In this next post examining some pragmatic insights from ICG Commerce (and others) in the legal and finance sourcing and category management areas, we'll turn our attention to a case study to bring the savings potential of services procurement alive. In looking at areas that fall under the purview of finance, no single category of spend is more sacred than external audit, which we previously mentioned has an existing supplier tenure of over twenty-five years (that's right, by the averages, the last time your company switched its auditor was towards the tail-end of Reagan's first term of President of the United States). Clearly, if a company is to successfully pursue the sourcing of audit services, it's critical to gain broad buy-in and support from the CFO and controller, not to mention other key executives.
But the results that are possible speak for themselves. One company, in a highly competitive and consolidating industry (with significant M&A activity across the globe), had used the same audit firm for 10 years, never having signed a recent formal agreement covering the entire relationship. The existing relationship with the incumbent firm included a combination of Full, Specific, Limited and Statutory scope. The partnerships ran deep with the incumbent, going past the CFO level to board of director relationships between the company and the firm. In this environment, it was critical to think through the internal approach and hand-holding as much as any external negotiation or vendor management strategy.
Starting first with the corporate controller and CIO, the sourcing team and its partner were able to get two early supporters on board. They then designed a precise communication strategy to engage the CFO while creating a line of communication to the CEO and board of directors audit committee leadership as well. With these relationships and discussions established, the team then conducted an in-depth benchmarking analysis, looking at past hours, rates and overall audit scope.
They then were able to take a data-driven approach in presenting a cost reduction case to the incumbent supplier focused on driving efficiency, AS5 (legal requirements) and Public Company Accounting Oversight Board (PCAOB) guidance. In essence, the sourcing approach in the end looked like the type of target costing and scope-focusing exercise you might see in more advanced sourcing approaches in manufacturing.
The results of the program achieved are likely to surprise even the most curmudgeonly and change-resistant CFO. In addition to achieving breakthrough transparency into target and actual scope, fees and hours, the company was able to achieve a year-one cost savings of 19%. Specifically, they were able to reduce domestic audit hours by 24%, the domestic hourly rate by $45/hour (17%) and lower international audit hours by 2,886 (20%).
Achieving these results involved far more than taking the category "to market" as some sourcing folks are fond of saying. Rather, the real secret to achieving savings involved a combination of internal selling and relationship building, category knowledge and structure (in this case brought both internally and via a third-party partner), targeted price benchmarking on a granular level and an implied target costing (or else ...) approach with the supplier.
- Jason Busch