Cost and revenue recovery can be a strategic linchpin during the COVID-19 crisis. A robust cost and revenue recovery strategy not only helps achieve significant cost and savings benefits, but also enhances an organization’s ability to realize—and fund—extended enterprise goals.
GIVEN the scope and importance of today’s extended enterprise, organizations have been working to upgrade their management of suppliers, vendors, and partners. Yet as previously noted in Deloitte Insights,1 extended enterprise management practices are not always equal to the risks presented by the extended enterprise. One of the major reasons for this is the tendency of organizational leaders to overlook or misinterpret the role that a sound cost and revenue recovery program can play in optimizing their extended enterprise.
Cost and revenue recovery generally falls within larger extended enterprise management initiatives. Many organizations have implemented certain elements of an extended enterprise management program; however, some programs lack certain other elements or deploy them in a siloed and inefficient manner. A robust cost and revenue recovery program can invigorate or reinvigorate—as well as help fund—an organization’s journey toward extended enterprise management maturity.
In today’s environment, as organizations look to recover from the COVID-19 crisis, cash has become a primary focus for the entire organization. An extended enterprise management program can assist in assessing third-party resilience and financial stability—key elements to help ensure that sales continue and cash is flowing in. Additionally, a cost and revenue recovery program can identify where cash is incorrectly flowing out—stopping leakage and keeping cash within the organization.
Regardless of the market conditions, a rigorous—yet responsible—cost and revenue recovery program can enable the organization to:
The last benefit mentioned above should also be viewed as a goal. Executives may be reluctant to commission rigorous reviews of third parties, fearing that they signal lack of trust or a need to “police” the relationship. However, in practice, cost and revenue recovery findings are rarely employed in a confrontational manner. Rather, they are used to renegotiate an existing contract or to negotiate more favorable terms upon renewal.
Most third parties take cost and revenue recovery reviews in stride, even under these current unprecedented conditions. Few vendors set out to take advantage of their customers. Indeed, they often face the same challenges as their customers, given fragmented systems, informal approaches, and failure to track contract terms, billings, and performance. The impact an organization feels from COVID-19 is likely also being felt by their third parties; because of this, the calculated implementation of a cost and revenue recovery program or review at this time can be used to help strengthen the relationship between the parties by collaboratively confronting challenges and concerns in the review process.
Here are some examples (sidebars, “A company recovers cash” and “A manufacturer achieves sustainable savings”) of how two companies achieved significant cost and savings benefits through an extended enterprise management program focused on cost and revenue recovery.
A true cost and revenue recovery program not only recovers costs and plugs leaks, but also gives management tighter control over the extended enterprise along with an enhanced ability to realize extended enterprise goals.
Programs for managing third-party relationships and the extended enterprise go by various names, and most organizations use their own internal titles for their programs. Regardless of nomenclature, a program can be characterized by its level of maturity. A mature extended enterprise management program will go beyond contract review, compliance, risk management, and cost and revenue recovery. These are parts of extended enterprise management but should not be mistaken for extended enterprise management.
A mature extended enterprise management program will include the following elements:
Over a four-year period, this organization had incurred around US$100 billion in expenditures across thousands of suppliers, millions of invoices, and a wide range of categories. In this environment, some of the specific problems were:
Given the need to conduct a robust accounts payable (AP) review and to position AP to prevent future overspending, the engagement team applied the following tools:
As a result of this project, the organization identified more than US$75 million in overspending occurring due to a multitude of issues—duplicate payments, unrealized credits, miscalculated incentives, and invalid pass-through costs to suppliers. Deep-dive analytics applied to spend versus specific supplier contract terms was critical in generating these findings.
This global organization faced increasing margin pressure and identified the need to achieve sustainable savings through strategic sourcing. The specific challenges included:
The engagement team took a three-step approach to classifying spend, analyzing suppliers, and prioritizing sourcing opportunities. These steps were as follows:
Each of these steps provided specific results:
In many organizations, greater CEO and board involvement is accelerating the broadening of the performance-based extended enterprise management role, where cost and revenue recovery is an integral component of financial management (figure 1). These organizations tend to adopt a more centralized or even a federated approach to drive consistency as well as coordination across business units/geographies. In many cases, they establish dedicated teams that manage other related aspects of their third-party relationships, including contractual obligations, data, and the individual relationship itself in the case of critical/strategic third parties.
Deloitte's research found that cost reduction is the reason cited most often for investing in extended enterprise management, with 62% of respondents citing it as such in 2019, up from 48% in 2018.2 This places cost and revenue recovery at the heart of extended enterprise management, but that is not always how cost and revenue recovery is viewed. Most often, it is seen as pure cost or revenue capture led by the procurement or sales/marketing team rather than a strategic linchpin in extended enterprise management. While central extended enterprise management teams often have the appetite to do more, our experience indicates that they are sometimes constrained, as cost and revenue recovery is not perceived as one of their core responsibilities.
While central extended enterprise management teams often have the appetite to do more, they are sometimes constrained as cost and revenue recovery is not perceived as one of their core responsibilities.
Indeed, organizations pursue varied goals in addition to cost reduction when investing in their extended enterprise management programs. Deloitte's research found these motives to include: reducing third-party incidents (cited by 50% in 2019 versus 43% in 2018); addressing areas of regulatory scrutiny (49% versus 43%); and internal compliance requirements (45% versus 41%).3 This implies there is a lot at stake for organizations when it comes to extended enterprise management—from the financial, operational, regulatory, reputational, and strategic standpoints.
In addition, many boards have become increasingly aware of their extended enterprise management responsibilities and their roles in overseeing cost and revenue. Although extended enterprise management has risen in priority on board agendas, many organizations exhibit an “execution gap” between what the board believes is happening and the reality on the ground. A cost and revenue recovery program can be a valuable instrument for helping to close that gap by making the tangible gains from the board’s investment in extended enterprise management a reality.
Within the process of managing third-party relationships, many organizations do a reasonably good job on the front-end activities of defining requirements, screening, selecting, contracting, and onboarding vendors. It is in the back-end activities—managing and monitoring performance, risk, and compliance, and renewing or terminating the contract—where challenges tend to arise. These challenges are often heightened during an economic crisis, such as the one caused by the COVID-19 pandemic, as organizations that are not closely connected with their suppliers may find it more difficult to conduct business with the extended enterprise and execute on recovery plans.
In addition, efforts to enhance extended enterprise management tend to be fragmented and episodic. For example, the procurement function might work on supply chain improvement; risk and compliance might assess exposures and review compliance failures; sales and marketing may be concerned about intellectual property infringement; and the board may enquire about reputational risks posed by third parties. An invoice or AP assessment team, or internal audit, may perform periodic reviews or audits.
Such activities and approaches rarely add up to a mature extended enterprise management program. A properly focused, well-defined, and rigorously executed cost and revenue recovery program can enable management to enhance the organization’s extended enterprise management maturity. This begins with avoiding common pitfalls and taking a holistic approach to cost and revenue recovery.
As the effects of COVID-19 are felt around the world, companies are looking to respond, recover, and ultimately thrive in the “next normal.” Whether it is your business, your supplier’s business, or your customer’s business, there is potential disruption along the supply chain. Whatever the circumstance, it is important for businesses to think ahead to be in a state of readiness to resolve these challenges to protect the future of the business and preserve important commercial relationships.
The implementation of a cost and revenue recovery program during a crisis can help an organization strategically evaluate its third-party landscape and understand where it may capture value in the short, medium, and long term.
Crisis events have the potential to have material detrimental impacts on an organization. However, those that navigate intentionally and actively through a crisis can develop learnings and capabilities that set them apart from the competition. Such capabilities, planned and honed during an organization’s response to the current crisis, can help provide better outcomes for employees, optimize mid-crisis financial outcomes, and result in an organization that is more resilient and better prepared to face future crises.
A cost and revenue recovery program should not only recover cash but also add direction, structure, and funding to the extended enterprise management program by analyzing contract terms, performance, and payments, and then enabling management to rationalize the extended enterprise strategy. Recovered cash can fund additional improvements, with a good number of them coming from enhanced life cycle management, consolidation of vendors, and use of shared services and managed services.
This calls for a strategic approach to cost and revenue recovery, which many organizations fail to take. Common pitfalls in prevailing approaches to cost and revenue recovery include:
These pitfalls can usually be attributed to the lack of strategic alignment between the cost and revenue recovery program and the larger extended enterprise management strategy. Taking the time to achieve this alignment can have benefits. A good cost and revenue recovery initiative focuses on contract terms, performance, and payments that can generate cash (see sidebar, “Gains to be made from a cost and revenue recovery program aligned with extended enterprise management”) and drive enhancements to extended enterprise management.
A good cost and revenue recovery initiative focuses on contract terms, performance, and payments that can generate cash and drive enhancements to extended enterprise management.
Initiatives through which organizations realize cost reduction by enhancing extended enterprise management include:
Specific areas of opportunity for cost and revenue recovery programs typically include:
A fruitful approach to cost and revenue recovery will not only look back to recover misspent money but also look forward to improve future performance. Future improvement occurs primarily through benchmarking to industry standards, right-sizing third-party relationships, identifying opportunities to streamline processes, and automating controls and monitoring. Four key cost and revenue recovery activities—AP analytics, statement of accounts, indirect tax, and supplier contract compliance—combine to drive these improvements (figure 2).
While they’re complementary in nature, each of these cost and revenue recovery activities can also be performed separately, depending on the organization’s spend management, extended enterprise management maturity, and objectives. Here’s how:
A strategic supplier analysis prioritizes tasks within these four activities based on contracts, AP extracts, purchase orders, invoices, and vendor master databases. Risk factors and potential flags include contract type, invoice volume, error history, incentives, inclusion or absence of certain contract terms, asset- or geography-specific exposures, and quality of existing controls. The nature and length of the relationship are also considered.
In practice, the same AP data extract supports each of these four activities, and the AP analytics and indirect tax prongs leverage the same data sets. This provides efficiency and expanded—even total—coverage of accounts while improving cash recovery. This technology-enabled approach can complement or replace existing reviews and audits, and can achieve more effective results compared to fragmented, episodic, sample-based methods of monitoring spend and performance.
A fruitful approach to cost and revenue recovery will not only look back to recover misspent money but also look forward to improve future performance.
With the extended enterprise becoming a business reality, the need for closer alignment between cost and revenue recovery and extended enterprise management at the operational and governance levels has become clear. It’s not just about cost and revenue recovery; it’s also about a way of conducting third-party relationships that are strategically, operationally, and financially vital to the organization.
To begin moving toward this way of managing the extended enterprise, consider the following actions:
For a host of reasons, cost and revenue recovery represents an excellent vehicle for any executive team that wants to enhance the performance of the extended enterprise and better understand and manage the costs, risks, and opportunities that third parties present to the organization.
Deloitte Risk and Financial Advisory can help organizations mitigate risk, reduce financial leakage, and accelerate performance across the extended enterprise. Our transformational extended enterprise management programs comprise enabling solutions that have demonstrated the ability to improve the bottom line through digital solutions, cost and revenue recovery programs, and managed risk services.