Deutsche Telekom and France Telecom — Can Procurement Mergers Work? (Part 3)

Even though Spend Matters is not privy to the details that will make up the planned €1.3 billion in annual savings synergy from Deutsche Telekom and France Telecom's procurement joint venture (see previous posts here and here), it's likely that if you do the 80/20 rule on what the companies came up with in the planning phases for the venture, that the great majority of the savings is predicated on strategic sourcing activities. It's our best guess that approximately 60% of savings based on the forecast is likely to come from better negotiated contracts alone. But there are likely other areas that will generate savings as well, given the size of the shared services organization that the two organizations are forming.

These include supplier development programs, which are likely not only to focus on supplier performance management, but also supplier development and collaborative cost take-out to drive year over year savings. It's often challenging for resource-strapped sourcing groups to get the type of resource budget they need to fully put these programs into place. But by forming such a venture and leveraging resources with a common supply base (where possible), the economies of scale on the supplier development side may be significant. Our best guess is that the venture is planning that 10% of its overall savings will come from this area over a 4-5 year period (with the savings weighted towards the out-years of the program).

The next area of savings that we believe the two organizations planned as a result of the joint venture is savings compliance and tracking. This includes not only supplier compliance (e.g. invoice auditing) but also internal compliance from driving business users to buy off specific contracts for both indirect and direct spend. It's likely that a front-end transactional system for indirect procurement will be involved (e.g., Ariba or SAP), plus a back-end direct materials (SAP), requisitioning and invoicing/payment environment. As part of this effort, it's likely that both a spend analysis application -- or potentially applications -- as well as a contract management application will also be included. From program compliance alone to negotiated agreements (i.e., not savings from lower contract costs due to new sourcing efforts, but supplier/internal compliance compared to past results), it's likely the venture is budgeting for savings in the 10-20% range.

What other areas are likely to drive savings in a shared services environment such as the one the two European telecom giants propose? Sourcing/contract cycle time reduction from shared contract management resources (including legal) that streamlines processes and reduces that time from RFX to award decisions to implemented savings is certainly one. Early payment discount programs funded either by treasury, bank or non-bank third party financing partners are likely another area that may generate savings as well.

Still, at the end of the joint venture day, for this procurement merger to be successful, the collaborative sourcing effort between the two parties will need to come together.

Jason Busch

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