Other parts of this series:
“Beware of little expenses; a small leak will sink a great ship.” - Benjamin Franklin
In the previous blog in this series, we looked at how financial services firms can improve and accelerate the returns on their investments in digital technology for the finance function. In this blog, we return to a focus on cost control and explore the elements of an effective spend diagnostic.
Finding the source of a cost leakage requires a forensic approach. Large financial services organizations work with thousands of suppliers and millions of transactions. Understanding this volume of data is key to identifying opportunities for cost reduction, and new technology in analytics and machine learning can favor a fast-forensic investigation not possible a few years ago.
The finance department should play an important role in helping the wider organization identify cost leakage and deliver on cost reduction targets. In our experience, there are three key steps to running an effective cost diagnostic exercise:
1. Data Preparation
An initial challenge is in consolidating all third-party spend data into one location and standardizing data fields before a visibility analysis can begin. For a full visibility analysis, it is important to consider the organization’s data in its entirety. A smaller scope may limit opportunities to perform a full reconciliation across all geographies and business units.
2. Visibility Mapping
Once the scope has been defined and data prepared, the next stage is performing a transaction level mapping analysis. This exercise, conducted at an invoice level of detail, is made possible by artificial intelligence (AI), machine learning algorithms and millions of historical transactional data points to conduct category mapping. Category mapping, which once took weeks or even months to complete, can now be done in a matter of days. Based on our experience, the tool can map 100 percent of transactional spend while achieving 80 – 90 percent accuracy in the mappings.
3. Value Identification
The final step of the diagnostic is to identify those areas where value can be realized. The mapping exercise can help identify the true allocation of costs and establish a solid cost baseline. This data then coupled with benchmarking, both internal and external, can pinpoint areas where there is potential to reduce cost. These areas can be probed in more detail with business stakeholders and suitable projects initiated to address the identified opportunities.
We have worked extensively with clients from different industries and have developed dedicated tools based on machine learning and advanced analytics to provide transparency into vendor spend. These forensic methods, coupled with our zero-based closed loop approach, can deliver a step change in the organization’s ability to produce significant levels of cost takeout.
For more information on a closed loop approach and examples of effective cost reduction programs, learn about our Zero-based Mindset (ZBx).