership team
Financial controller
Procurement
•
•
•
•
•
Key Milestones
•
•
•
Who is Engaged
PricewaterhouseCoopers
•
•
•
Reporting Stage
High level review with
•
leadership team
Develop understanding
of cost base and
•
historical cost
reduction
•
•
High level review
with site leadership
and finance
Kick-off meetings
Completion of
preliminary data
analysis and view
of opportunities
•
Project sponsors
Leadership team
Procurement and
invoice control team
•
30
•
•
•
•
Detailed spend
•
analysis, challenge
and rebudget
Headcount
•
benchmarking
Contracts review
•
Cost management and
control gap analysis
Confirmation of
cost controls
Completion of
gap analysis
Quantification
of savings
Savings captured
in revised budgets
•
Operational and
support function cost
center and budget
owners
Financial controller
and analysts
•
•
•
•
•
•
•
•
Compile revised
budget proformas and
rollup results
Conduct challenge
session
Develop cost
management roadmap
Confirmation of
findings with
budget owners
Development of
revised budgets
Management
challenge session
Final report
Project sponsors
Leadership team
Financial controller
Procurement
Operational and
support function
cost center and
budget owners
Intelligent Cost Reduction
Appendix 1 – Methodology summary
How we look at it (1 of 2)
The cost reduction component focuses on quickly delivering tangible saving opportunities that are owned
by management.
Process
Activities
Outputs
1. Set environment for cost control
• Confirm the process
• Preliminary data analysis
1. Cost savings opportunities
• Operating spend reduction
• Discretionary spend elimination
• Contingency reduction and control
• Headcount reductions
1
Set environment
for cost control
2
Spend analysis and
challenge session
3
Functional headcount
benchmarking
3. Functional headcount benchmarking
• GBP and Saratoga
4
Contracts review
4. Contracts review
• Re-bid challenge and prioritization
• Forensic review
5
Rebuild financial plans
6
Present
results
7
Eliminate waste
8
Track results
PricewaterhouseCoopers
2. Spend analysis & challenge
• Operating and discretionary
5. Rebuild financial plans embedding
identified cost savings.
6. Present results to leadership for approval
7. Eliminate waste by taking action to
achieve cost savings
8. Track results of actual cost against
financial plan to verify results delivery
31
2. Definition of operational cost drivers and
baseline activity levels with linkage to
financial plans
3. Prioritization matrix and approach for
contracts re-bid process
4. Improved third party spend control
5. Management challenge session to
approve cost savings
6. Revised current year financial plans
incorporating cost savings
Intelligent Cost Reduction
Appendix 1 – Methodology summary
How we look at it (2 of 2)
The cost management and control component focuses on improving weaknesses in the way costs are managed to
drive continuous improvement and sustainability.
Process
1
Review historical cost
reduction programs
2
Understand cost
ownership & structure
3
Cost management
framework interviews
4
Third party spend management
5
Finalize gap analysis
6
7
Present
results
PricewaterhouseCoopers
Finalize
Recommendations
Roadmap
Activities
Outputs
1. Review historical cost reduction
programs, sustainability, and results
2. Understand cost ownership & structure
3. Cost management framework interviews
• Financial management & controls
• Business process activities
• Contracts, suppliers, and
supply chain
• Performance management
1. Summary cost management themes and
findings across the business
2. Detailed cost management framework
gap analysis to shine a light on
significant opportunities
3. Critical cost control stabilization actions
4. Recommendations Roadmap and
prioritized opportunities
• Immediate and controllable
• Supported
• Transformational
4. Third party spend management
• Contractor management and invoice
controls
5. Finalize gap analysis
• Assess policy vs. actual
working practice
5. Culture of cost awareness
and ownership
6. Tighter span of control for
spend approval
6. Present results to leadership for approval
7. Finalize Recommendations Roadmap as
outline for Business Improvement Plan
32
Intelligent Cost Reduction
Appendix 1 – Methodology summary
Assessment – Planning stage activities
Planning stage activities are geared towards preparing both the PwC and client teams for the upcoming review to
ensure an efficient and effective project kick-off.
Kick-off conference call
•
We propose a call with the business unit management team to introduce each other’s teams, understand the number
of budget owners, and to outline the process and discuss the fieldwork and meetings required.
Information request and preliminary analytical review
•
•
•
•
•
•
Business unit overview, including history of ownership, dates, operations overview, etc.
High level business unit financials (for the last 3 years) and a copy of recent financial statements.
Current management structure and responsibilities, department structure, and headcount data.
Current year budget by area, including a summary of the quantity and size of cost centers, and cost center owners.
List of contracts, including type of vendor, average annual spend, and last renegotiation date.
Details of the authorization and approval limits in operation within the business unit.
Communicate process to management
•
Since PwC will be meeting with a variety of managers within the business unit, we will provide a short document describing the
process in advance of the meeting. We will expect to have a working session with key managers to explain and discuss the process
in week 1.
Confirm team and approach
•
We recommend that at least one member from both the business unit finance and operations organizations are nominated to work
with PwC to facilitate reviews and provide additional support on a part-time basis, where necessary.
PricewaterhouseCoopers
33
Intelligent Cost Reduction
Appendix 1 – Methodology summary
Assessment – Fieldwork stage activities (cost reduction component)
Fieldwork activities for the cost reduction work stream will help the team to understand the nature and structure of the
business unit cost base and then to identify cost savings opportunities and embed the savings into a revised current
year budget.
Detailed spend analysis, challenge sessions, and rebudget
•
•
•
•
Work with finance to establish a cost baseline, identify budget owners, and discuss issues or gaps identified during the review, as well
as cost controls and the role of finance in controlling cost.
Conduct multiple interviews with operations and support function budget owners to understand their cost base, perform a historical
spend analysis, and use the underlying cost drivers and activity plans to identify cost saving opportunities and develop a should
cost budget.
Prepare budget owners for the management challenge session by conducting a series of internal reviews with budget owners to
challenge historical spend, budget cost drivers, and assumptions.
Budget owners complete a revised budget pro forma, detailing assumptions, risks, and rejected savings opportunities.
Headcount benchmarking
•
Using PwC Global Best Practices (over 2600 companies) and Saratoga HR Services (~400 benchmarks from 1200 companies
globally), complete functional headcount benchmarking to shine a light on potential areas of inefficiency and headcount reduction.
Contracts review
•
•
Forensic review of selected contracts and invoices for leakage and other contract usage and invoice control opportunities.
Conduct a wholesale review of existing contracts, including assessment of value for money, renegotiation strategies, and the
involvement of procurement services at the corporate level.
PricewaterhouseCoopers
34
Intelligent Cost Reduction
Appendix 1 – Methodology summary
Assessment – Fieldwork stage activities (cost management and control component)
Fieldwork activities for the cost management and control work stream help the team to assess the business unit cost
culture, identify cost management and control deficiencies, and develop overall cost management and control
recommendations to sustain identified cost reduction opportunities.
High-level review with leadership team
•
•
•
An introduction from business unit management to provide a top-down overview of the site, organization structure, background to its
cost heritage, performance, and management objectives.
Facilitate a working session with key managers to explain and discuss the process and agree on how to tailor the approach to the
specific business unit.
Finance function meetings to discuss the current cost base, controls, and the role of finance in controlling cost. This meeting will occur
on the first day of fieldwork, with informal follow-ups throughout the fieldwork.
Review historical cost reduction programs and understand cost ownership and structure
•
•
Understand previous initiatives to control costs, their timing, outcomes, and sustainability.
This will include a broad analysis and understanding of major spend areas, details of group recharges, one-off and exceptional costs,
and how cost accountability is managed from a business unit management perspective.
Cost management and control gap analysis
•
•
We will confirm how financial controls operate and understand how management effectively controls spend.
Review the cost management and control processes to determine inefficiencies, gaps, and opportunities for improvement across our
cost management framework:
- Financial management and control
- Business process activities
- Contracts, suppliers, and supply chain
- Performance management
PricewaterhouseCoopers
35
Intelligent Cost Reduction
Appendix 1 – Methodology summary
Assessment – Reporting stage activities
Reporting stage activities finalize the cost reduction opportunities through completion of a revised budget, performing
a management challenge session, and building a recommendations roadmap for implementing the cost management
controls required to sustain the benefits and achieve additional opportunities.
Compile revised budget pro formas and rollup results
•
Work with finance to compile revised budgets, summarize the results of the spend analysis and detailed interviews, and ensure
consistency of the various budget owner inputs - including resolving any inconsistencies, ownership, and other data issues.
Conduct management challenge session
•
•
•
Set the stage for the challenge session, which includes agreement on session objectives and outcomes, the information required from
the management team, and format of the revised budgets and recommendations to be presented.
Embed consistent budget assumptions and “discretionary spend rules and guidance” into detailed cost center budgets.
Conduct the management challenge session to gain buy-in and commitment
Develop cost management roadmap
•
•
Based on the gap analysis, summarize the stabilization (immediate), supported, and transformational recommendations actions into
a prioritized recommendations roadmap. The Recommendations roadmap considers the financial and operational impact and difficulty
to implement.
The recommendations roadmap forms the foundation for development of a Business Improvement Plan (BIP) upon completion of
assessment work.
PricewaterhouseCoopers
36
Intelligent Cost Reduction
Appendix 1 – Methodology summary
Assessment – Outputs and benefits
The review results in immediate cost reductions and a cost management and control recommendations roadmap to
sustain the identified savings and achieve additional opportunities.
Cost Reduction
Cost Management and Control
•
•
•
•
•
•
Cost savings from spend analysis and revised budget
challenge exercise
- Operating activity level adjustments
- Discretionary spend elimination
- Contingency reduction and control
- Headcount reductions
•
•
Defined operational cost drivers and baseline activity levels
Contracts renegotiated and improved control
Culture of cost awareness and ownership
Tighter span of control for spend approval
•
PricewaterhouseCoopers
37
Common cost management issues and risks across the
business units
Cost savings opportunities that can be achieved through
operational efficiencies and increased rigor in the
management of the cost management framework elements
Financial management and control gap analysis and spider
charts across the four dimensions:
- Financial Management and Control
- Contracts, Contractors, and Supply Chain
- Business Process Execution
- Performance Management
Recommendations roadmap and prioritized opportunities
- Stabilization (immediate and controllable)
- Supported
- Transformational
Intelligent Cost Reduction
Appendix 1 – Methodology summary
Outputs – Cost reduction
Outputs include an improved cost awareness and discipline, definition of cost drivers and baseline operating activity
levels, and revised fiscal plans incorporating the identified cost savings.
Current Year – Financial Plan
Unsupported
Balances
Estimation
Contingency
Review and challenge
“non- activity based” budgeted
cost for necessity
Inefficiencies
Estimation
Contingency
Inefficiencies
activity based
Operating
Budgets
Activity based budget review
to understand cost drivers and
challenge spend
Operating
Budgets
Current Year – Revised Financial Plan
Operational and Discretionary
Spend Analysis and Challenge
Management Challenge Session
and Revised Financial Plans
•
Contracts Prioritization Matrix
Projected Spend/Savings Supplier Profile 2006/07
Weenas
Caltech
Borsig
Alstom Power
Klinger
Dew Construction
Schmidt & Clemens
BJ Services
Durham filtration
Ondeo
Grosvenor Health
Interserve
Man Ghh
(tbc ) temp cabins
Kinder James
Value of Savings (in GBP)
First Priority
>100k
High
Hewden
Honeywell
IKM
John Crane
•
Mitsui Babcock
M. Bridge construction
12,400
1,505
Low
Wellman & Graham
Balfour Kilpatrick
GIS
Arco
Tyco valves
Rotork
Bentley Nevada
Paralloy
Siemens auto.
Capture all
Chaucer
Zellweger
Metso
CIS
DEI
Invensys
LGH
M. Bridge
Luddon
Masterton
PII
Roevin
Spirax
Albion
Dron & Dickson
Ashworth Fraser
Lyreco
ABB
Midland Electrical
Arco
Spend Value
Savings
Low
Spend Value
Savings
12.1%
47,450
2,940
6.2%
BSL
Third Priority BOC
Briggs
<100k
Aramark
Watson Norie
Fourth Priority
•
Raynesway
13,340
790
Actual
$m
Bottom-up Budgets
5.9%
Complexity
PricewaterhouseCoopers
Spend Value
Savings
3,125
112
3.6%
Savings
•
(Cumulative)
2005
2006
2007
2008
%
39.1
(4.1)
(5.8)
(5.9)
15.0%
(0.0)
(0.3)
(0.8)
2.1%
(By cost center)
Longer-term Business Cases
Procurement Savings
39.1
Longer-term Business Cases
(0.1)
(0.4)
1.0%
(4.1)
(6.2)
(7.1)
18.1%
0.0
(0.8)
(2.5)
(6.9)
(9.6)
•
Approved cost
reduction opportunities
Revised financial plans
incorporating the identified
cost savings
(Out of scope variable cost saving)
(4.1)
Key:
Bottom-up forecast
Top-down estimation pending clarification
[Enter Cost centre number]
$'000
Second Priority
Hertel
Johnson Controls
Luddon
Spend Value
Savings
Cost savings from
spend analysis
challenge exercise
- Operating activity
level adjustments
- Discretionary
spend elimination
- Headcount
reductions
- Contingency
reduction
and control
Contracts pricing
challenge and
renegotiation
planning
Contract leakage and
other invoice control
savings from forensic
contract analysis
GL item
Cost group
671460
Scrapped inventory-fg
671510
Repair materials & supplies consumption-
701000
Educational assistance - job related
701010
R&r-no tax impact
704005
Moving expense - deductible
704010
Moving-nondeductible w/tax make-up
704035
Travel & entertainment - 100% deductible
704040
T&E(Only): Meals,entertainment - 50% Ded
704041
On site working business meals - 100% de
704050
Seminar & training fees
704065
Rtrmnt/svc award lun
704070
Emp'ee trade, prof & civic organiz. Mber
704100
Incidental employee expense
710000
Contractor-service agreement
710015
Contractor services-equipment
FY07
actual
FY08
plan
FY08
rebudget
FY09
plan
High
38
Intelligent Cost Reduction
Appendix 1 – Methodology summary
Outputs – Cost management and control
Outputs highlight existing cost management and control gaps and risks to the business. A recommendations roadmap
details the key changes required to monitor spend activities, sustain benefits captured during the cost reduction
exercise, and provide a go-forward cost management strategy.
Framework Gap Analysis
Cost
Management
and Control
BU – Chicago
BU – New York
• Team leader cost initiative improves
cost visibility/accountability but no link
of budgets/forecast to activities
• Monthly reports provide transparency
of budget spend across OCM areas
Business
Process
Execution
Performance
Management
6.2%
•
Summary themes and
business unit
specific findings
Standardization,
simplification, and control
recommendations
Opportunities to improve
financial and
operational performance
• Effective linkages with Commercial
through monthly review meetings
• Effective FC&A/Commercial link
(driven by existing resources)
Contracts,
Contractors
and Supply
Chain
Recommendations Roadmap
• Minimal reliance on regional contracts
• Improving coordination between
construction and production teams
• Field PSCM role is value add but
not fully integrated into site planning
•
• SPU/regional vs. local contract
strategy may not be optimal
• SPM activities ‘self-scoring’ and no
repercussions to vendor
• Frequent off-contract purchasing
• Work order level of detail could improve
• Daily activity planning calls completed
• Effective work order scheduling
(excluding BA activities)
• No reports to show activity status in
conjunction with budget spent
• WMS conversion in October
• Activity scheduling is not consistently
established and reviewed
• DoA clearly understood and applied
• FFA role is key for monitoring site cost
• DoA issue-varying levels of admin
authority for invoice approval
• Performance management strong for
cost/production but weak for activities
and contractors
• Planning and scheduling needs
improvement – level
loading contractors
•
Systems and Transformational Changes
•
Supported
Relative
Financial/
Operational
Impact
Anticipated
Benefits
Realization
Immediate & Controllable Actions
•
Asset specific targeted recommendations
•
Invoice processing
Design ‘field ticket’ support package
Resolve DoA interpretation and
application issues
•
Contractor deployment & management
Identify and dedicate PSCM single
points of contact
PSCM resource technical training
Design ‘field ticket’ quality
control process
•
Integrated budget
Commence job
execution analysis
Formalize and document budgeting
roles and processes
Invoice processing
Engage vendors for invoice
structure and frequency
Initiate ‘stamp’ approval and
coding process and
re-allocate resources
Define exception parameters
•
Contractor deployment &
management
Agree Operations & PSCM
support roles, DoA , etc
Initiate ‘field ticket’ validation
& quality control process
Take ownership of SPM
•
Integrated budget
Define routine activity cost
standards
AFE construction & Rig Schedule
process changes
•
Invoice processing
Tulsa SLA updates and
process changes
Automate approval process
with exception parameters
•
Contractor deployment
& management
Agree and implement SPM
non-performance
repercussions
•
Integrated budget
Commence integrated
budget/forecast processes
using activity plans and
cost standards
Leverage WMS to
monitor monthly spend
against budget
Degree of Difficulty
0 to 6 months
6 to 12 months
12 to 18 months
Cost Management and Control
•
Cost estimation and
budget construction
4
Allocation of
budget construction
3
Cost
management
tools
Detailed gap analysis,
“spider charts” and
commentary for cost
management and
control processes
•
•
A prioritized recommendations framework, considering financial
impact and implementation difficulty
The “roadmap” provides a cost management strategy
and timeline to carry forward into Design, Construct, and
Implement activities
2
1
0
Drivers for
cost increases
Budget owner
organizational structure
PricewaterhouseCoopers
Cost forecasting
and reporting
Budget owner skills, training,
and capacity
39
Intelligent Cost Reduction
Appendix 1 – Methodology summary
After the assessment – Setting the direction for transformation
The business improvement plan (BIP) design and implementation activities will further leverage the appropriate
methodology to create sustainable cost savings and capture additional financial benefits.
Recommendations Roadmap
Systems and Transformational Changes
•
Supported
Relative
Financial/
Operational
Impact
Anticipated
Benefits
Realization
Immediate & Controllable Actions
•
Asset specific targeted recommendations
•
Invoice processing
Design ‘field ticket’ support package
Resolve DoA interpretation and
application issues
•
Contractor deployment & management
Identify and dedicate PSCM single
points of contact
PSCM resource technical training
Design ‘field ticket’ quality
control process
•
Integrated budget
Commence job
execution analysis
Formalize and document budgeting
roles and processes
Invoice processing
Engage vendors for invoice
structure and frequency
Initiate ‘stamp’ approval and
coding process and
re-allocate resources
Define exception parameters
•
Contractor deployment &
management
Agree Operations & PSCM
support roles, DoA , etc
Initiate ‘field ticket’ validation &
quality control process
Take ownership of SPM
•
Integrated budget
Define routine activity cost
standards
AFE construction & Rig Schedule
process changes
•
Invoice processing
Tulsa SLA updates and
process changes
Automate approval process
with exception parameters
•
Contractor deployment
& management
Agree and implement SPM
non-performance
repercussions
•
Integrated budget
Commence integrated
budget/forecast processes
using activity plans and
cost standards
Leverage WMS to
monitor monthly spend
against budget
Finance Effectiveness
• Revenue Growth
- Budgeting and Forecasting
• Risk Management and Compliance
- Close Process Improvement
• Supply Chain
- Corporate Performance Management - Logistics and Network
Optimization
- Finance Transformation
- Sourcing and Procurement
- Management Reporting
- Supply Chain Risk
- Treasury Management
- Supply Chain Strategy
- Warehouse and transportation
Mergers, Acquisitions, Divestitures,
Mgmt
and Spin-offs
- Tax Effective Supply Chain
People and Change
- Cultural Transformation and
Communications
• Tax Function Effectiveness
- HR Effectiveness
• Technology
- Talent Management
- Business Intelligence/Data
Warehousing
- Workforce optimization
- Enterprise Applications
- Enterprise Data Management
Reorganization
- IT Strategy
- Back-office consolidation
•
Degree of Difficulty
0 to 6 months
•
6 to 12 months
12 to 18 months
•
Business Improvement Plan
•
-
PricewaterhouseCoopers
40
Facility rationalization
Organizational Design
Outsourcing, Off-shoring, and
Shared Services
Intelligent Cost Reduction
Appendix 1 – Methodology summary
Toolkit
Our toolkit is centered around a set of basic principles, with tools are based on actual client project experience, which
are constantly updated to incorporate new approaches and lessons learned.
Spend analysis pro forma
Contract prioritization matrix
Management challenge
session
Projected Spend/Savings Supplier Profile 2006/07
Inefficiencies
Review and challenge
“non- activity based” budgeted
cost for necessity
Estimation
Contingency
activity based
Operating
Budgets
Inefficiencies
Activity based budget review
to understand cost drivers and
challenge spend
Operating
Budgets
Value of Savings (in GBP)
Contingency
Current Year – Revised Financial Plan
Estimation
Current Year – Financial Plan
Weenas
Klinger
Caltech
Dew Construction
Borsig
Schmidt & Clemens
Durham filtration
Ondeo
Grosvenor Health
Interserve
Kinder James
First Priority
Unsupported
Balances
>100k
High
Actual
Hewden
$m
Honeywell
IKM
Bottom-up Budgets
Johnson Controls
Luddon
Mitsui Babcock
12,400
1,505
2008
%
(5.8)
(5.9)
15.0%
(0.0)
(0.3)
(0.8)
(By cost center)
Zellweger
Metso
Spirax
Albion
Dron & Dickson
Ashworth Fraser
ABB
Procurement Savings
2.1%
39.1
Fourth Priority
Allocation
of budget
construction
Invensys
LGH
M. Bridge
Luddon
Masterton
PII
Roevin
18.1%
0.0
(0.8)
(2.5)
(6.9)
(9.6)
(4.1)
Key:
Bottom-up forecast
Raynesway
Top-down estimation pending clarification
13,340
790
5.9%
Spend Value
Savings
Complexity
3,125
112
3.6%
High
•
Cost Management and Control
- Kick-off presentation
- Assessment framework and maturity matrix
- Gap analysis and spider charts
- Recommendations roadmap and prioritization framework
•
Transformation
- Business improvement plan
- Lean Principles Playbook (e.g., value stream mapping and waste
elimination)
- Change management methodology and tools
- Corporate Performance Management
Recommendations
roadmap
3
2
Systems and Transformational Changes
Supported
Cost
management
tools
Relative
Financial/
Operational
Impact
0
Budget owner
organizational
structure
1.0%
(7.1)
(Out of scope variable cost saving)
CIS
DEI
1
Drivers
for cost
increases
(0.4)
(6.2)
Longer-term Business Cases
Cost estimation and
budget construction
4
Cost Management & Control
(0.1)
(4.1)
6.2%
Aramark
Watson Norie
Third Priority
Low
47,450
2,940
Gap analysis
spider charts
Contracts, Contractors
& Supply Chain
2007
(4.1)
Longer-term Business Cases
BSL
GIS
Arco
BOC
Tyco valves
Rotork
Briggs
Bentley Nevada
Capture all
Paralloy
Siemens auto. Chaucer
<100k
Spend Value
Savings
12.1%
Balfour Kilpatrick
Low
Business
Process Execution
(Cumulative)
2006
39.1
M. Bridge construction
Spend Value
Savings
Wellman & Graham
Midland Electrical
Arco
Spend Value
Savings
Performance
Performance
Management
Management
Savings
2005
John Crane
Lyreco
Cost management
framework
Alstom Power
BJ Services
Second Priority
Hertel
Man Ghh
(tbc ) temp cabins
Toolkit Areas
• Cost Reduction
- Kick-off presentation
- Meeting approach, schedule, and agendas
- Spend analysis and rebudget pro forma
- Contracts review pro forma
- Management challenge session presentations
Cost forecasting
and reporting
Immediate & Controllable Actions
• Asset specific targeted
recommendations
• Invoice processing
- Design ‘field ticket’ support
package
- Resolve DoA interpretation
and application issues
• Contractor deployment &
management
- Identify and dedicate PSCM
single points of contact
- PSCM resource technical
training
- Design ‘field ticket’ quality
control process
• Integrated budget
- Commence job
execution analysis
- Formalize and document
budgeting roles and processes
Budget owner skills,
training, and capacity
Anticipated
Benefits
Realization
• Invoice processing
- Engage vendors for invoice
structure and frequency
- Initiate ‘stamp’ approval and
coding process and
re-allocate resources
- Define exception
parameters
• Contractor deployment &
management
- Agree Operations & PSCM
support roles, DoA , etc
- Initiate ‘field ticket’
validation & quality control
process
- Take ownership of SPM
• Integrated budget
- Define routine activity cost
standards
- AFE construction & Rig
Schedule process changes
• Invoice processing
- Tulsa SLA updates and
process changes
- Automate approval
process with exception
parameters
• Contractor deployment
& management
- Agree and implement
SPM
non-performance
repercussions
• Integrated budget
- Commence integrated
budget/forecast
processes using activity
plans and
cost standards
- Leverage WMS to
monitor monthly spend
against budget
Degree of Difficulty
0 to 6 months
6 to 12 months
12 to 18 months
Principles
• Simple tools to increase efficiency based on what has worked in the past,
tailored to your needs
• Minimize time required to use the tools – don’t over-engineer the process
• Cascading levels of detail as required by sponsors, team members,
and stakeholders
• Rapid escalation of issues to facilitate decision-making
PricewaterhouseCoopers
41
Intelligent Cost Reduction
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