Creative Way for States to Make Money through Vanity

on Wednesday, August 31, 2011

States are trying to figure out new and creative ways to supplement their ever shrinking budgets and offset their continuously expanding debt. Across the country, states are slashing spending, laying off employees, and increasing taxes wherever possible. Well in order to battle this and boost revenue, some states have realized people may pay top dollar for specific vanity license plates.

For decades, most states charged a minimal additional fee for customized plates – anywhere from $5 to $25. (In Pennsylvania the fee is currently $20). In recent years, states began raising these fees and proposing annual fee hikes. Well in these dire times, states like Texas have taken this a step further with auctioning off specific vanity plates. This year, in the country’s first vanity plate auction, the state of Texas earned $139,400 from selling these. A “PORSCHE” plate sold for $7,500 and a "FERRARI” plate sold for an amazing $15,000. The potential revenue growth for this market is enormous, especially in the U.S. Despite having 9.3 million motor vehicles with vanity plates, the 46 states that charged annual fees for them collectively raised only about $177 million, according to a 2007 study by the American Association of Motor Vehicle Administrators.

The U.S. state with the highest number of registered vanity plates was Virginia, with 16% of all vehicles, the 2007 study found. New Hampshire was second, followed by Illinois. The state with the lowest rate at the time was Texas at 0.56%. Texas has hired a private company to run and market these vanity plate auctions to raise $25 million over the next five years.

Other countries have already tapped this revenue stream with big results. A businessman in Abu Dhabi bought a license plate with "1" at an auction for $14.3 million in 2008. That of course was a critical investment in himself – before it was unclear, but now everyone truly knows who exactly is number 1 in the United Arab Emirates. Last year, in England, a retired businessman bought "1 RH" -- his initials -- for about $400,000. Hong Kong sold a plate that read "STORAGE" for $12,000.

Clearly low numbered plates offer their drivers ultimate prestige. But people often get customized plates for many different reasons – mostly as a way of self-expression. For example, using a vanity plate to let others know your likes and dislikes (“LUV2FRT,” “IH8CATS”), musical preferences (“8675309”), how you feel about them (“URATOOL”), how you feel about their parents (“LVURMOM”), your marital status (“D-WIFED,” “WUZ HIZ”), or just your overall level of nerdiness (“DCPTCON”).

People also use them as a way to attract the opposite sex – which I am sure works great although I was unable to find any empirical evidence. You have to be very careful with what plate you choose or end up with. You never know – you could mistakenly get the wrong vanity plate like Kramer did from Seinfeld – from a proctologist whose plate read “ASSMAN.” I wonder how much that one would go for at auction.
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Copper futures rise amid threat of strike in Indonesian mine and Chinese demand

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Copper futures rise amid threat of strike in Indonesian mine and Chinese demandCopper futures rose on August 31 as a possible strike at an Indonesian mine increased buying of the metal. Anticipation of strong physical demand from China also helped to fuel speculative buying, Reuters reports. Industry insiders have speculated that such a strike could significantly affect supply, which could cause problems for trading of the metal, according to Dow Jones Newswires.

The most-actively traded copper futures contract, which is scheduled for December delivery, rose 1.3 percent to reach $4.1940 per pound on the Comex division of the New York Mercantile Exchange, Dow Jones Newswires reports. Copper futures scheduled for September delivery also rose 1.3 percent to hit $4.1765 a pound.

"I think copper has been in a technical rebound this week boosted by the strike threat in Indonesia and anticipation of China restocking soon," Minmetals Futures analyst Zhuo Gui Qiu told Reuters.

Copper is utilized in manufacturing and the price of its futures is largely based on anticipated activity in that sector. If traders believe that manufacturing activity will improve, they will drive up the price of the commodity. Alternatively, speculation that output in the sector will drop will lead to lower prices.  
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Marketing Moves Made at GM

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A little over a week ago, GM announced its plan to launch a review of its media buying agencies. According to Advertising Age, GM released this news through a company statement reporting: “As part of its normal review of business processes, General Motors will request proposals on ways to improve the efficiency and effectiveness of its global operations for purchased media. The request for proposal (RFP) will be issued to several global media companies and will include all consumer-facing planning and buying operations in support of all media channels including print, digital, broadcast, SEO (search engine optimization) and social media.” This news is creating a lot of buzz in the industry mainly because of the size of GM’s advertising budget. The company reportedly spent about $4.26 billion in 2010 on its worldwide advertising. GM’s spend for creative work is included in this figure, but the majority of the spend represents actual media, such as TV ad placements. About 67% of 2010’s global advertising spend was for media buys placed in North America.

The media planning and buying responsibilities for GM are currently distributed across more than 20 global media buying companies. The New York Times adds that the bulk of GM’s spend is handled by three major agencies. Starcom MediaVest Group, a division of the Publicis Groupe, oversees advertising in North America. Carat, a division of the Aegis Group, handles advertising in Europe; and Universal McCann, a unit of the Interpublic Group of Companies, covers Latin America. The media planning and buying for China and India are not part of the scope of work for this initiative because GM operates as part of a joint venture in those countries.

Many industry professionals are trying to understand why this review is taking place. Vice President and Global Chief Marketing Officer at GM, Joel Ewanick, is leading the initiative and stated that GM is “looking for an innovative model that helps us become more effective in leveraging global marketing opportunities more efficiently. We will make a comprehensive assessment of all options before reaching a decision, and in fact, may end up validating our current approach.” Advertising Age followed up with another article that looks a bit more closely at GM’s motives; and several speculate that GM’s main objective is to uncover costs savings. Apparently, GM is in the midst of developing a plan in the U.S. to reduce spending so that it can eventually reach the level of spend it was at before filing for bankruptcy. In the first quarter of 2011, GM’s ad spending dropped by 8.3%. Even if cost cutting is GM’s main objective, Ralph Paglia of Tier10 Marketing points out that “media consumption patterns have changed dramatically in the last five years.” Therefore, some agencies included in the bid process may present creative proposals that address these pattern changes.

One aspect of this review that is important to note is that GM’s creative duties are not included in the scope either. GM’s advertising spend is unbundled as is the case with many global advertisers. Plus, GM already made some bold moves about 15 months ago when they moved Chevrolet and Cadillac to Goodby, Silverstein & Partners and Publicis’ Fallon, respectively, without a review.

To help with this review, GM has hired R3:JLB, a global marketing consulting firm based out of Chicago. R3:JLB will oversee the process and work with GM to overcome challenges encountered along the way, such as conflicts of interest. The pool of agencies included in the review may shrink due to the fact that exclusive relationships may already be in place with direct competitors of GM.

Since GM’s media buys are already unbundled from its creative spend, the real question that needs to be answered relates to whether or not consolidation makes sense. GM should also be mindful that when it comes to marketing, cost should not be the “end all, be all.” An agency's ability to collaborate with your creative team is highly important as well as the actual strategy to make sure the appropriate target audience is reached. Several factors need to be evaluated when the proposals are received. It should be very interesting to see how this all unfolds.

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DoJ Seeks to Block AT&T Acquisition of T-Mobile: The Future of 4G Unfolding

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Today, the United States Department of Justice seeks to block an AT&T acquisition of T-Mobile, a $39B deal, due to antitrust concerns. The DOJ complaint cited the resultant damage of the removal of T-Mobile from the competitive marketplace to be the crux of the matter. AT&T stands next to its claim that the acquisition of T-Mobile is necessary in order to facilitate the expansion and improved quality of it's 4G LTE network. AT&T responded to the suit today and indicated surprise as this suit was not anticipated following preliminary communnications with the DOJ prior to moving forward with the deals. AT&T also noted their intention to expedite and contest the matter in court, "We remain confident that this merger is in the best interest of consumers and our country, and the facts will prevail in court."

FCC Chairman, Julius Genachowski, responded today saying, “By filing suit today, the Department of Justice has concluded that AT&T’s acquisition of T-Mobile would substantially lessen competition in violation of the antitrust laws. Competition is an essential component of the FCC’s statutory public interest analysis, and although our process is not complete, the record before this agency also raises serious concerns about the impact of the proposed transaction on competition. Vibrant competition in wireless services is vital to innovation, investment, economic growth and job creation, and to drive our global leadership in mobile. Competition fosters consumer benefits, including more choices, better service and lower prices."

Sprint's Senior Vice President of Government Affairs, Vonya B. McCann responded in part, "The DOJ today delivered a decisive victory for consumers, competition and our country."

While this is a monumental case with significant implications no matter which direction it goes, it will be particularly interesting to see how things unfold as we watch 4G technologies Long Term Evolution (LTE) and WiMax continue to grow. With rumors in the past few weeks that Comcast, Time Warner Cable, and Brighthouse Networks are in talks with Sprint to raise the $600M required to help Clearwire convert its existing WiMax network to LTE. The WiMax/LTE decision has still not been made, but things are looking good for LTE at the moment. Both the AT&T acquisition of T-Mobile and Sprints continued talks with Clearwire and its investors will have a significant impact on the future of wireless voice and data in the United States.


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Manufacturing reports indicate hiring and expansion

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Manufacturing reports indicate hiring and expansionRecent reports on the Manufacturing industry indicate expansion and job creation. However, almost half of survey participants have indicated issues with supply chain disruptions, and a slightly-lower fraction stated they needed to find new suppliers.

A Federal Reserve report on Industrial Production and Capacity Utilization that was released August 16 indicates that manufacturing output increased 0.6 percent in July. This improvement followed gains of 0.2 percent that occurred in both May and June. A major contributor to July's upward movement was a 5.2 percent jump in the index for motor vehicles and parts.

"The growth in manufacturing output in both May and June were revised upward," Don Norman, economist for the Manufacturers Alliance/MAPI, told Industry Week.

He added that "for manufacturing, the increase was the largest since March 2011."

MFG.com, which provides a global sourcing marketplace for manufacturers, announced the results of its Quarterly Survey of North American Manufacturers on August 30. The survey data indicates that 36 percent of contract manufacturers and job shops increased hiring in the second quarter.

The manufacturing sector seems to be improving steadily as a recent Institute for Supply Management report indicated that July was the 24th straight month of expansion for the industry.  
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Public School Systems Continue to Outsource Services

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Reducing budget deficits in our public school systems is not an easy task for public officials. Many school systems are turning to outsourcing ancillary services as an alternative to cutting vital classroom services. Custodian services are the number one target across the country. Private custodial firms work more efficiently by utilizing a fleet of new and time-saving machinery typically not in the budget for a school custodial department. They also take advantage of a full management structure to drive efficiency. School custodial departments typically just have a head custodian, and possibly an assistant managing the process on a per-school, decentralized basis. In one recent example, Monroe County School District which services the Florida Keys announced the outsourcing of custodial and maintenance services. This move is projected to save $1.2 million annually.

Outsourcing decisions are not without their share of controversy. School custodial workers argue that they are more than just cleaners . Their jobs also involve other tasks such as helping out in emergencies, and helping teachers move furniture and goods. In some cases though, the cost savings are just too compelling to ignore given the budget crises across public school systems.

Outsourcing services doesn't just save money for public schools, it can work for businesses too. Many companies may be performing services at an unnecessarily high cost as a result of anything from micro-management to a "that's how it's always been" mentality. If outsourcing services to produce cost savings is something your business could benefit from, a cost reduction specialist like Source One may be able to help.
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Cost Savings in the Windy City Part 7 - Understanding Termination Penalties

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In times of crisis, leaders can often be heard saying, “We hope for the best but we prepare for the worst”. In the case of the contract between Accenture and the City of Chicago, it’s clear that one party kept this mantra in mind.

Exhibit 2 of the Chicago/Accenture contract provides context to the rules surrounding early termination. Both the City and Accenture can terminate the agreement (for convenience/without cause), upon 30 days written notice. No penalty fees will be incurred for early termination; however the City is required to compensate Accenture for fees due up to the date of termination.

The agreement also allows Accenture to terminate with cause in the event that:
  • “a material change to the City of Chicago’s financial condition that affects the City of Chicago’s ability to meet its financial commitments to Accenture”
  • “the City of Chicago has failed to pay Accenture within 60 days from receipt of an invoice from Accenture and Accenture has given the City of Chicago 30 days written notice specifically identifying the breach, unless the breach is cured within the 30 day period”
  • “The City of Chicago has failed to make commercially reasonable efforts to maintain Addressable Spend of up to $500 million within 20 business days of receiving notice from Accenture as described in Exhibit 1"

If Chicago terminates the contract without cause, or if Accenture terminates the contract with cause, Accenture is still due their fee. The fee is either the amount “Value Based Fees” earned against “Value Committed Milestones” through the effective date of termination (same as when Accenture terminates without cause) OR an amount listed in Table 4 of the Exhibit, called “Minimum Termination Schedule” - whichever is greater.

The minimum termination schedule starts in September 2011 and ends in October 2012, and each month has an amount in it ranging from a low of $128K to a high of $934K, as well as a totaled amount of $8.2 million listed at the bottom of the chart. Since the numbers are totaled, it’s a good bet that if the agreement is terminated in October 2011, the fees due will be September + October, in this case, $1.155 million. Not bad for two months work provided by…how many resources?

Yes, we noticed a rounding error in this table too, it should be 8,221,121. This contract is full of mistakes like thisThe minimum termination schedule is telling in that it gives an indication of how much, minimally, Accenture expects to make on the deal over the next year- $8.2 million. Anything above this amount will be gravy.

The termination clause, as outlined above and as written is probably one of the most lopsided clauses we have ever read. Accenture can terminate with or without cause, and they still get paid. The city can terminate at convenience, and they still have to pay. Yet there is nothing in this agreement that defines how the City can terminate with cause and without penalty; the contract is moot on that point. Once the City signed the agreement, Accenture was going to make money, regardless of how much or how little savings were actually achieved.

The applicability of a minimum amount due in a contingency agreement aside, the three reasons defined as “cause” by Accenture also come into question.

“A material change to the City of Chicago’s financial condition that affects the City of Chicago’s ability to meet its financial commitments to Accenture”.
This is a fairly broad statement. Normally a contract would define precisely what conditions need to be met in order for an agreement to be terminated due to financial conditions. Some metric, such as bankruptcy, should be provided. Otherwise, any negative report on the City’s finances could be reason enough for Accenture to bail (and get their minimum payment).


“the City of Chicago has failed to pay Accenture within 60 days from receipt of an invoice from Accenture and Accenture has given the City of Chicago 30 days written notice specifically identifying the breach, unless the breach is cured within the 30 day period”
This rationale for cause puts tremendous risk on the city. The people in AP who are responsible for writing the check to Accenture had better be on their game. One slip up, particularly in March or April when the minimum fee schedule peaks, and the folks at Accenture may decide their services are better suited elsewhere.


“The City of Chicago has failed to make commercially reasonable efforts to maintain Addressable Spend of up to $500 million within 20 business days of receiving notice from Accenture as described in Exhibit 1”
This statement, like the first, is way too broad for us. After all, who defines what is reasonable? Let’s say the City can only find $400 million in addressable projects. Accenture gives notice and then what? The project is cancelled because there is not enough spend, AND Accenture still gets their minimum (yet still substantial) fee up through that date? It doesn’t seem rational that a City looking to reduce costs will be penalized for not having high enough spend. Yet that is how this contract is structured. That aside, the clause may work in the City’s favor, as I would guess Accenture meant for this clause to say “at least $500 million” rather than “up to $500 million”.

Now, is it likely that Accenture, acting in good faith, would terminate this agreement with cause due to any of the clauses provided above, just to get the minimum fee dictated by the agreement? Probably not. But just as we have seen with pretty much everything else in this contract, the concept of risk and reward is clearly spelled out. And in every case, the risk goes to the customer, the reward to the consultant. The only guarantee is that Accenture will get paid.

Stay tuned for our last post on the Chicago/Accenture contract where we will answer the real question, are Chicago taxpayers likely to get what they pay for?

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See the Windy City Cost Savings Series:

Part 1 - An Intro to Chicago Accenture Sourcing Deal
Part 2 - Unclear Language and Term Definitions
Part 3 - Analyzing the Accenture Fee Structure
Part 4 - Tracking and Compliance
Part 5 - Resources and Responsibilities
Part 6 - Determining What Counts as Savings
Part 7 - You are Here
Part 8 - Will Taxpayers Get What They Paid For in Chicago
Part 9 - Final Thoughts on Accenture Chicago
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Boeing officials set sights on $1 trillion in new orders

on Tuesday, August 30, 2011

Boeing officials set sights on $1 trillion in new orders  Boeing Co., the world's second-largest aeronautics company, is hoping an updated, energy efficient version of its vaunted 737 will help increase its market share over the next 20 years, according to a published report.

Boeing, which recently won government approval for its Dreamliner, is looking to capture at least half of the airline market over the coming years. Bloomberg reports that Boeing officials are betting the company's latest iteration of the 737, the MAX, will help it to receive more than $1 trillion in new orders.

Airbus is Boeing's biggest competitor, and the European-based agency announced earlier in the summer it had received a record number of orders for its new energy efficient planes. Airliners across the globe are increasingly working to improve fuel efficiency, especially given the volatile swings in energy prices witnessed over the past few years.

"This is an airplane that’s going to allow us not to just maintain the market share we have, but one that will allow us to grow the market share," Boeing Commercial Airplanes president Jim Albaugh said.
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Virginia coal-fired plant to close

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Virginia coal-fired plant to close  The federal government has enacted increasingly stringent environmental regulations over the past decade. Many utilities are preparing to decommission antiquated coal-fired power plants as a result of the new laws, with one of the biggest such facilities in the U.S. slated to close next year.

The Associated Press reports that federal guidelines pertaining to greenhouse gas emissions will ultimately result in the closure of roughly 20 percent of the country's coal-fired power plants. While such facilities are responsible for a significant amount of energy generation and can be turned on quickly, they are also some of the biggest polluters, experts say.

The Potomac River Generation Station, located near Old Town Alexandria, Virginia, will shut its doors next year as operator GenOn Energy complies with the environmental regulations. Environmentalists have long worked to close the plant, and city officials recently agreed to a deal with the Houston, Texas-based power company to close the antiquated power generating facility, according to The AP.

Some industry analysts are worried, however, that the closure of coal-fired plants will spur higher electricity prices for consumers. Many utility officials have similarly expressed such concerns, affirming they will be unable to achieve business cost reductions as they invest in renewable energy technologies, which are considerably more expensive.
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Cost Savings in the Windy City Part 6 - Determining What Counts as Savings

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The word savings itself can be somewhat enigmatic. Everyone has a concept of what savings “is”, but how to define it is something else altogether. Some would say that only a unit cost reduction (I paid 2, now I pay 1) counts as savings. Others include “cost avoidance” in their definition (I paid 2 in the past, now I pay 3, but I would have paid 4). Sometimes savings definitions include non-price or total cost of ownership factors, such as the reduction of demand or process improvements that make tactical transactions more efficient. The doctor over at Sourcing Innovation even likes to opine that there’s no such thing as savings.

In the case of the City of Chicago, savings can probably be defined as anything that results in a budgetary reduction, when compared to the previous year. In order to achieve these reductions, the City has enlisted the help of Accenture, who has agreed to work on a gain share basis, only getting paid if they produce savings.

This brings about an important question - is the Accenture definition of savings in line with how the City of Chicago defines it, or at least should define it? After all, alignment between the two definitions is critical not only to the success of the program for the City, but to the Accenture compensation model.

Appendix A of the contract between Chicago and Accenture goes into great detail as to what qualifies as savings, or what Accenture calls “Sourcing Benefit Levers”….really? There are 15 “levers” in total, and I give Accenture credit for the clarity they provide in this section of the contract - each lever includes a definition, an example (called a “Situation” and “Result”), and the precise way savings would be calculated and forecasted out (referred to as “Benefits”). Some are very reasonable. For example, Lever # 1 - Purchase Price Reduction, is basically a no brainer. It is defined as a “Reduction in baseline purchase price for same specification with same supplier”, which could not be more clear. Lever # 2 - Specification Changes, even takes into account switching costs, though some may take issue with how those costs are determined. Lever #5 - Contract Compliance demonstrates that Accenture will also be auditing invoices and requesting credits if the supplier charges an incorrect price. Lever #11 accounts for transportation costs. While overall the “sourcing levers” defined in the agreement match the City’s expectation of budgetary reductions, there are a few calculations Chicago should have had removed from this agreement, or at the least, defined more clearly.

Lever #4 - Capital Improvement. This lever is defined as “Capital savings attributed to improved inventory management performance, although absolute value of capital expenditures may remain constant or increase due to overall demand increases”. Accenture gives an example illustrating an inventory of motors. In the example, a 60 days supply equating to 100,000 units (worth $300 each) of motors is kept in inventory. As part of an Accenture recommendation, inventory performance is improved by 20%. Accenture considers this a “one-time benefit” of 20,000 units reduced at $300 a clip, translating to $6 million in savings.

In this example, the motors will still be purchased, just at a later date, but Accenture is calling it a savings. There may be a business case that demonstrates a reduction in inventory carrying costs, but certainly not 100% of the value of the inventory. Will the City budget be impacted by 100%? Not really, this option simply improves their cash flow position. This lever really gives me pause, because there are tons of vendor managed inventory and other programs that the City should and could be taking advantage of to improve inventory carrying costs, but outsourcing your tool crib to a third party certainly doesn’t translate into a 100% savings for spare parts. Given the current definition, Accenture could make a good amount of money by simply recommending lower inventory levels. Additionally, there is no mechanism for defining the additional cost of presumably higher order quantities now that inventory is cycling quicker (which are in fact accounted for as a savings in Lever #8 below).

Lever #8 -Purchasing Process Improvement. The definition states this is a “Change in purchasing process, resulting in a lower cost to buy.” In the example of savings, Accenture transitions individual buys for each location for a particular item to a centralized demand and buy through a blanket Purchase Order (PO). So instead of issuing dozens or hundreds POs for the same item, scheduled releases come off of one PO. The benefits include “Purchase Price Reduction + transaction process cost reductions”, yet transaction process costs are undefined. So in this case, if Accenture identifies a way to improve a process, they will apply “transaction process cost reduction” to the savings calculation, but they do not spell out how to calculate that reduction in the contract.

Besides the lack of a clear definition, the problem is this really isn’t a cost reduction to the City. Sure, people will be working more efficiently, and additional time available may mean that they will get to projects they didn’t have time for before. In the long run it might even mean the city doesn’t have to hire additional staff. Identifying these types of efficiencies is important, but they have zero budgetary impact. This should be considered a value-add, not a cost savings.

Lever #9 - Operational Process Improvement. The contract defines this as a “Reduction in FTEs given a streamlined or consolidated processes (e.g., centralized planning).” The example includes reducing resource needs by 25%, “through process changes and new automation”. Under this scenario, Accenture Value Added Fees are weighted against 100% of the reduction in staff.

There are numerous issues for including headcount reduction as a form of savings during a strategic sourcing initiative, particularly when working with a government entity. First, it is important to remember a point we covered in our last post on this topic. Once Accenture issues a recommendation, the City has 10 days to accept or disqualify it. After the 10 days pass, the proposal is accepted by default and Accenture is due its fees. Accenture can recommend a headcount reduction, and if the City doesn’t have time to review the recommendation within the allotted timeframe (maybe because they don’t have enough heads), Accenture gets paid, even if the City doesn’t follow through.

Beyond the timeline restriction, which really is a concern of ours for all of the levers, is the problem of the applicability of a clause like this in a government contract. In government, like it or not, it’s very difficult to just get rid of people. Even if the City is overstaffed, which they probably are not, the best they could hope for is the ability to shift resources to other areas. Perhaps Accenture has created efficiency in that the City no longer needs to add headcount sometime in the future, but from a budgetary perspective, there is no net improvement on the books.

The second issue with this lever is that the calculation provided by Accenture takes no consideration into the costs of process improvements or “new automation”. Under their scenario, you can replace a man with a machine and the savings is based on the cost of the man, without factoring in the cost of the machine. Total Cost of Ownership it ain’t.

Third, under Lever #8 we have savings accounted for “transactional process cost reductions”, in other words, for making people more efficient. However, if reducing headcount means a shift of some, if not all, of that FTE’s responsibilities to other workers, shouldn’t the added capacity placed on others be factored into the savings? Efficiency savings run both ways.

Lastly, and possibly most importantly, the project the City has engaged in with Accenture requires a substantial amount of time and effort from city employees. How willing will employees be to work with Accenture or implement their programs if the consulting firm is simultaneously recommending headcount reduction? Yes, FTE reductions should be analyzed, but that initiative should be separate and apart from a strategic sourcing engagement.

Overall, many of the savings levers that result in compensation to Accenture are in line with the City’s goal of budgetary cost reduction. However keep in mind that Accenture gets paid whether the City takes action or not - as long as the City accepts the recommendation. That being the case, some of the levers identified in the contract do not belong there, or at least require further explanation.

In our next post on the Accenture/City of Chicago contract, we will examine termination penalties and what happens if things go wrong. We will then wrap up the series with our take on the contract as a whole, and give our prediction on what the results of this engagement will produce, for both Chicago and Accenture.

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See the full series:


Part 1 - An Intro to Chicago Accenture Sourcing Deal
Part 2 - Unclear Language and Term Definitions
Part 3 - Analyzing the Accenture Fee Structure
Part 4 - Tracking and Compliance
Part 5 - Resources and Responsibilities
Part 6 - Determining What Counts as Savings
Part 7 - Understanding Termination Clauses and Penalties
Part 8 - Wrap Up, Getting What You Paid For?
Part 9 - Why We Did the Cost Savings Series
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Cost Savings in the Windy City Part 5 - Resources and Responsibilities

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We are now several posts deep into our our ‘Cost Savings in the Windy City’ analysis of the City of Chicago and Accenture’s contract for Strategic Sourcing Services that was announced by Mayor Rahm Emanuel on Thursday August 18th, 2011. So far, we discussed the confusing terms, the fee structure, and the tracking and auditing of compliance. Today we will be discussing the resource and responsibilities of each party.

Staffing Requirements:
Services: City Support Requirements:
i) “Provide Procurement Strategic Sourcing Executive Lead (1 day per week)”
We think this is perfectly reasonable. Executive sponsorship and leadership is critical to any sourcing projects ultimate success.

ii) “Provide City of Chicago Project Manager (3 days per week)”
Do we feel this excessive? Well, no. It might not even be enough people power based on the amount of work that Chicago agreed to perform. The only comment we can make here is that Accenture defines all kinds of “soft costs” as savings that they should be paid on. Shouldn’t it work both ways? The soft costs of managers and resources provided by Chicago should offset the “savings” that Accenture puts up.

iii) “Provide 4-8 Strategic Sourcing resources (2 to 3 days per week) to participate in strategic sourcing projects, with exact resource need to be determined as part of Spend Assessment”
Four to eight half-time+ resources? Who is actually doing this consulting engagement? Accenture, or Chicago? Is Accenture simply providing training services for the City’s staff? If so, 10% is pretty high. Is Chicago staffing 50% of this engagement, more? This number seems excessive; we would expect Accenture to be providing these resources.

iv) “Provide analysts to prepare data (as needed)”
This is a very generic statement that could put a lot of undue hardship on the City. In engagements for our clients, we typically send our own staff in for data collection (once the internal resources point us in the right direction).

Accenture Support Requirements:

Oops, my mistake, the “Accenture Support Requirements” section does not exist. In fact, there is very little in the contract that specifies how many resources Accenture needs to staff the initiative. Within the document, there is a letter from Accenture to the CPO of Chicago that explains:
“Given the unique gain share structure of this PSA, Accenture does not yet have an accurate perspective on the anticipated required FTE effort or fees for this project”
What exactly does that mean? Because this is a “unique gain share” does that mean that Accenture is not going to provide the same level of service they would on a fee based project? Shouldn’t Accenture be able to estimate the amount of resources they need if they are in this business? I know we would be able to.

To their credit, Accenture points out that if the City does not like the direction that the initiative is headed in after the spend assessment; it can walk away without obligation. But how likely is that, especially after Rahm Emanuel publicly announced this cost reduction initiative. And wouldn't the $250,000 assessment fee that was already paid to Accenture count as some sort of obligation?

Timelines:

“Review and approve Spend Assessment deliverables within 10 business days or provide feedback for resolution to allow for progression into Strategic Sourcing”
As we have discussed in detail in a previous post, failure to meet this responsibility means that Chicago immediately agrees to whatever is presented in the Accenture report. In the real world, 10 days is simply an unreasonablyshort time to review such information. The contract calls for two waves of approximately 35 sourcing projects to be happening at the same time. Does a business manager have the time to review/audit and understand multiple reports if they are delivered on the same day/week? What if someone is on assignment or vacation? What if the report gets delivered the day before the holidays? What if a piece of baseline data needs to be challenged? Can they retrieve information from a supplier in enough time? In our opinion, the 10-day restriction puts Chicago at risk of signing something that they don’t completely understand.

“Accenture will invoice the City of Chicago on the 15th and last day of each month based on Value Committed Milestones two months earlier. Payments will be due 60 days from invoice as described below…….This should allow the City of Chicago to pay Value Based Fees from previously Realized Savings, staying cash flow positive at all times.”

We will save the discussion of simply assuming that things got 100% implemented for another day. (Notice the word “Should” instead of “will” above). Now, let’s assume that Chicago does actually have the resources and management to make sure that a project gets implemented, and for a particular project they are planning on changing vendors. Does 2 months provide enough time to achieve 100% compliance? The short answer, in 50% of spend categories, is no. It is unreasonable to expect every project to be a simple flip of a switch or signing of a contract and poof, magical savings are achieved. In the real world, the suppliers may need prep time, your own staff may need training, materials or products might need to be tested, and pricing and billing platforms need to be audited. This cannot always happen in 2 months.

In our post covering audits, we already discussed that the City is exclusively responsible for tracking and measuring savings and compliance, so we will not re-hash it all here. Let’s just say that we feel that the contract puts an undue burden on Chicago that we would never expect our own clients to accept.

Overall, we feel that this contract is extremely specific about the City’s support requirements and extremely vague about Accenture’s requirements. Other bloggers had commented that 10% was a low fee for this type of engagement. We believe that due to the amount of resources Chicago is committed to, combined with the ability for Accenture to earn a fee based on projected savings and soft-dollar savings, as opposed to actual realized hard-dollar savings, 10% is not a low number at all, it’s a windfall.

Up next, Joe will continue to discuss some of the details of calculating the baseline and savings forecasts.

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Links to each article:
  1. An Introduction to the Accenture Chicago Contract and our Analysis
  2. A look at the redifined terms created by Accenture and Chicago
  3. A quick view of the Accenture Fee Structure for Sourcing Services in Chicago
  4. Audit and Compliance Responsibilities and Tracking
  5. You are here. 
  6. What Counts as Savings
  7. Termination Clauses and Penalties
  8. Will Taxpayers Benefit?
  9. Wrapping Up, Why We Wrote This Series
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Mining giant expects Chinese demand to keep copper prices high

on Monday, August 29, 2011

Mining giant expects Chinese demand to keep copper prices high  Many commodities have surged in value over the past two years, as worldwide inventories have rapidly depleted amid burgeoning demand. According to a published report, the world's biggest copper producer is betting China's exceedingly high consumption rates will justify its massive investment in its mines.

Bloomberg reports that Codelco plans to invest more than $20 billion as it works to upgrade its copper mines. Codelco chief financial officer Thomas Keller said in an interview this week the mining giant expects copper prices to continue to rise over the next year as demand for the commodity - used in most construction projects, as well as in a number of electronics - rises in emerging economies.

Copper futures have declined 10 percent this month, but the metal has soared in value over the past few years, leading many analysts to dub it "the new gold."

Global supply shortages have served to bolster prices, while Codelco projects demand from China, which currently uses about 35 percent of the company's out, will help support the commodity's high prices.

"Copper is on very sound footing to withstand these difficult times," Keller said. "Our investment plan won’t be impacted by the short-term copper price indicators."
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Cost Savings in the Windy City Part 4 - Audit and Tracking

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As we continue our series exploring the Chicago/Accenture sourcing contract , our next point of analysis concerns the contract language surrounding auditing and tracking of savings, project success, and ultimately Accenture’s fees (or ‘Value Added Fee’ as they like to call it).

As was recently pointed out in our last chapter ,the fees are already structured in a way that is not optimal for the city of Chicago. In a later post, we will discuss in detail the resources that are required of Chicago’s workforce to support the initiative, and the lack of detail surrounding the commitment on Accenture’s side. The point for now is, for auditing and tracking, the burden of it is placed solely on the City’s resources.

Generally speaking, tracking and auditing the results of sourcing events can be as critical as the bidding event and methodology (RFP, Negotiation, Auction, etc.) itself. Without constant review or adequate monitoring, every spend category can be at risk of never reaching compliance or not achieving expected savings. Maverick buying (employees buying from something other than the contract), suppliers raising prices, usage pattern shifts, and a variety of other factors can contribute to sourcing initiatives never reaching their savings forecasts. ‘Forecast’ is an extremely critical word in the last sentence, because that is what Accenture uses to determine how it gets paid.

In our experience in consulting engagements such as this, the supplier (procurement service consultants) typically assumes the bulk of the responsibility of ensuring compliance. The consultant normally does this not only to protect its fee (assuming it gets paid from actual instead of forecasted results), but it also does this as part of its professional services to help the already-resource-restrained customers that hired it. However, this particular contract does not follow the “typical” consulting engagement.

Very early in the document (Scope of Services, Page 1), we are hit with this:
“City Responsibilities: iii) Help develop and implement financial scorecards to manage realized savings, which are the savings accrued monthly based on savings commitments.”
Then, later in the document under “Project Value Milestone”, we see this:
“The City of Chicago will be responsible for calculating actual gross benefits realized on a monthly basis (“Value Realized”) for all project benefit areas….”
Okay, so it is now clear that it is the City’s sole responsibility to track and monitor compliance and usage. So, aside from maybe some minor compliance issues, why is any of this all that important? Let me direct you to Exhibit 2, Schedule of Payment:
“Accenture’s Value Based Fees shall be accrued against the Gainshare Percentage of Committed Savings (i.e., benefits that are projected at the Value Committed Milestone…..)”
This is the critical point: Accenture earns their fees based on forecasted savings that had been agreed upon in a report BEFORE implementation is ever even attempted. Even more, Accenture starts billing 2 months after the report is agreed to. The reality is that it is highly unlikely to implement 100% compliance in that short of a time frame. We will show you why in a subsequent post.

So, Chicago hires a consulting firm. The consulting firm does some work and provides some guidance and documents on how to reach some savings target. They then want to start getting paid on those targets within 2 months. Chicago is already crunched for resources and has not done the greatest job in these areas in the past (that’s why they hired a consultant, right?). Now, Chicago is exclusively responsible for implementation and compliance. Keep in mind that there are up to 35 simultaneous projects going on at the same time, within this Accenture initiative alone. It is starting to look like those forecasted savings targets might never get achieved.

Still not convinced that these terms are not as favorable as they should be? Let’s look at Chicago’s right to audit:
“Accenture agrees that upon twelve months after the completion of the strategic sourcing project, the City of Chicago may elect to review any material changes in the volumes of the sourced categories with Accenture.”
The wording of this clause was very carefully chosen. It authorizes Chicago to conduct an audit on a spend category, and a later clause allows them to seek a financial adjustment to from Accenture. However, the term specifically says a material change to ‘volumes’. The auditing does not provide any remedy or price relief for non-compliance, only on adjustments in pricing volumes. Theoretically, the suppliers can stop honoring a price, and Accenture still gets paid for the original savings projections because Chicago can only contest volume.

Under the “Schedule of Payment” section Accenture provides some very vague language:
“…Will work together in good faith to implement market pricing adjustments for specific UVEs when pricing/cost changes occur due to market forces outside of the City of Chicago’s and Accenture’s control, including applicable inflation. …..Examples may include increases or decreases in a supplier’s raw material costs, currency fluctuations, or significant variability in the supply market”
Wouldn’t inflation, raw material costs, currency fluctuations and variability of supply cover just about every reason a supplier might adjust their price? In our opinion, the language of the audit and fee component simply does not offer Chicago adequate protection from fees owed to Accenture without guaranteed benefits.

We are not quite done yet. The auditing definition is even more cumbersome than what we outlined earlier.
“It shall be the sole responsibility of the City of Chicago to schedule this review and the City of Chicago must give Accenture 30 days advance written notice of the review. If the City of Chicago does not elect within 13 months of the completion of the project to initiate the review, Accenture shall have no obligations to participate in any review.”
So, the City’s procurement team, which is already short on resources, is now conducting aboutof 70 projects over a one-year period AND presumably still has their day-to-day job responsibilities. Now, they have to measure and track results for each project that a consultant helped them with, and is solely responsible for remembering that on the 11-month anniversary of each project’s report signature date that it must contact Accenture to schedule an audit, and then must conduct the audit itself. I guess that makes sense; Accenture never claimed to be in the audit business, right?

Almost as a slap in the face, the Audit section of the contract wraps up with this:
“The City of Chicago agrees and recognizes that Accenture is taking considerable risks on the City’s behalf by allowing a deferred gain share payment instead of a fixed fee schedule.”
As an outsider looking in, I would say that Chicago is the one assuming almost all of the risk with this contract.

Our next post in this series will discuss the resource requirements outlined in the contract.

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Start from the beginning:
  1. An Introduction to the Accenture Chicago Contract and our Analysis
  2. A look at the redifined terms created by Accenture and Chicago
  3. A quick view of the Accenture Fee Structure for Sourcing Services in Chicago
  4. You are here
  5. Roles and Responsibilies of Chicago and Accenture
  6. Savings Calculations
  7. The Termination Clauses
  8. The Actual Benefits to Taxpayers
  9. Reason for This Analysis
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McGraw-Hill more valuable if split in pieces, experts say

on Friday, August 26, 2011

McGraw-Hill more valuable if split in pieces, experts say  McGraw-Hill is a business that sells textbooks, rates government bonds and compiles car surveys, but industry experts believe the company will be far more profitable if it is broken up into smaller discrete units, according to a report from Bloomberg.

Though estimates vary, many experts contend McGraw-Hill could be more than 40 percent more profitable if it is sold and broken into separate businesses. Though the company has long been an American powerhouse, the recession has caused a decline in textbook sales. What's more, the positive ratings it bestowed upon subprime mortgages were shown to be ill-advised, following the financial crisis.

The company is worth a reported $11.7 billion, but its market value has fallen over the past few years, and it is now worth less than rival firms, according to the news provider.

However, JPMorgan Chase & Co. analysts assert the company's shareholders stand to benefit if it is broken up and its businesses are valued separately. According to estimates from the vaunted U.S. bank, McGraw-Hill shareholders could get roughly $5 billion more in a payout, should the company be broken up.

"A breakup is better," Holland & Co. chairman Michael Holland said in an interview this week. The company has "value that isn't being reflected in the market today. They just have really good brands. The CEO and the board have to consider if they want to unlock value," he added.

If McGraw-Hill were to take such a path, it would not be the first company to do so. The recession has placed an inordinate amount of pressure on businesses to increase their efficiency and achieve business cost reductions as they navigate the volatile economic landscape.

Many companies have struggled amid tepid demand for products, and McGraw-Hill has fared poorly, with subdivisions like Standard & Poor's coming under intense scrutiny in the wake of its downgrade of the U.S. government's credit rating.

The company appears to be moving closer to a break-up, with Jana Partners and Ontario Teacher's Pension Plan, which represent two of the company's minority shareholders, stating in an Securities and Exchange Commission filing they had met with company management to discuss a plan to break the company into four units, CNN reports.

Nonetheless, there is uncertainty surrounding whether the company will move forward with such plans. 
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Cost Savings in the Windy City Part 3 - Analyzing the Accenture Fee Structure

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The concept behind the city of Chicago’s contract with Accenture is “Gainshare”, meaning Accenture receives a percentage of the savings achieved by the city. In this case, the fee structure allows for compensation of 10% of savings up to $70 million, tapering downwards after that.

Accenture Fee Table

In theory, this type of arrangement means that the city can only come out ahead - or at worst, even (if no savings can be found). However, contingency can be a tricky concept and several questions need to be answered to validate the budget-neutral or budget-positive theory, including how is savings defined, how is it calculated and most importantly, when is it billed for?

The question of how savings are defined is spelled out in detail in the contract. Rather than use the contract terminology, which is needlessly cumbersome, I will use “common folk” speak to explain it. Under the agreement, before sourcing begins, spend is analyzed by project area and a baseline report is provided to the City. This baseline report spells out current price points down to an SKU level, and is intended to be a “Total Cost of Ownership” assessment including service levels, price change mechanisms, contractual requirements, and any other relevant information. The report also provides the strategies that will be employed to achieve savings for the project area. The City has ten days to review and approve or dispute the report, and then sourcing begins. This report is intended to be the basis for all future savings calculations and projections.

After market research, sourcing and negotiations are complete, a new report is created that provides the City with the savings options. The City now has ten days to approve or dispute the opportunity, after which the savings is considered “Value Committed” and Accenture is due their “Value Based Fees” of 10% of forecasted savings.

So when is Accenture due its 10% of savings? After a contract is executed with a new vendor? After implementation? After testing and approval of an alternative specification? No. Accenture bills their fee, in whole, 2 months after they present the savings opportunity to the City. And that’s where the major problems with this agreement start.

The actual language states that :
Accenture’s Value Based Fees shall be accrued against the Gainshare Percentage of Committed Savings expected to arise from a UVE during the life of the contract with the vendor following implementation and the start of benefits being received by the City of Chicago as confirmed by the Value Committed Milestone. For contracts with a life of greater than 24 months, the Value Based Fees will be capped based on Committed Savings over the first 24 months of the contract.
Under this scenario, Accenture receives their 10%, up front, based on a 2 year projection that requires the City to take full advantage of 100% of the savings opportunities identified. The likelihood of 100% compliance and actual savings being the same as forecasted is not very high.

Why not? Well, as Peter Smith referenced on Spend Matters, right now the city has no current picture of spending. With a procurement team that has no real tracking or controls in place currently, how are concepts such as preferred supplier utilization, consolidation, product substitution, and inventory management, not to mention ongoing supplier account management, SLA Maintenance and operational process improvements supposed to take place?

Sure, some may say that Rahm Emanuel is tough, and he will mandate the change necessary. But as we’ve mentioned in previously blog posts, an Aberdeen study has shown that even in companies with shareholder responsibilities and monthly/quarterly/annual P&L goals, 66% of savings go unrealized.

The reality is identifying savings is the easy part! Most markets have competition, and leveraging offers and negotiating pricing is basically a tactical skill. The real challenge of strategic sourcing is change management - getting your own people to make the changes necessary to implement and sustain the savings opportunity. In this case, Accenture isn’t on the hook for the hard part; they get their fee when savings are identified.

Assuming only one out of every three savings dollars identified are actually implemented, the real fee to Accenture is closer to 30% of savings. Even 30% is not bad, but it’s also no guarantee. In a government setting, many savings opportunities may get squandered altogether. If a consulting firm is getting paid based on savings, it should have some responsibility for ensuring the savings are implemented, and the responsibility of tracking should go to them as well. Contingency is supposed to be about the consultant taking on risk in exchange for a reward. Unfortunately in this agreement, all the risk remains with the customer, with no guaranteed reward. But Accenture tries to paint the picture otherwise in the contract terms:
“The City of Chicago agrees and recognizes that Accenture is taking considerable risks on the City’s behalf by allowing a deferred gain share payment instead of a fixed fee schedule.”
Next week, in our next post on this topic, Bill will provide some context to who is actually tracking the savings, and what happens in a year if Chicago looks back and sees that the budget is still bloated. In future posts we will cover the types of savings that are billable by Accenture and answer the question: Are Chicago taxpayers likely to get what they pay for?
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Part 1 - an intro
Part 2 - term confusion 
Part 4 - Audit and Tracking
Part 5 - Responsibilities
Part 6 - Calculating Savings
Part 7 - Understanding Termination Clauses and Penalties
Part 8 - Will Taxpayers Get What Was Promised?
Part 9 - What Reason Did We Analyze This For?

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Cost Savings in the Windy City Part 2 - Unclear Language and Term Definitions

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Yesterday, we kicked off our blog series “Cost Savings in the Windy City” with a quick recap of the contract that the City of Chicago has just signed with Accenture to provide strategic sourcing services. Before Joe and I get into the contract term analysis, I wanted to talk about our high level impressions of the contract.

As with many large-dollar contracts that we evaluate, we expected to see a lot of legal jargon and clauses meant for lawyers to potentially argue over down the road. In reality, there was not a lot of that in this agreement. However, in my opinion, the contract has an abundance of overly-complicated terms, buzzwords and redefined definitions that serve little purpose other than to confuse the reader. Or perhaps they are meant to be consistent with some internal (non-industry recognized) terms used either at Accenture or the City of Chicago. Either way, they get challenging when used in conjunction with run-on sentences.

Here is a quick example of some of the gems you will find in the contract: Unique Value Events (UVEs), Value Defined Milestones, Value Committed Milestones, DPS, Value Based Fees, OBM and of course the ones that you already know, such as TCO (total cost of ownership) and PSA (professional services agreement). Huh?

Well:
  • “Unique Value Event” (UVE) - is an individual project within a spend category (we call them “projects”)
  • “Value Defined Milestone” - is Accenture’s version of a Baseline report (how much stuff costs today)
  • “Value Committed Milestone” - is their version of a Savings report (which becomes their basis of future billings)
  • “Value Based Fees” - we call these “fees” in our company
  • “DPS” - my guess is “Department of Procurement Services” or “Department Professional Services”, really not sure, it is not defined in the document
  • “OBM” - I think refers to the Office of the Business Manager, again, not defined

I was hoping to see Chicago and Accenture adopt some of the “plain language law”  signed into law recently by Chicago native, none other than, President Obama. For the unfamiliar; the law requires Federal agencies to use “Clear Government communication that the public can understand and use”. On January 18, 2011, the President issued a new Executive Order, "E.O. 13563 - Improving Regulation and Regulatory Review.” It states that "[our regulatory system] must ensure that regulations are accessible, consistent, written in plain language, and easy to understand." Well, unfortunately, this is not a Federal sourcing initiative, so none of this applies.

Without plain language regulations, we arrive at paragraphs such as this (taken directly from the contract verbatim):
“Value Committed Milestone. The next milestone for each UVE will be the “Value Committed Milestone” checkpoint which will occur when applicable commitments are obtained (eg., supplier makes a commitment on price reduction, plan is finalized by the City of Chicago to strategically manage demand or reduce inventory, etc.) at which point the leadership team or relevant stakeholders meet to review preliminary benefits calculations based on the foregoing and more accurate estimates on proposed benefits realization and timeline will be reviewed and established (also, “Value Committed”).”
Okay Accenture, I was with you for a while there, but then my eyes crossed after line 5 of this run on sentence. Don’t worry; we will untangle this mess for our readers in a subsequent post about the fee structure established in the contract. For those of us that use standard industry language, they are attempting to define a baseline report here (their basis on how theoretical savings are then calculated).

The use of their redefined industry terms is not even consistent throughout the document. For instance, early in the document we get the definition of a UVE:
“the City of Chicago and Accenture will perform specific Strategic Sourcing projects referred to as Unique Value Events (UVEs)”.
However, later in the document, when talking about Chicago’s right to audit Accenture, they slip back into industry standard language:
“If the City of Chicago does not elect within 13 months of the completion of the project to initiate the review, Accenture shall have no obligations to participate in any review.”
What happened to our UVE? Why can’t we just stick with the word project?

I am not sure the real reason behind adding all the lingo and jargon and redefining terms that have been industry accepted for 20 years. All I know is, at times, it can be a confusing read.

Our next post in the series will discuss the fee structure defined in the contract, and determine if it is truly contingency in nature.
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Read the entire series:
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Northeast BEWARE! Hurricane Irene Is on Its Way!

on Thursday, August 25, 2011


The hurricane season of 2011 is well under way now, that the first major hurricane in the Atlantic has developed. Hurricane Irene has pummeled through Puerto Rico and the Bahamas and now has its eyes set on the Eastern coast of the United States. Currently a category 3 hurricane with the potential to develop into a category 4, Hurricane Irene’s destruction seems inevitable.

Alex Howerton’s recent blog post
The Earthquake, the Hurricane, and the Supply Chain discusses natural disasters and what to do in order to decrease the negative effects of a natural disaster. Florida is no stranger to the devastation brought on by powerful hurricanes. They have clear evacuation plans and services as well as the experience with these situations to make sound business decisions in terms of minimizing their losses (proper contractual provisions, using more than one supply for goods, etc.) However, Florida appears to be one of the few eastern states that will be spared from the possible wrath of Hurricane Irene. It’s the more vulnerable states that are being targeted. After experiencing the aftershocks of Tuesday’s earthquake that struck central Virginia, the Northeast must now brace itself for another environmental abnormality.

This poses a huge problem. New York City has not been hit with a hurricane since 1821. New York City and other northern metropolitan cities are just not prepared to deal with such a powerful storm. If the hurricane continues on its current path, these cities will most likely experience major storm surges, intense winds, and power outages.

According to the Wall Street Journal, this can cause at least $100 billion dollars in insured losses alone. From entertainment to agriculture, many businesses will have no means of operating and could be forced to close for days, depending on the severity of power loss and property damage. Disruptions in businesses in the East coast will definitely be felt throughout the country and other parts of the world. These businesses will be non-functional, causing a major gap in their production lines. Airlines will have to cancel flights, causing many states to lose out on revenue generated from tourists and business travel.

There is a lot to lose if Hurricane Irene makes its way up the east coast. It is still too early to tell its exact path, so all we can do is cross our fingers and prepare.

 
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The Earthquake, the Hurricane, and the Supply Chain

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It’s not the much-ballyhooed end of the world, but the East Coast has been the target of several natural disasters of late. First a 5.9 earthquake hit Virginia on Tuesday, and now Hurricane Irene is on her way to ruin everybody’s weekend. Pile that on top of record rainfalls, which has made the ground soggy, and many trees might be coming down as the storm rips through the area, causing all kinds of havoc.

There have been many articles about supply chain disruption caused by the Japanese earthquake earlier this year, many on this very blog, but a quick Google search reveals scant articles regarding supply chain disruption, or any steps to prepare for such eventualities, in light of the recent Virginia earthquake and impending hurricane landfall.

As the weather reporters inform us ad nauseam, the time to prepare is before the storm hits. It is far too late to do much specifically (other than ad-hoc solutions which will cost your business quite a bit of money) for this go-round, but between the Japanese Earthquake, The Virginia Earthquake, and Hurricane Irene, there are several supply chain lessons to learn and implement. I will concentrate on the three most important here.

Expect the Unexpected

While Japan is prone to earthquakes, a 9.0 quake is a rare event, and Japan’s emergency and safety systems were shown to be lacking for such a magnitude. And who could have possibly anticipated a 5.9 quake on the East Coast? Thankfully the designers of North Anna nuclear power plant in Virginia did. The plant’s safety systems, designed to withstand a 6.0 quake, are working as planned, but this quake was at the outside of the planning envelope; any stronger, and we could have had some serious Japanese-style nuclear trouble.

Also, Hurricane Irene is coming much farther north than most other hurricanes, and the latest data from the National Hurricane Center projects a direct hit on New York City, with much of the most-populated areas of the East Coast directly affected. Can your supply chain handle a shock like that?

Force Majeure

Earthquakes and hurricanes are, quite literally and in contract-definition terms, “acts of God” (or mother nature, or the universe, however you wish to designate them; they sure aren’t man-made). The conditions governing these events are spelled out in the Force Majeure clause of most contracts.

While there are events that are actually outside of a supplier’s control, you don’t want those clauses written such that the cost of bearing those burdens is passed onto you. For example, in your next round of contract negotiations, watch out for wording that defines “acts of God” too broadly. We know of one supplier who tried to claim that temperatures in excess of 100 degrees constituted an act of God (we have had several such days like that, all across the country this summer), and tried to invoke Force Majeure.

Another thing to watch out for in the Force Majeure clause is wording which stipulates that the supplier may halt service, but the buyer must continue to pay according to the agreed-upon schedule. In other words, the supplier gets paid for doing nothing. Not a good savings generator.

Adequate Service Levels

If you have a sole source for a category of spend, and if that sole source has one warehouse in New Jersey, more than likely your supply in that category will be disrupted this weekend. This does not bode well for order fulfillment Monday morning, or for several weeks thereafter.

Make sure you have redundant supply chain capabilities, either by using multiple suppliers, or by using a supplier who has multiple facilities, and can fulfill orders from another location, if necessary. You may experience a little bit of a time hit, but you won’t be shut down completely.

Prepare Before the Event Strikes

If you take away no other lesson from this week’s Earth-generated events, it is to take these possibilities into consideration while you are negotiating your next contracts. You have plenty of leverage with suppliers by invoking these natural events to get favorable terms in relation to the above-mentioned clauses, and others. It is a legitimate question to ask suppliers how they would handle such eventualities. Such events are not just the plot-drivers of so many recent movies; it could happen to you, tomorrow.
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Kraft cuts U.S. coffee prices by six percent

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Kraft cuts U.S. coffee prices by six percent On the heels of food giant Smuckers announcement it would reduce prices of its coffee products, Kraft Foods said this week it will also lower coffee prices in the U.S. by roughly six percent, The Associated Press reports.

Kraft said this week the price reduction will affect a number of its brands, including Maxwell House and Yuban. However, prices for its Gevalia, Tassimo and Maxwell House International lines will remain unchanged.

The price cut is significant, and amounts to roughly a 20 cent drop per pound on roast and ground coffees, and about 2 cents per ounce on instant coffees, according to The AP.

Coffee prices, along with those of nearly every other commodity, have shot up over the past two years, as global demand has rapidly outpaced worldwide stockpiles. Many companies - Kraft included - have raised coffee prices over the past year, and consumer advocates are hailing the recent declines.

"We evaluate the various market factors and make our pricing decisions when we feel it's appropriate for the business," Kraft spokeswoman Brdget MacConnell said in a statement.

With coffee prices starting to edge down, other companies are projected to follow Smuckers and Kraft in reducing coffee prices, experts assert.

   
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Cost Savings in the Windy City Part 1 - Will Accenture Produce Tangible Budgetary Reductions?

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In an effort to curb costs, the city of Chicago recently entered into an agreement with Accenture for strategic sourcing consulting services. The public announcement indicated Accenture will be paid 10% of savings for the first $70 million identified, and a smaller portion thereafter.

Looking at costs of goods and services is a good (and long overdue) step in the right direction for Chicago, and other state and local governments could learn from them. Using a contingency model, which theoretically requires the consulting firm to put “skin in the game” is also a great strategy. Source One has examined the theory of selecting the right contingency-based sourcing consultant in a previous blog post.

Of course, being in the business of strategic sourcing consulting, and specializing in contingency based compensation, Source One was interested to see a firm such as Accenture, which normally does not work on 100% contingency, and is well known for their profitability, signing up for such an engagement.

That got us wondering what the actual terms of the agreement were. Fortunately, because a government entity is involved, the contract between Chicago and Accenture is a matter of public record. You can find the agreement on the city’s website, here. Once you click the link, go to “Contracts and Awards”, type in “Accenture” and hit Search. It’s the first contract listed.

Over the course of several blog posts, the Source One team is going to examine the terms and conditions of this agreement and explore several key questions, including:

  • What is the 10% fee based on (realized savings, projected savings, something else)?
  • What qualifies as “savings”? Is it simply hard dollar bottom line unit cost reduction, or are there other soft cost benefits that Accenture will be compensated for?
  • What happens if the contract is terminated?
  • Who is responsible for implementing the savings? Does it matter?
  • Who is responsible for tracking the savings?

In our last post on the topic, we will weigh in on the question that really matters the most:

Based on the contractual terms, are Chicago taxpayers likely to get what they pay for?

Stay tuned over the next week as we answer each of these questions and offer guidance to other cities and companies that are looking at writing their own contingency based strategic sourcing service contracts.

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Cost Savings in the Windy City -
An Analysis of the Accenture Chicago Contract
(will be updated as they post)
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iPhone 5 to Sprint and The Struggles of RIM

on Wednesday, August 24, 2011

As I ponder which new cellphone device to purchase, I just read the news that Sprint will be offering the iPhone 5 this October. Sprint will still have to address their "bad service" stigma that looms large in the American consumer conscience, but now iPhone and Android will be available on all three major US carriers. This leaves one strange, and confused entity in the smartphone world: RIM Blackberry and the new Blackberry 7 operating system. Wall Street is showing signs that RIM is losing the high-end of the smartphone market to Google and Apple and is starting to become a low-end bargain supplier to the market. The Blackberry brand, corporate loyalty to the brand, and email are their strongest assets. No one buys a Blackberry for the operating system. RIM also spends valuable time and resources on their operating system and app development community.

So what is the solution to RIM's losing strategies? Android on Blackberry! If RIM was to adopt the Android OS, it would be a huge market gain for Android, and send Apple's iOS on the defensive. Additionally, RIM would gain ground in the non-business, young consumer demographic groups they so desperately need. But wait, there's a potentially devastating side to this. If RIM adopted Android, they would become just another player in the already-crowded field of Android device suppliers. They could rapidly devalue if they don't correctly right-size and restructure the company along with the switch to Android. They would also have to spend significant resources porting their back-end servers over to Android. It is definitely a tough situation to be in, but something needs to be done before they become the next Palm.
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Delta seen ordering 100 Boeing extended-range 737s

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Delta seen ordering 100 Boeing extended-range 737s  Airlines have been hit by volatile energy prices over the past few years, with many carriers experiencing precipitous upticks in operating expenses as a result of surging oil costs. In a bid to improve its profit margin, Delta is expected to order energy efficient aircraft from Boeing.

According to a report from Reuters, industry experts assert Delta is likely to place an order for Boeing's extended-range 737s. Analysts project the U.S.-based carrier will purchase 100 of the aircraft from Boeing as it works to improve energy efficiency and achieve business cost reductions across all of its divisions.

The total market value of the order is projected to come in at around $8.6 billion. However, that figure is based on average prices, and large buyers are often given hefty price discounts, experts say.

Delta officials sent a request to plane makers last year, informing them of its plans to replace 200 aging planes. Though the airline was said to have been considering purchasing the planes from other manufacturers, it ultimately decided on Boeing, according to the news provider.
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HP on “Shaky” Ground?

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HP’s recent announcement that they are considering selling off their PC division is causing quite a stir among stock holders and other related investors.  With shares dropping 20% on Friday HP has now dropped over 43% for the year. They have decided to relinquish the TouchPad tablets and the mobile phones division already.

What does this mean? Well first of all they are basically handing off the market share to Apple in a pretty pink box with a big ribbon on it. Apple’s tablet division alone will be strengthened quite a bit.  Other competitors such as Dell, Lenovo, Acer and Asus are also vying for the PC market share before it is even officially up for grabs.  Sales representatives from all competitors are hot on HPs’ customers’ tails to seize the unstable business relationships at the onset of this announcement. 

Analysts are predicting that this will not affect HP supplies in the short term but that with so much action occurring at once the costs could drop significantly in an effort to sell off the products. Many rumors are emerging about the future of HP and even more speculations are flooding the IT world.  All in all I doubt HP is anywhere near performing a disappearing act altogether but they have certainly generated quite the ear perking buzz lately.
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Data Entry 101 or Refresher

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When you are about to conduct a strategic sourcing event, one of the first steps includes data collection. Here are a few pointers to consider next time you have a new sourcing project. Let's say you are at the point where you have all the spend data for a particular category and now you need to organize it in a usable format. For example, if you have a stack of invoices with the information you need on them, think about 3 things:

1. What information is on the invoice? Is it office supplies or parts for a car?

Don't be afraid to take a few minutes to research and understand what you are looking at before you start entering data into a spreadsheet. It's only going to be a benefit to you as you move forward with a project.

2. What information from the invoices is important?

Outline the database with the information you feel is important before you start to enter the data. Put things in an order that makes sense to you and potentially other people that may look at the database.

3. What is the best way to enter data so that you can easily conduct a spend analysis?

Everyone has their own format for entering data into a database. I have no issues with that, but as you are entering the data don't get yourself stuck in a data entry trance. Take a look at what you're entering every once in awhile and make sure everything you are entering is in line with the data from the invoices or report.

And please, don't just plug away entering numbers believing it is correct. Use Formulas! Especially is you are using tools like excel and access. These programs can do amazing thing to help you enter data and check your work.
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