Most small, independent companies can attain the services they need at a comfortable price point from a “one size fits all” sourcing model provided by a second-tier or niche provider. But for an enterprise that owns multiple companies that run different administrative solutions with varying degrees of automation, process robustness, standards, and technology platforms, this model can become prohibitively expensive and fall severely short of required results.
To help a holding company with a portfolio of over 20 companies find ways of lightening the administrative costs across all its holdings, we recently conducted an exercise to test the efficacy of “joint sourcing” multiple SG&A functions to a single first-tier provider.
The companies belonged to a variety of different industries, and, as expected, they varied in their administrative solutions and infrastructure. Some had an internal support staff; others had already sourced portions of their services; and others still relied on the parent company for administrative support. Thus, we decided to focus our attention on six of the 20 companies we felt were best suited for this exercise. The selected companies operate in the automotive and parts, manufacturing, personal and household goods, pharmaceuticals and biotechnology, and communications industries.
To estimate the joint sourcing cost savings, we followed a five-step approach:
- Perform a high-level peer group analysis – Assess the relative operational efficiency of each company by evaluating SG&A spend as a percentage of revenue in comparison to a peer group
- Derive baseline spend for IT, HR, F&A, CRM, procurement, logistics, knowledge services and engineering based on the client’s financial reports
- Develop estimates for addressable spend – Identify addressable portions of functional spend (those sensitive to optimization levers such as sourcing and process improvements) and fine tune estimate by considering each company’s pre-existing optimization and sourcing programs (See Table 1 below)
- Estimate potential savings for the function – Estimate the savings potential for each addressable portion, and derive the range of savings estimates based on existing operational efficiency (See Table 1 below)
- Estimate the impact of earnings per share (EPS) – Calculate the impact of savings on EPS (by comparing to operating income)
Table 1: Addressable spend and savings potential by function
We next analyzed each company individually with the assumption that each could achieve the pricing and solutions available to large organizations. Table 2 is a portion of the outcome of the analysis we performed for a subset of the functions for one of the companies.
Table 2: Annual Cost Savings Estimate
The results of the exercise and analysis, shown in the following table, speak for themselves.
Table 3: Joint Sourcing Savings Potential
By joint sourcing to a major provider, we were able to identify a combined savings that would not be available if sourced separately as the owned-companies would benefit by:
- Greater attention
- Speed of implementation
- Solution standardization, in turn resulting in improved management reporting and compliance
- Access to mature capabilities (e.g., ERP technology platforms)
- Significant investment already made in offshoring
- Increased viability of captive/shared services centers
Companies with multiple holdings and private equity firms alike are constantly looking for ways to achieve a positive impact on their SG&A expenses. We believe joint sourcing is an interesting option for them to consider when evaluating potential cost savings scenarios.