Case Study #3
How A Multi-Billion Dollar IT Provider Streamlined Its Operations While Managing Costs
Headquartered in the US, the client is a multi-billion dollar provider of voice and data network communications (e.g., broadband, voice over Internet Protocol (VoIP), multiprotocol label switching (MPLS), and managed services (e.g., virtual servers, managed firewall, etc.), to businesses in the United States. The company was formed as a result of a merger of the divisions of two telecommunications companies, and has experienced growth over the last 6 years through increased revenue and acquisitions.
As the result of some recent acquisitions over the last few years, the client absorbed additional workforce, assets and expenses. The client had been working the last few years to center its operations and cut costs. Through the process, the client realized it had done significant business with vendors in various departments, and needed to reduce product costs from these respective vendors in a strategic manner. To assist with this cost management strategy, the client asked Gaither & Company (“Gaither”) to develop an extensive sourcing strategy to achieve greater savings in a few key departments with over almost $200 million in annual spend.
Once we carefully framed a hypothesis for solutions to the client’s current objectives, the client decided to proceed. They asked us to collaborate with them as they embarked on an ambitious program to aggressively drive vendors to provide greater savings on their annual spend. Ultimately, the client decided to use a request for proposal (RFP) process, in which incumbent and non-incumbent vendors were asked to submit proposals that involved bids for future models that require a litany of components/items at the most competitive prices. This approach was used to strategically persuade vendors to provide competitive pricing by offering long-term contracts to the winning vendors. Historically, purchases were made on a yearly basis, and the current RFP process would award winning vendors 5-year contracts with the client, which in term meant guaranteed purchases for the respective 5 years. The client had used similar RFP approaches in the past for other departments, but chose to engage Gaither due to our proprietary methodologies and market analytics which would insure that the RFP process would be a pivotal success.
Gaither & Company’s Contribution
Based on analysis of the facts and available data, Gaither developed crucial processes and methodologies to drive towards department-wide savings. The overall approach for this engagement involved the following steps:
Develop a realistic baseline for future spend across the affected departments
Determine the client’s target prices for the projected purchases
Negotiate with the vendor to arrive as close as possible to the client’s target prices
Issue final terms and conditions to the selected vendors
Develop processes/methodologies for maintaining long-term savings department-wide
Develop a realistic baseline for future spend across the affected departments:
One of Gaither’s primary steps was to establish an approximate baseline for the 2 departments based on their historical spend for 2011. This was a unique challenge as the client was proposing to purchase components/items for telecom models that were never constructed before. Since Gaither had no historical data with which to compare the projected spend, we had to use multiple sources of information to construct the most approximate and credible projection for future spend. The first source involved analyzing purchase orders from the client’s internal databases. The client had two distinct databases as a result of an acquisition, and each database reflected different PO data. Gaither worked to compile and synthesize the data to accurately reflect the company’s aggregate purchases for the respective departments.
The next source involved asking the vendor to provide hypothetical pricing for the components/items if they were purchased in 2011, reflecting current discounts and agreements. In order to obtain credible information, Gaither held several meetings with the client and vendor, conveying the need for realistic pricing. Gaither matched to a high degree (approximately 90%), the items and the respective prices of the first source with the items and respective prices from the second source. The number of items compared totaled more than 20,000, which was more than an adequate sample for statistical purposes. Gaither decided to conservatively use the last-price-paid (LPP) to give the most realistic depiction of what the components/items would have cost in 2011.
Determine the client’s target prices for the projected purchases:
After the client was comfortable with the baseline developed, Gaither worked with the client to identify target prices for the respective components/items. This was based on management’s goals, historical pricing, estimated inflation, etc. Gaither paid special attention to the various criteria to ensure the target prices were reasonable and achievable, as the process was extremely delicate in persuading vendors to meet the client’s demands, and unrealistic approaches and/or expectations would have hindered or quite possibly thwarted the engagement’s overall goals.
Negotiate with the vendor to arrive as close as possible to the client’s target prices:
With the client’s input, Gaither negotiated with various vendors to arrive at the client’s target prices. This involved a combination of approaches such as meetings and discussions, emphasizing the long-term value for the respective vendors in providing favorable pricing. In addition, Gaither examined various incentives (e.g., technical support, extended warranties, etc.) the respective vendors were offering, and made concessions (with the client’s approval) on certain demands based on these incentives.
Issue final terms and conditions to the selected vendors:
Once negotiations were finalized, Gaither assisted the client in crafting and submitting the final terms and conditions to the chosen vendors, which included finalized pricing. This involved getting complete signoff from the senior executives of each vendor, and additional efforts to further strengthen the client’s long-term relationships with the respective vendors. Gaither advised the client that these relationships are key to long-term cost management, as the chosen vendors would be more likely to provide favorable pricing in the future if the client is open and responsive their concerns. With the client’s input, Gaither negotiated with various vendors to arrive at the client’s target prices.
Develop processes/methodologies for maintaining long-term savings department-wide:
Lastly, Gaither worked with the client to develop ensure the various processes and methodologies were thoroughly documented for use in maintaining effective management across the affected departments. Gaither & Company also held training sessions with the client’s management team, confirming their grasp of the various details involved in effective, long-term cost management.
As a result of Gaither’s efforts, the client has effectively saved an estimated 25% or $50 million across the 2 affected departments. Going forward, the client will use the cost management methodologies developed by Gaither for consistently monitoring department-wide spend, and for negotiating with vendors for favorable pricing.