Driving efficiency through strategic procurement

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January 2010 The Delta Perspective The successful implementation of strategic procurement can help organizations improve their EBIT margins by 4-8 p.p. Driving efficiency through strategic procurement Authors Javier Alvarez – Partner Lorenzo Campos – Associate Partner Inken Lasar – Senior Associate Delta Partners Intelligence Unit Introduction The global financial crisis has reshaped strategies to increase overall operational efficiency among telecom operators especially in the Middle East and Africa. Operators are required to increasingly focus on an improved bottom-line to ensure funding for future expansion. Such conditions make procurement one of the vital efficiency drivers for operators. Strategic procurement is more than just squeezing suppliers, but it is instead an overall change in the purchase approach. This enables it to make the transition from an ‘ad- hoc’ support function to a long-term strategic approach. To maximise this shift, it is essential that the approach is adequately supported by analytics and a facilitating environment within the organization. This paper illustrates Delta Partners’ perspective on how the procurement KEY HIGHLIGHTS Two thirds of all costs of a telecom operator are within the area of influence of a procurement function Strategic procurement can help organizations improve their EBIT margins by 4-8 p.p. The successful implementation of strategic procurement depends on three pillars – defining a sourcing model, organizational model and overall governance functions, traditionally seen as a mere administrative and control unit, can be transformed into a ‘change-agent’ for a telecom operator. This can be possible if the organization is willing to transform its existing business models towards a more integrated one for value creation.

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Delta Partners Perspective Driving efficiency through strategic procurement January 2010 The successful implementation of strategic procurement can help organizations improve their EBIT margins by 4-8 p.p.

Transcript of Driving efficiency through strategic procurement

Page 1: Driving efficiency through strategic procurement

January 2010

The Delta Perspective

The successful

implementation of strategic

procurement can help

organizations improve their

EBIT margins by 4-8 p.p.

Driving efficiency through strategic procurement

Authors Javier Alvarez – PartnerLorenzo Campos – Associate Partner Inken Lasar – Senior AssociateDelta Partners Intelligence Unit

Introduction

The global financial crisis has reshaped

strategies to increase overall operational

efficiency among telecom operators

especially in the Middle East and Africa.

Operators are required to increasingly

focus on an improved bottom-line to

ensure funding for future expansion.

Such conditions make procurement

one of the vital efficiency drivers for

operators. Strategic procurement is

more than just squeezing suppliers,

but it is instead an overall change in

the purchase approach. This enables it

to make the transition from an ‘ad-

hoc’ support function to a long-term

strategic approach. To maximise this

shift, it is essential that the approach is

adequately supported by analytics and

a facilitating environment within the

organization.

This paper illustrates Delta Partners’

perspective on how the procurement

Key hIghLIghts

Two thirds of all costs of a telecom •operator are within the area of influence of a procurement function

Strategic procurement can help •organizations improve their EBIT margins by 4-8 p.p.

The successful implementation of •strategic procurement depends on three pillars – defining a sourcing model, organizational model and overall governance

functions, traditionally seen as a mere

administrative and control unit, can be

transformed into a ‘change-agent’ for a

telecom operator. This can be possible if

the organization is willing to transform

its existing business models towards a

more integrated one for value creation.

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This involves adopting a long-term

approach, the buy-in from the rest

of the organization as well as the

presence of analytical capabilities and

skilled negotiators in the procurement

department. Therefore, the key

question that needs to be answered is

what is the correct sourcing strategy

and how does this translate into

efficiency improvement? There is no

straightforward formula to the correct

sourcing strategy – especially since what

is applied successfully in one market

or operation may not work in another.

The most important aspect in strategic

procurement is to carefully account

for potential sourcing approaches

considering the operator’s corporate

and commercial strategy, the strategic

importance and financial relevance of

the item to be sourced and the supplier

market conditions.

Despite the financial downturn, regional

players have witnessed an overall

subscriber growth and remain on the

lookout for expansion opportunities.

However, operators would have to

adapt their operating models to the

more demanding environment of limited

capital, high competition and need

towards synergy realization.

Limited access to capital

Access to capital for expansion plans has

become more difficult and expensive

due to higher risk-aversion from the

banking industry. Only companies that

can demonstrate extraordinary market

What is Strategic Procurement? Strategic procurement consists of applying the correct sourcing strategies for each element within a sourcing category. In telecommunications, the four major categories are Network, IT, Sales & Marketing and General Administration.

performance, in terms of top line

growth as well as bottom-line efficiency,

are allowed access. In this environment,

CAPEX and OPEX optimization is

essential to ensure each dollar invested

delivers the highest return.

highly competitive market

Similar to comparable European

markets, heightened competition and

increased pressure on margins across

maturing Middle Eastern markets

requires increased cost efficiency

strategies. In Africa, cost efficiency

has historically played a much more

important role than in the Middle East.

This is due to the higher proportion

of low-value users which makes ROI

challenging to achieve.

synergy realization

After intense consolidation activity in

the emerging mobile market sector,

driven mostly by strong and committed

regional players such as Zain, Etisalat,

Orascom, Qtel and MTN, the pace is

slowing. Operators are facing a real

challenge in realizing cost synergies

that were projected in ambitious

business plans. In summary, emerging

market operators would move away

from a time when they were merely

focused on expansion to generate

shareholder value, to a time when they

focus on time-to-market and efficiency

improvement. All of these require

that the procurement function plays a

central role.

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This is achieved by identifying key

saving potential areas and driving

innovative sourcing models which can

enable operators to reinvent their cost

structures. For example by turning

traditionally fixed costs into variable

through outsourcing models. While not

all cost categories can be influenced

by procurement, typically up to two

thirds of all costs of a telecom operator

are within the area of influence of a

procurement function. Focusing the

resources on the most relevant sources

of cost, the procurement function

can support the operator in achieving

How can Strategic Procurement contribute to effective value creation?

Strategic procurement is a major tool to conceptualize new business models seeking efficiency improvements.

EXHIBIT 1: SAVINGS POTENTIAL THROUGH STRATEGIC PROCUREMENT - IMPROVE EBIT UP TO 8 PP

Source: Delta Partners Analysis; Note: Cost categories based on benchmarks from MEA mobile players. Savings are from Delta Partners selected projects

critical efficiency improvements in the

short term. This is achieved by direct

or indirect manipulation of the key

purchase levers of 1. Price of goods and

2. Volume of purchase.

Price of goods1.

With the support of other business

units, procurement is assigned the

responsibility for evaluating, comparing

and (re)negotiating prices with vendors

across all business lines, based on initial

offer and best available market rates.

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Volume of purchase2.

Following up on each business

unit’s needs, procurement should

concentrate on requests, centralize

relations with vendors and achieve

discounted prices through improved

negotiating power. In parallel,

procurement should also internally

strive for enhanced consumption

policies and control mechanisms.

Positive results by short-term actions and

tools can be taken to the next level with

the support of a strategic procurement

function focused on the improvement

of overall sourcing and purchasing

processes. Based on Delta Partners’

experience, it was observed that the

potential for value creation ranges

between 4 - 8 pp of EBIT margin for a

typical emerging market mobile player

(As shown in Exhibit 1).

Case study: A mobile operator that

had historically relied on local fuel

distributors decided to broaden its

horizon by considering international

importers in order to reduce its

dependency on local players. This

helped it to improve security of

supply, and bring down overall rates

How do organizations implement Strategic Procurement?

The successful implementation of strategic procurement is built on the three pillars of: 1. Sourcing Model 2. Organizational Model and 3. Governance Structure (As shown in Exhibit 2).

Sourcing Model1.

A robust sourcing model is essential

for the overall success of strategic

procurement since it is required for

each of the four main categories

of telecommunications - Network,

IT, Sales & Marketing and General

Administration. In order to procure

different items under each category, the

sourcing model needs to delve deeper

into the aspects of spend analysis,

supplier relationship management, and

category plans.

1.1 Spend analysis

The first step towards a strategic

approach in the procurement function is

the achievement of transparency across

the organization on what is bought by

whom, the type of approvals required

and its regularity.

It is essential that the procurement unit

possesses people with an analytical

profile in order to perform regular spend

analysis and reporting. For instance, just

by installing transparency about spend,

and channeling every purchase order

through the procurement department

(empowered for the entire negotiation

process), a mobile operator was able to

reduce annual OPEX spend by 2%.

1.2 Supplier relationship management

The next step in the sourcing strategy

is to research available sourcing options

in the supplier market, which can

either be from local or international

vendors. A detailed assessment of the

Case study: Backed by Delta

Partner’s advisory support, a MEA

mobile operator was able to reduce

its network CAPEX by 35%, through

centrally renegotiating network

elements. This was based on a

competitive bidding process and

closure of a framework agreement

for the forthcoming years.

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different supplier options should be

undertaken, weighing various criteria,

such as price, lead time, quality, on-site

support and long term conditions,

amongst others. Here, procurement

personnel should use their creativity in

exploring alternative supply options.

A supplier pre-qualification process to

ensure they comply with requirements

aligned with procurement strategy and

policies is also necessary.

1.3 Category plans

The implementation of a successful

sourcing strategy is also based upon

effective category planning. For all the

items within the four categories – i.e.

Network, IT, Sales & Marketing and

General administration, the elements

of vendor strategy, relationship,

price structure, payment terms and

delivery terms play a critical role. This

entails being clear about source of

purchase (such as original equipment

manufacturers, wholesalers or retailers),

use of one/multiple suppliers, short or

long-term basis, credit terms or cash

and decision on delivery period. As a

rule, the overall framework needs to

contain all the items requested from

Case study: Whilst supporting

a MEA operator in the bidding

process and selection of preferred

vendors in the region, Delta

Partners helped create a platform

that could achieve annual savings of

30% and 15% on SIM and scratch

card purchases respectively.

the suppliers as part of the provided

quotation, along with a long-term

outlook of annual volumes as well as

re-negotiation cycles. This needs to be

formalized in writing and made known

to respective procurement employees.

Organizational Model2.

The introduction of strategic

procurement within an organization

has to be carried out in a phased

approach. Firstly, a capable and

empowered procurement organization

needs to be put in place. Most modern

organizations choose the category

management principle, whereby each

procurement employee is responsible

for a certain category.

However, strategic procurement is

not necessarily linked to a certain

organizational model. Regardless of

the operators’ set-up, procurement

employees should be specialists with

strong experience in the area and

possess not only sound quantitative and

analytical skills but also the ability to

communicate and negotiate effectively.

Above all, integrity is a non-negotiable

EXHIBIT 2: IMPLEMENTATION OF STRATEGIC PROCUREMENT

Source: Delta Partners Analysis

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requirement. In order to be effective,

the procurement organization must

be empowered by the company’s

management. Empowerment is done

by choosing an adequate reporting level

within the organization which is most

likely the Chief Financial Officer (CFO).

However, this is not a hard and fast rule

and should be adapted to local market

conditions. For example, in an emerging

market, where a quick network roll-

out was required, a mobile operator

appointed the Procurement Director

into the Executive Committee as a

C-level executive, i.e. the CPO (Chief

Procurement Officer). This reflected the

importance the organization bestowed

upon procurement as a crucial function

especially when time-to-market was

critical.

Governance Structure3.

An adequate governance system is

vital to reap benefits from strategic

procurement, as strategic procurement

is often oriented at achieving savings,

and can conflict with the interests of the

business units. An escalation process

to senior management needs to be

considered and implemented to address

such conflicts. The governance system

should also include mechanisms to

manage the relationship with suppliers.

In this way, new trends and potential

issues can be detected as early as

possible and new sourcing models can

be designed to react accordingly.

Rather than strictly looking at P&L

effective cost reductions that compare

to last year’s spend, procurement needs

Illustrations of strategic Procurement Best Practices

target pricing:• Instead of using a competitive RFP process, a mobile operator shifted to the ‘target pricing

model’, setting its suppliers a price target for a certain product category, leading to maximum transparency. This

price target was derived from overall world market price, accounting for a ‘mark-up’ to reflect additional costs

(Example transportation, distributor margin etc.). The overall savings achieved was estimated to be around US$ 1

Mn per annum

Reverse auction:• Standardization of P&S request, maintaining price as the only variable to compare suppliers

against. Reverse auctions can also be conducted over the Internet, further reducing time and effort. For example, a

MEA operator identified new integrated site maintenance providers through a competitive reverse auction process,

leading to 40% cost reduction

Volume bundling:• Centralized procurement at Group level allows for standardization of Products & Services (P&S)

across all operations as well as quantity discounts. A mobile operator who bundled its CAPEX at Group level was

able to reduce network CAPEX by 35%

sourcing of different components:• In some situations, it might be preferential to source different components

from different suppliers instead of the whole and centralized package. This can lead to the most competitive offers

from different sources. Furthermore, a global sourcing framework that caters to the operator’s footprint, can

further contribute towards significant savings

Preferred supplier:• Electing a preferred supplier using a pre-defined set of parameters ensures quality control as

well as helps to obtain preferential rates. Mobile operator was able to get a EDGE upgrade for free from a vendor

in return for the award of the exclusive contract for 3G network roll-out in a European country

Discount by vouchers:• In certain instances, an operator can negotiate for discount vouchers from the vendor at

the time of placing a large order. These can then be used in subsequent purchases

Long-term contracts/ versus spot buying:• For volatile supply markets (e.g. fuel), it might be beneficial to enter

into a long-term agreement with a fixed price for a certain period to hedge against expected price increases

Outsourcing:• Delta Partners supported a mobile operator in outsourcing its call center function to an external

service provider, resulting in savings of around 10% of operating costs, alongside increased service quality

Backwards integration:• If the product/service procured is of high importance for the operator (e.g. content

providers), close co-operation with a specific supplier or even backwards integration might be a viable strategy

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ConclusionSince the global financial crisis

surfaced over a year ago, MEA

telecom operators have slowed

down their aggressive expansion

plans due to limited availability of

funding. Meanwhile, the need to

establish synergies and the presence

of increased competition in existing

markets continues to exert pressure

on margins. In this environment,

strategic procurement has proven

to be a powerful lever in order to

improve overall efficiency. Mobile

operators that have consciously

invested in the re-orientation of their

scattered purchasing units, changing

their pure operational spot buying

approach into a long-term, integrated

strategic one, usually creating a

centralized group function as driving

force are bound to succeed.

Delta Partners has had significant

exposure supporting operators across

emerging markets in the establishment

of a strategic procurement function.

Based on its experience, savings of up

to 4 to 8 p.p. in operating profit (EBIT)

can be achieved by those operators that

succeed in this process. They take the

initiative to transform the procurement

function into a “change agent” that

works hand in hand with business users

to redefine traditional operating models

for value creation.

Operators willing to adopt

strategic procurement within their

organizations need to concentrate on

three key dimensions:

Definition of strategic sourcing •

models for key procurement

categories, which requires detailed

spend analysis and the development

of detailed category plans as

key inputs to select the most

appropriate strategy

Creation of a capable and empowered •

procurement organization wherein

each procurement employee is

responsible for a certain category such

as Network, IT, Sales & Marketing and

General administration

In-depth review of the procurement •

organization and the definition of a

governance model that covers both

procurement specific issues as well as

the interaction with business users to

ensure integrated decision making.

Organizations would also need to

develop long-term partnerships

with suppliers, by enhancement of

market intelligence through rigorous

supplier research, clear vendor pre-

qualification criteria and periodic

evaluation & feedback mechanisms

As the world begins to look beyond

the current crisis and take the first

steps towards recovery, operators

mastering strategic procurement will

be able to resurge stronger, leveraging

this sustainable competitive advantage

to strengthen their position in an

increasingly tough environment in

emerging markets.

its own savings calculation methodology

to access true savings. This should be

auditable and supported but at the

same time adequately incentivize the

employees. Delta Partners has developed

its proprietary savings classification

methodology, accounting for different

type of savings depending on the nature

of the effective purchase process.

hard savings: This includes savings

registered against historical spend

data and thus directly reflected in the

P&L account.

soft savings: These include cost

reductions which cannot be calculated

using historical data and therefore do

not create a direct impact on the P&L

accounts. However, they minimize the

negative impact to the bottom-line

that a higher expenditure for a certain

item would have caused. Example. Price

reductions through negotiations during

the purchase of a new item.

Cost avoidance: This includes cost

reductions that have been achieved as a

result of changing product specifications

(scope changes) due to the involvement

of procurement function. Registration

of cost avoidance implies a negotiation

process between business users

(responsible for the request) and the

procurement department (responsible

for the purchase).

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Delta Partners is the leading TMT advisory and investment firm in emerging markets. With more than 150 professionals the

firm operates across 50 markets in the Middle East, Africa, Eastern Europe and Emerging Asia. Delta Partners provides three

synergistic services: management advisory, corporate finance and investments from its offices in the UAE, Bahrain, South Africa,

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players to help them address their most challenging strategic issues in a fast-growing and liberalising market environment in over 50

markets.

Investments: As a fund manager, Delta Partners manages a $80M private equity fund, targeting investment opportunities in

the TMT space in high growth markets. The focus is the Middle East, Africa, Eastern Europe and Emerging Asia. Delta Partners

private equity fund leverages the firm’s unique TMT industry expertise to create value for its investors throughout each stage of the

investment cycle, from deal sourcing to supporting portfolio companies in driving value extraction.

Corporate Finance: Delta Partners provides corporate finance services and has been involved in several buy-side and sell-side

telecom transactions in the region. As true industry specialists, the firm offers a differentiated value proposition to investors

and industry players in the region. Delta Partners actively leverages its close link to its private equity arm to access the investor

community as well as top-level financial talent.

Delta Partners delivers tangible results to its clients and investors through its exclusive sector focus on telecom, media and

technology, and a unique approach to services, combining strategic advice and a hands-on pragmatic approach.

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