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In this blog series, we will be looking at different cost management techniques, including forensic spend analysis, enhancing the capitalization of IT spend and the alignment of finance and procurement to unlock efficiencies. This first blog will focus on how data plays a critical role in managing expenses.
Finance has always played a key role in cost management. Traditionally, this role is in accounting for costs and providing cost reports to the business. However, true cost management is much more than keeping score. Processes should be considered end-to-end, from how finance collaborates with procurement in facilitating straight-through processing of purchasing and payments, to how finance interrogates data and provides the most relevant insights to the business.
Effective control is like implementing a diet. Dieters seek to understand what they consume, to identify the “bad” foods to cut out, and to control intake. In cost management, control of data is key to the process at all stages, permitting better visibility of expenses and embedding a data-driven approach across the organization.
There are three key elements to data-driven cost management:
1) Effective data capture at the source – visibility into what is coming in
Organizations are commonly hindered by complexity in the way goods and services are purchased. An example is if the finance team is unable to establish when to accrue charges and when timing data is not properly recorded in procurement systems.
Finance and procurement alignment across the purchase-to-pay process is key now that ordering, payment and accounting are all intrinsically linked. The implementation of e-procurement purchasing channels and e-invoicing means the goal of straight-through “no touch” invoice processing is becoming ever more achievable. Establishing a clean data stream from source procurement systems can provide immediate benefits in improved visibility. This, in turn, can drive significant savings in accounts payable as manual processes, such as scanning and coding, become automated, as well as generating cash flow benefits due to timing of invoice payment.
2) Intelligent cost reduction – identifying what items can be cut
Once an organization has addressed issues of data quality, the next step is targeted interrogation of data to identify opportunities for cost reduction. Again, technology is providing solutions not available just a few years ago. New artificial intelligence (AI) and advanced analytics tools can be used to break down silos, connect real-time data sets, apply predictive modeling, and effectively pinpoint cost reduction opportunities.
Forensic levels of investigation can be applied to large transactional data sets, allowing for visibility across thousands of invoices. For example, Accenture has created a proprietary self-learning algorithm to map financial general ledger (G/L), vendor, purchase order (PO), and cost center data to cost categories, leveraging a global database. Using this digital-based AI tool, we can now perform a “forensic quick scan” exercise in days as opposed to weeks – interrogating millions of accounts payable (AP) transactions and providing clients with a detailed categorization of spend across the entire organization.
“Working with clients over the years, our experience has been that significant parts of the cost base (often 15%-20%) are incorrectly categorized, resulting in data that is confusing and that consequently is not seen as meaningful by senior managers.”
Source: Get Fit – Shining a Light into the Black Box, Accenture 2017
3) Embedding cost discipline – controlling future intake
Developing a culture where cost control is embedded in the employee mindset requires fundamental change. An effective way to drive such a mindset change is through the application of cost category management. This permits a standard approach to cost accountability across all business divisions and geographies for a specific category of spend (such as travel and expenses or marketing). Effective cost category management requires finance teams to provide relevant reporting and insight. Again, an end-to-end approach is required, with finance partnering with procurement and the business to deliver both historic and future forecasts in spend, cost and demand reporting. Overlaying digital data visualization tools to large data sets can help inform executive teams, delivering clear and rapid insight, and providing a consistent approach across the organization.
Demand planning (typically in the form of consumption forecasts) should be a key component of all cost category management plans. Finance teams should deliver finance acumen along with business understanding to help model future demand and drive improved accuracy in cost forecasts.
“Depending on procurement maturity for each company, some 60-70 percent of savings would come from consumption and the rest from price.”
Source: ZBB and Closed-loop Cost Management: An Engine for Growth, Accenture 2015
Reaching the next frontier of cost management requires investment in digital technology. However, there is a compelling business case if improved cost management can be directly linked to the identification of savings across the wider organization. In addition to the quick financial payback, improved end-to-end cost management can also reduce operational risk and improve employee engagement.
In the next blog in this series, we will discuss how finance and procurement can align to drive greater efficiency. In the meantime, read our CFO Reimagined report in banking and insurance.