Welcome back to another installment of Whitepaper Wednesday here on the Purchasing Certification Blog. This week, I’ll be reviewing a whitepaper entitled “Visibility: Better Insight Leads to Better Cost Control” from Runzheimer International and CFO.com.
Now, I usually don’t review whitepapers from the same source two weeks in a row. But I’ve made an exception in this case because this whitepaper was so good and I recently posted some thoughts on the very subject of reducing travel costs.
So, what did this whitepaper bring to the table?
I knew it would be good when it started out with some powerful stats: “Travel and entertainment (T&E) expenditures typically represent an organization’s largest discretionary
spend, with an average annual cost of $10,039 per traveler. Organizations with a strong travel policy and aligned processes tend to be high-performing, and realize significantly lower costs that can range from 5% – 20% of annual spending.
So, multiply the number of travelers your organization has by $10,039 and then divide that number by 5. The result is your potential savings at 20%. If you work for a big company, that just might be one heck of a lot of money!
The next question is: how do you save 20%?
The whitepaper suggests three activities common to successful companies:
- Use of benchmarking information to identify savings opportunities
- Centralizing control
- Tightening T&E policy and enforcing compliance through automation
The whitepaper actually gives a decent amount of detail for all of these bullet points. For example, it offers example benchmarks that you can use such as these internal ones:
- Spending information by individual, business unit (department, division, etc.) and by trip, project, job, client or other categories appropriate to the organization
- Current and historical cost information for frequently-visited locations and by vendor
- Policy compliance information
…and these external benchmarks:
- Comprehensive industry cost data for frequently-traveled locations
- Airfares for domestic and international city pairs
- Yield (revenue per passenger mile) and market share information for all covered
- City-specific hotel costs per room night for economy, first-class and deluxe
- Car rental daily cost information for U.S. & international cities
- Local meal cost information
In addition to simply gathering statistics, the whitepaper recommends that companies benchmark with their peers to compare travel policies, metrics, procurement practices, and more.
The whitepaper also advocates having travel-related management be consolidated under a single department. In this section, there was a pie chart that I found quite interesting. It showed which departments typically manage travel. It illustrated that travel functions most commonly report to Accounting and Finance, with 34% of companies organizing their travel functions this way.
And can you guess which department was in second place?
Yep. Procurement with 29%! And, actually, the whitepaper addressed a lot of procurement-specific topics such as achieving economies of scale with vendors, negotiating, and more. I’ve always thought that travel should report to procurement and it seems that this is becoming more and more common (finally!).
Before closing with a section on automation, the whitepaper details how to improve travel compliance among employees. This section was good in that it spelled out several principles that could be applied to compliance of any procurement initiative, not just travel.
What I thought was a bit lacking in the whitepaper was that the theme of visibility seemed to be 100% focused on past spending patterns, not future ones. And, just like solely relying on spend analysis for sourcing initiatives, you have to know what you are going to buy in the years ahead, not so much what you bought in the years past. The only value in using historical spend data is to determine how it will change in the future when future plans are factored in.
Let me explain that. If you know that you are going to have 52 round-trip flights per year between Pittsburgh and Chicago, 20 round-trip flights between New York and London, and 10 flights between Los Angeles and Hong Kong, that’s great. You don’t need spend visibility.
But if you don’t know precisely what your plans are, spend visibility can help. Then you can say, “Oh, we’ll be traveling between Pittsburgh and Chicago about twice as much as the previous year; between New York and London about half as much; and we won’t have any need to travel between LA and Hong Kong.” The historical data simply serves as a baseline from which adjustments are made to arrive at a forecast when you consider how business will change.
Maybe a certain city pair was for a project that is now complete. You wouldn’t want to blindly think that the pattern will continue. That’s my sole complaint with the whitepaper’s perspective on spend visibility – it makes an implicit assumption that all conditions will remain the same when, in fact, they might not.
Also, the whitepaper talks about using benchmarks to adjust per diems. Per diem adjustments are a traditional way of reducing travel costs. In my post tomorrow, I’ll address how a company can augment per diem adjustments with other travel cost reduction approaches.
If your organization spends a decent amount of money on travel, it would be worthwhile for you to check out this whitepaper. You can download it from CFO.com (registration required).
To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
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