2500 Dallas Parkway, Suite 300Plano, Texas 75093

600 Congress Avenue, Suite 300Austin, Texas 78701

300 Throckmorton Street, Suite 520Fort Worth, Texas 76102

TRANSFORMING THE COST STRUCTURE FOR SUSTAINED BENEFITSTRANSFORMING THE COST STRUCTURE FOR SUSTAINED BENEFITS

November 12, 2015November 12, 2015

ENTERPRISE COST REDUCTIONENTERPRISE COST REDUCTION

Paul DunnPartner

paul.dunn@mcggroup.comoffice: (972) 748-0235

mobile: (214) 929-4805

2

CFO PERSPECTIVES REFLECT A VIEW THAT THE INFORMATIONTECHNOLOGY (IT) ORGANIZATION IS STRATEGIC TO SUCCESSCFO PERSPECTIVES REFLECT A VIEW THAT THE INFORMATIONTECHNOLOGY (IT) ORGANIZATION IS STRATEGIC TO SUCCESS

According to a recent Gartner and Financial Executives International (FEI) survey…• CFO influence in IT is growing - 42% of IT organizations report directly to the CFO.• 53% of those surveyed view IT as being strategic.• CFOs cite "gaining business insight" and "improving business efficiency" as top technology

opportunities, but capturing those opportunities hinges on the quality of the company'sbusiness intelligence (BI) programs.

• CFOs are still concerned about achieving business benefits from IT.• IT success relies more on understanding and working with the business than on technological

excellence.

Recommendations• Communicate technology priorities to senior financial executives.• With more IT departments reporting to the CFO, IT teams must be able to explain costs,

encourage adoption and share information with non-IT employees who use the technologydaily.

• CFOs and IT departments should work as business partners, enabling the business to move toleading-practice business processes with better business insights.

2014 Gartner FEI Technology Study

3

COST REDUCTION HAS BECOME AN ESSENTIAL AGENDA ITEM WITHSENIOR EXECUTIVESCOST REDUCTION HAS BECOME AN ESSENTIAL AGENDA ITEM WITHSENIOR EXECUTIVES

Source: The Economist Intelligence Unit surveyed 250 C-Suite and board level executives

Respondents expressed common ground in factors driving cost reduction within their own organizations

Primary Drivers of Cost ReductionHeadcount reduction is clearly not the primary focus of cost reduction programs

Cost Reduction Initiatives

Pressure to improve company performance may originate from changing market conditions, enterprise strategy, business model, or external factors

33%

37%

46%

47%

49%

60%

77%

0% 20% 40% 60% 80%

Retention Programs

Training Programs

Outsourcing

Headcount Reduction

IT Optimization

Supplier Cost Reduction

Business Process Improvement

19%

20%

29%

31%

31%

50%

55%

0% 20% 40% 60%

Finance SSC/Outsourcing

Finance infrastructure improvement

Increasing board/audit demand

Globalization

Increasing investor demand

Profitability

Competitive pressure

Based on a recent cross-industry survey of 250 global C-suite and board-level executives, cost reduction has become essential, with more than 85% of respondents citing it as a key issue in their business.

4

Why are cost reduction efforts failing to deliver or sustain the intended benefits?

FEWER THAN 1 IN 3 RECENT COST REDUCTION PROGRAMS HAVESUSTAINED IMPROVEMENTS IN PERFORMANCEFEWER THAN 1 IN 3 RECENT COST REDUCTION PROGRAMS HAVESUSTAINED IMPROVEMENTS IN PERFORMANCE

Sustainability of cost reduction benefits within 115 multinationals (FTSE 350) analysis of year-on-year performance.

Savings leakage examples• Resources assigned to initiative

lack necessary skill sets or arediverted into other assignments

• Costs and timing to implement areunderestimated

• Execution delays reduce run-rateimpact

• Savings double-counted withanother area

• Inappropriate cutting of capabilitiesleads to costs of “growing back”

70% of companies failed to improve their cost/

revenue ratio year - on-year for 3 years after announcing a significant cost reduction

program

Total cost reduction programs

100%

63%

41%

30%

% of companies sustaining benefits

through year 1

% of companies sustaining benefits

through year 2

% of companies sustaining benefits

through year 3

5

Challenges Leading practices “What must go right?” Client enablers

1) “This too shall pass” mentality

Establish a sense of executive sponsorship and

urgency

• Create a clear, compelling cost/benefit analysis• Honest and regular communications to create understanding, purpose, and

momentum• Senior executive sponsorship and mandate

2) Lack of a powerful guiding coalition

Create a core group of influential stakeholders

• Design team with both business unit leaders (BU, BU, BU, etc.), businessunit functional leaders (e.g., BU Marketing), functional leaders across BUs(enterprise-wide marketing), and executive stakeholders

• Effective stakeholder governance to build support• Create high-impact communication vehicles to help stakeholders drive the

message

3) Analysis paralysis

Strike a balance between analysis and action

• Develop a set of hypotheses early on to drive analysis• Follow an objective prioritization process – top-down and bottom-up with

stakeholders• Focused project management to balance time, cost, and quality

4) Failure to create quick wins

Strong emphasis on measurable wins early in

the program

• Project portfolio that balances short-term and longer-term savings• Structural process/technology savings should comprise 70%+ of the total cost

savings target to make the change “stick”

5) Over-reliance on benchmarks

Challenge the organization, but don’t lose the credibility

of the cost-reduction message

• Recommendations have to be rooted in specific process recommendationsand not high-level benchmarks

• Use American Productivity and Quality Center (APQC) benchmarks for keyprocesses, combined with internal “best of breed” analysis

6) Unclear objectives

Establish a clear definition of success

• Clear financial cost/benefit analysis that highlights key metrics versus thebaseline

6

AS COST REDUCTION EFFORTS INCREASE, COMPANIES FACE THESECHALLENGES TRIGGERING FUNDAMENTAL QUESTIONSAS COST REDUCTION EFFORTS INCREASE, COMPANIES FACE THESECHALLENGES TRIGGERING FUNDAMENTAL QUESTIONS

Cost Reduction

Strategy

7

MOST COST REDUCTION EFFORTS LOSE THEIR STEAM BEFORE TRUETRANSFORMATION IS ACHIEVEDMOST COST REDUCTION EFFORTS LOSE THEIR STEAM BEFORE TRUETRANSFORMATION IS ACHIEVED

Diff

icul

ty to

Impl

emen

t

Low Hanging Fruit Transformation

Discretionaryspend

Clarity of operating

cost drivers and financial

plans

Sustainability

Waste eliminationand Lean

Strategic portfolio approach to cost

reduction

Costmanagementand controlprocesses

Contracts and 3rd party

spend management

8

Common Approach Traditional “How” Reasons for Failure:

Top Down“Top-down” review

of the business –typically

organization and process changes are

required

• Cost team frames “available” population ofcosts and strategic options

• Cost team and department leads responsiblefor analysis to identify potentialopportunities (e.g., organization alignmentand reallocation of work)

• Tend to bet on a single solution (e.g., organizational redesign, IT system change, shared services, off-shoring, etc.)

• Complexities of reducing costs and existing behaviors are not changed

Slash and Burn Business as usual

but at less cost –reduces operating

plans by a set target (e.g., 10% cost

reduction)

• Overall target set by CEO or CFO• Does not differentiate between lean or high-

value processes and wasteful/low-value• Tends to capture the “easy to cut” costs

instead of the “should be cut”

• Reactive and focused on survival• Rarely results in lasting savings• Due to arbitrary nature can destroy

value• Negative impact on morale and

culture

Boil the Ocean

A bottom-up detailed analysis across all

departments to identify potential

opportunities

• Cost team frames “available” population ofcosts

• Cost team or department performs extensiveinterviewing, process analysis andbenchmarking to enhance process efficiencyand leverage technology

• Completely integrated and coordinatedexecution

• Slow and complex• Difficulty assigning accountability• Typically loses momentum and focus• Departments become personally

invested in their own budgets and rarely find waste

9

FOCUS ON GENERATING TESTABLE HYPOTHESES THAT RESULT IN ANACTIONABLE COST REDUCTION PROGRAMFOCUS ON GENERATING TESTABLE HYPOTHESES THAT RESULT IN ANACTIONABLE COST REDUCTION PROGRAM

AC

TIV

ITIE

S

Generate cost reduction hypotheses

Prioritize the improvement portfolio1 2

TARGETING

Refine analysis and select projects

Develop cost/benefit analysis and roadmap

SOLUTION DEFINITION

43

► Document phased execution approach to implement cost reduction initiatives

► Socialize conclusions

► Refine projects and roadmap as needed

► Determine next steps

► Conduct readout/design session #2 (focus: readout and buy-in)

► Conduct detailed data analysis of selected projects to confirm cost-saving opportunity

► Iteratively review projects with appropriate stakeholders to refine and validate

► Re-visit improvement project portfolio as needed for additional project opportunities

► Develop and assign prioritization criteria across the improvement project portfolio

► Review prioritization results and determine short list of improvement project candidates

► Produce high-level cost, benefit, and timing assumptions

► Conduct readout/design session #1 (focus: align on the right opportunities)

► Confirm addressable costs and headcount baseline

► Review historical and in-flight analysis

► Conduct executive interviews to generate hypotheses, develop main improvement themes, and focus data analysis

► Develop benchmarking analysis for key process areas

► Conduct data reviews and analytics

KE

Y O

UT

PUT

S ► Improvement project portfolio

► Prioritized improvement project portfolio

► Recommended projects to pursue for validation and further analysis

► Selected cost reduction projects

► BU, functional, and executive agreement

►Project descriptions and cost/benefit analyses

►Cost reduction program roadmap and cost/benefit analysis

►Executive commitment and momentum to execute

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The goal of this process is to generate a strong portfolio of fact-based improvement opportunities for analysis and prioritization

GENERATE COST REDUCTION HYPOTHESESGENERATE COST REDUCTION HYPOTHESES

► New ideas

► Confirm or challenge BU perspective

► Idea (business model)

► Idea (operating model)

Filter out:• Non-addressable spend

categories• Variable vs. corporate

allocated costs• Non-starters

SG&A cost data-set

Stakeholder InsightConduct interviews and workshops with key stakeholders to consider in-flight analysis and generate new ideas

Advisor InsightUtilize advisors to consider leading practices and how they can be applied to the business

► Idea (Functional)

► Idea (BU)

► Idea (Shared/COE)

Sources of ideas

Improvement Opportunity

Portfolio► Reduce costs► Redesign

processes► Restructure

operating model

Executive InsightObtain long-term vision to promote strategic cost objectives

Executive steering group (ESG)

review

► Idea (Volume driver)

► Idea (Efficiency)

► Idea (Outliers)

Analytic ReviewsMine addressable SG&A data-set to reveal cost reduction opportunities

This phase rapidly scans the business to develop strong cost reduction ideas1 2 3 4

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PRIORITIZE THE IMPROVEMENT PORTFOLIOPRIORITIZE THE IMPROVEMENT PORTFOLIOThis phase narrows a large set of possible ideas to a focused list

1 2 3 4

1. Value impact• Cost reduction impact• Additional benefits (e.g.,

improved customer service, reduced cycle time)

2. Difficulty of Implementation• Organizational change• System implications• Process redesign• Implementation

capabilities

3.Speed of benefit realization• Short term (<6 months)• Medium term (6-18

months)• Long term (18+ months)

PrioritizationIdeas Criteria

1010

Long termShort-term Medium term

3

7

6

2

4

9

11

8

1

12

Diff

icul

ty o

f im

plem

enta

tion

5

1010

3

7

Speed of benefit realization

6

2

4

9

11

8

1

12

Low

Med

ium

Hig

h

Size of bubble denotes the value impact of each project

Color of bubble denotes related initiatives (e.g. HR, IT, real estate)

5

► Functional► BU► Geographic► Shared/COE

Improvement opportunity

portfolio

► Reduce costs► Redesign

processes► Restructure

operating model

This phase concludes with a design workshop to validate opportunities with client leadership, align with strategic objectives, and ensure the cost reduction program is correctly prioritized

12

REFINE ANALYSIS AND SELECT PROJECTSREFINE ANALYSIS AND SELECT PROJECTSThis phase builds confidence that the right ideas are on the table

1 2 3 4

Gather additional data

Review with Stakeholders

Applyre-prioritize

Validate assumptions

► Validated set of cost reduction projects

► Buy-in that the right ideas have surfaced to deliver material cost savings

► BU, functional and executive agreement on key assumptions and potential benefits

Iterate to gain confidence and

consensus

1010

3

7

6

2

4

9

11

8

1

12

5

10

Conduct additional data collection, interviews, and workshops to challenge the prioritized opportunities and validate the cost-savings

potential

Prioritized improvement opportunities

Design workshop output and ESG buy-

in

13

DEVELOP COST/BENEFIT ANALYSIS AND ROADMAPDEVELOP COST/BENEFIT ANALYSIS AND ROADMAPThis phase lays the foundation for implementation

1 2 3 4

Each improvement opportunity is scoped with particular focus on:• Clear description of the opportunity and scope to

communicate across stakeholders• Timing of costs, benefits, and one-time investments• Ownership and governance considerations• Baseline data to monitor benefits• Key milestones and gates to track the project and validate

progress against plan

The overall set of improvement opportunities are aggregated into a cost reduction program:• Roadmap that shows timing of key milestones,

dependencies, and benefits• Alignment with long-term vision and strategic objectives• Key performance metrics and communication plan

14

CREATE BENEFIT CAPTURE FUNCTIONCREATE BENEFIT CAPTURE FUNCTION

Formal benefit capture function• Track and report on the progress of projects

within enterprise portfolio of projects (traditional PMO role)

• Monitors potential benefits during AND AFTER project completion to ensure benefits are “captured”

o Identifies specific budget and GL line items where cost reductions are expected

o Monitors savings and distinguishes between random cost variance and project specific savings

o Maintains vigilance after project completion to prevent benefit leakage

• Drives continuous rebalancing of portfolio

BENEFITS CAPTURE

Report status and

results

Identify ineffective projects or new needs

Track progress

and benefits

Re-balance project

portfolio

15

THE DESIGN OF SUCCESSFUL COST MANAGEMENT PROGRAMS

SHARE A FOCUS ON THREE PRIMARY FACTORS

THE DESIGN OF SUCCESSFUL COST MANAGEMENT PROGRAMS

SHARE A FOCUS ON THREE PRIMARY FACTORS

PaceEstablished via effective

project management, focus, and balancing short and longer term

savings

ValueRealized by carefully

examining every element of addressable

spend

SustainabilityShift spend to activities central to performance

Time

Value

Actual value delivered

Technical limit of maximum potential

Embed sustainability by reducing the right costs and redeploying expenditures to areas that drive competitive advantage

Identify the maximum potential and deliver more value

Improve pace through rigorous stakeholder engagement and project management

• Clear strategy and objectives

• Focus on the right costs

• Sponsorship, momentum and project management

• Maintaining savings over time

All cost programs should be designed withpace, value and sustainability in mind from the beginning

16

ENTERPRISE COST REDUCTION REQUIRES ENTERPRISE-WIDE FOCUSENTERPRISE COST REDUCTION REQUIRES ENTERPRISE-WIDE FOCUS

Functional Cost Reduction Product Cost Reduction

Enterprise Cost Reduction

Working Capital Efficiency

• Front Office and Operations Functions and Processes (Sales, Marketing, R&D, Product Development, Manufacturing/ Service Delivery, Distribution)

• Product/Region/Channel/Customer Segments

• Direct Materials

• Specialty Functions (Treasury, Supply Chain, Tax)

• Current Liquid Assets

• Inventory (RM, WIP, FG)

• Current Liabilities

• Tax Efficiency

• Back Office Functions and Processes (Finance, Accounting, Procurement, HR)

• Project-Based Activities

• Procurement Spend

• Technology

• Facilities/Infrastructure

Realization of sustainable reductions in corporate infrastructure/G&A overhead expenses

Harness operations experience to continue to provide effective support servicesthroughout the organization

Infrastructure platforms must be able to readily absorb an acquisition in order to realize cost synergies

Remediation of cost elements driving low profit or unprofitable products/segments (regions, channels, customer segments)

Cost base must be structured to enable lean growth, either organic or acquisitive growth, as a key driver in value creation

Improve asset performance by reducing the amount of capital tied up in net current assets

One-off cash releases from the balance sheet can be re-invested in higher return activities to create incremental value

17

FOCUS FOR WORKING CAPITAL MANAGEMENTFOCUS FOR WORKING CAPITAL MANAGEMENT

A working capital management practice can unlock millions of dollars of tied up capital, through• Addressing inefficient working capital practices to improve available cash flow across Receivables, Payables,

Inventory, and Cash/Banking Management• Effectively leveraging Operational Processes, Human Assets, and Technology Enablers

Order to Cash (Increasing Inflows)• Reduce time to collect revenue• Increase bill accuracy and timeliness• Improve Payment processing efficiency• Optimize customer service, processes and

organization• Reduce bad debt

Procure to Pay (Controlling Outflows)• Increase payment terms to suppliers

• Manage demand, control spend• Minimize AP transaction costs

• Optimize customer service, processes and organization

Inventory Management• Reduce total cost of ownership and

inventory• High resource utilization• Inventory control• Optimize levels of emergency inventory• Lower raw materials inventory• Supply chain enhancement

Cash Management• Increase forecasting accuracy

• Maximize disbursement and collection banking strategies

• Optimize cash usage and banking structures• Link the financial activities of the business units to the

treasury• Reduce financial interest expense

ImprovedCashFlow

18

WHAT ASPECTS OF RISKS SHOULD BE ASSESSED AS PART OF ACOMPREHENSIVE VENDOR RISK MANAGEMENT PROGRAM?WHAT ASPECTS OF RISKS SHOULD BE ASSESSED AS PART OF ACOMPREHENSIVE VENDOR RISK MANAGEMENT PROGRAM?

Vendorrisks

Information security risk

Reputational riskSe

rvic

e ri

sk

Financial risk

Regulatory risk is the risk that a vendor fails to comply with a required regulation, thus causing your company to be out of compliance. This is commonly the most complex risk to quantify and assess.

Service risk is the risk that a vendor fails to meet your needs as a company from a service delivery perspective. Common metrics include SLAs, scalability and overall performance reviews.

Exit strategy risk is the risk that the business would suffer a negative impact should the relationship with the vendor need to be ended. This is commonly internally controlled via a formal exit strategy.

Financial risk is the risk that the vendor cannot continue to operate as a financially viable entity. This may also be interpreted as the potential for financial loss due to vendor failure or non-performance.

Information security risk is the risk that an organization’s data is lost or security is compromised.

Business continuity risk assesses the risk of vendor failure on the continuation of business as usual for the organization.

Reputational risk assesses the impact to the organization’s reputation should an event occur at your vendor.

Country risk assesses the risk of doing business in a specific country and includes legal/regulatory, geo-political and socioeconomic considerations.

There are numerous aspects of risk to account for when making the decision to utilize a vendor to perform a service for your company.

19

WHAT DO THE KEY ELEMENTS OF THE VENDOR RISK ASSESSMENTPROCESS INCLUDE AND HOW ARE RESPONSIBILITIES DEFINED?WHAT DO THE KEY ELEMENTS OF THE VENDOR RISK ASSESSMENTPROCESS INCLUDE AND HOW ARE RESPONSIBILITIES DEFINED?

Monitor Manage

Inherent risk assessment

Control assessment Residual risk

• Identify processes and data the vendor is/will be interacting with

• Leverage existing methodologies and policies (e.g., ERM function, data classification policy)

• Assess vendors based on vendor risk universe

• Design on-site assessment process - vendor notification, planning and coordination

• Create supporting enablers - assessment framework, questionnaires and templates

• Conduct on-site assessment

• Define issue risk rating criteria

• Establish issue management and communication processes

• Mitigate or accept identified risks

Identify vendors

• Create vendor classification policy

• Identify and inventory vendors including existing vendors, new vendors and vendors acquired through acquisitions

Typical roles and responsibilities

Business/IT Owner IT Risk Management Internal Audit

• Owns vendor relationship • Executes performance management

monitoring activities

• Drives vendor identification • Leads inherent and control risk

assessment activities• Communicates results to

stakeholders

• Supports the creation of an effective vendor risk management program

• Assesses VRM function for completeness and operational effectiveness

20

HOW CAN IT ASSIST WITH VENDOR RISK MANAGEMENT AND WHATSHOULD IT CONSIDER FOR BUSINESS PARTNERS?HOW CAN IT ASSIST WITH VENDOR RISK MANAGEMENT AND WHATSHOULD IT CONSIDER FOR BUSINESS PARTNERS?

• Does a vendor execute a critical business process?

• Are there facilities hosting sensitive data located outside US borders?

• Are you sharing sensitive intellectual property or other competitively sensitive information with vendors?

• Do your vendors handle confidential information (i.e., Protected Health Information (PHI), Personally Identifiable Information (PII), credit cards)?

• Have you had an incident with a 3rd party in the past?

Assess VRM program current state

Develop future state roadmap

Execute program transformation

Sustain VRM Program – Co-Source/Outsource

How can IT help?

What should IT consider for business partners?

Risk models

Organizationalmodel

Technologyand data

Monitoring

Policiesand

proceduresOversightand

governance

21

WHAT DOES BUSINESS INTERVENTION LOOK LIKE? WHAT DOES BUSINESS INTERVENTION LOOK LIKE?

Controllable Spend Reduction - Purchased

Goods and Services

Technology Effectiveness

Capital Optimization

Tax Optimization

Business Process and Organization Optimization

• Finance and Accounting• Information Technology• Human Resources and Legal• Procurement• Sales and Marketing• Research and Development• Manufacturing/Supply Chain

• Direct Materials• Contract Services• Travel and Entertainment• Advertising and Marketing• Compensation and Benefits• Supply Chain Costs• Other Indirect Spend

• Applications Management• Hardware Optimization

• Construction and Real Estate• Facilities and Occupancy• Working Capital

• Global Supply Chain• Mergers and Acquisitions• Effective Tax Rate

• Shared Services• Outsourcing• Organization Simplification• Process Redesign• LEAN and Six-Sigma

• Strategic Sourcing• Product/Service Standardization • Demand Management• Policy Development and Compliance • Contract Management

• IT Streamlining• Outsourcing• Vendor Rationalization

• Capital Program Management• Facilities Rationalization• Working Capital Management

• Transfer Pricing• Tax-Efficient Structuring• Tax Strategies and Planning

Cost Improvement Opportunities

MONTGOMERY COSCIA GREILICH LLP2500 Dallas Parkway, Suite 300

Plano, Texas 75093(972) 748-0300

300 Throckmorton Street, Suite 520Fort Worth, Texas 76102

600 Congress Avenue, Suite 300Austin, Texas 78701

www.mcggroup.com

MONTGOMERY COSCIA GREILICH LLP2500 Dallas Parkway, Suite 300

Plano, Texas 75093(972) 748-0300

300 Throckmorton Street, Suite 520Fort Worth, Texas 76102

600 Congress Avenue, Suite 300Austin, Texas 78701

www.mcggroup.com