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Action Matters

The Case for Clarity and Accountability

We spend how much on consulting fees? That was the stunned reaction of the CFO of a mid-sized national bank upon learning the company was spending nearly $90 million a year on professional services. In reality, the number was roughly half of that, but inconsistent and siloed information, multiple accounting systems and the lack of basic ground rules for what classified as a professional service – and who was responsible for the fees – created a catch-all category, making it nearly impossible for the company to get its arms around the data.

As expense management continues to be a top priority for companies in an uncertain economy, corporate leaders are likely to find themselves in similar situations – trying to execute a mandate to cut spending, without having an accurate line of sight into exactly how much the company is spending, who is spending it, on what and with whom.

In the absence of a clear framework and guidelines, vague general ledger categories, such as professional services, can frequently become dumping grounds for miscellaneous expenses. Worse, they can become convenient hiding places for services and projects that have not been approved, since there is rarely one person responsible for overseeing the entire category. This not only hinders a company’s ability to control costs and maintain transparency and accountability, it makes it nearly impossible to manage costs, for example, leveraging spending across multiple departments for similar products and resources. By undertaking a general ledger rationalization, companies can create the architecture, processes, procedures and controls that will ultimately produce complete and accurate spend analysis. And while professional services was the bank’s particular area of focus, the process is now being applied to multiple expense categories.

The process begins by identifying what defines a professional service and other key parent categories. What should the professional services category include? IT services? Research services? Contract labor? Business consulting? Food services? Mailroom? Tax / audit?

Once parent levels – e.g., professional services, outsourcing, legal services, contract services, standard goods and services – are identified, specific categories within those parent levels should be determined based on historical data and planned areas of spending. A professional services parent level, for example, might include categories such as business consulting, IT services, tax / audit or data services. In some cases it makes sense to take the process one step further and divide those categories into subcategories, such as corporate strategy or risk advisory, which would fall under business consulting. Then a decision tree can be developed to aid in coding projects to parent levels.

Assessing the Facts

The next step is to conduct a formal spending analysis to determine true professional services spending for the past year. There are two primary methods: a general ledger-based option and a supplier-based option. While the supplier-based method is more time consuming, since it requires a review of supplier activity at the invoice level regardless of the general ledger structure or coding, it produces a much cleaner and more accurate picture. For example, the general ledger may show a payment to an office supply company. However, a review of the actual invoice indicates that party supplies, rather than office supplies, were actually purchased from that company. The end result of the intensive data scrub will produce an accurate list of all suppliers and transactions that should truly be classified as professional services.

Once the data is clean, professional services spending can then be redefined across categories. So, for example, a company may spend 60 percent on business consulting, 10 percent on data services, 18 percent on IT services and 12 percent on tax / audit services. From there, invoice volumes can be assessed with an eye toward reducing processing costs by consolidating into larger, less frequent invoices.

Driving an Effective “Spend Management” Culture

Once systems are in place to control costs, strategies can then be implemented to manage spending, with the goal of increasing transparency and accuracy at the parent spend level and ensuring an effective spend management culture. For example, the bank was able to project a 7 to 10 percent decrease in business consulting and IT services costs by establishing volume pricing agreements, developing rate cards, rationalizing subcategories and improving spend visibility, among other actions.

A new spend management process can typically be executed over a 90- to 120-day period. The first step is to develop the guidelines of an operating model and assign internal talent to be responsible for each supplier. Those suppliers can then be segmented into four tiers: strategic, critical, leverage and non-critical. Scorecards can be used to measure and analyze the performance of strategic and critical suppliers with an eye toward continuous monitoring to ensure spending is being optimized. To be successful, the process requires all components of the framework to be highly integrated and aligned to maximize performance and achieve maximum benefit.

In Conclusion

Studies have shown, improved information and analysis is key to sound decision making and countering market uncertainty in 2011 and beyond. Clearly, accurate information is an essential component to producing improved spend and supply planning, budgeting and forecasting, demand visibility, supplier risk mitigation, supplier performance, and price hedging. As the experience of the forward-looking bank demonstrates, by undertaking a general ledger rationalization, companies can put in place architectures, processes and procedures that produce thorough and accurate spend analysis that drive rapid and decisive action, and bottom-line results.