Reducing Indirect Spending Through Effective Procurement Management

Welcome back to CFO Weekly, where we're talking with financial leaders about how to build efficiency in their teams, create time for strategy, and ultimately get results. With your host, Megan Meese, let's jump right in.

Megan - 00:00:18: Today, my guest is Matt Smith. In 2001, Matt was Rich’s first call with his vision for a new business. The initial discussion led to a successful collaboration that helped Rich get the business started, and thus Fine Tune was born on February 1, 2002. Matt has had over 20 years of extensive executive experience outside of Fine Tune as CFO of Soteria Imaging Services and EVP of indiGO Auto Group. During those 20 years, Matt was instrumental in helping both companies grow from promising startups, culminating in successful sales for both companies. After the most recent sale of Indigo auto group, matt has now joined the Finetune team full-time as Executive Vice President and CFO. Matt, thank you very much for joining me on today's episode of CFO Weekly.

Matt - 00:01:22: Thanks, Megan, and I'm glad to be here.

Megan - 00:01:24: Yeah, today we're going to be discussing a topic that doesn't get enough attention, given its importance to a company's bottom line and that's indirect spending and the procurement process. And I'm really looking forward to learning from you, Matt. So let's get started.

Matt - 00:01:38: Sounds good.

Megan - 00:01:40: First and as always, let's start with you and your journey and how it is that you got to where you are today.

Matt - 00:01:46: Well, thank you. Yeah, I have had an interesting route to my current position. I've done several entrepreneurial things. I am an MBA in finance and started my career in medical imaging and started with a small growing entrepreneurial medical imaging business that we grew and ultimately sold, did a private equity deal and then left that and spent a ten-year stint in a luxury automotive similar sort of a run. We were buying luxury car dealerships throughout the country and eventually sold that in 2017. And then Fine Tune, I had been a co-founder and investor. I helped Rich Ham, our CEO, start the company way back in 2002, and I had had these day jobs over the years. And after the automotive run, there was Fine Tune. After 17 or so years, it had grown to the point where it was ready for my services and so it was a nice landing spot for me after we sold the automotive business and I joined, been enjoying working full time at Fine Tune for the last few years now.

Megan - 00:03:00: And can you tell us a little bit more about your role as Executive VP and CFO at Fine Tune?

Matt - 00:03:06: Sure, yeah, it is interesting. Fine Tune is a professional services organization. We like to say we're software-enabled professional services, but the finance and day-to-day accounting needs of our organization are pretty simple, relatively speaking, certainly compared to the luxury automotive business with many employees and lots of stores in many states. But what's interesting about it is I get to apply my skills now in all sorts of ways for Fine Tune and really a lot of which are on behalf of our clients. We get involved in really complex situations and I enjoy lots of different scenarios and tackling tough problems and so I get to do that every day here at Fine Tune. Now that we're expanding our software and getting into bill payment services in particular, that's an area I have a lot of experience with. Having been in multiple industries with multiple payment systems and operating systems, I have really good perspective on how those systems work, and how to roll them out and now we're getting to design our own, which is pretty cool. So I really enjoy getting to do lots of different things at Fine Tune and in particular helping our clients and using my skills to get involved for their benefit.

Megan - 00:04:27: So let's talk about Fine Tune. What services do you guys deliver and how do you work with procurement and sourcing professionals within large organizations?

Matt - 00:04:38: We are a full-service category management solution and we're a little more targeted than maybe some cousins in the industry that are more broad-based consulting. We have a few categories. We like to say we're like four inches wide and a mile deep. We have deep category expertise in a relatively few numbers of categories. Our categories are Uniform Services, Waste Management, Security, Pest Control, and more recently Utilities and Energy. And we are a full-service category manager. We like to describe our model as kind of a three-legged stool of deep category expertise from the industries that we target. We then have software and technology that supports that expertise and then finally it's all wrapped in a full-service dedicated invigilate management model and type in a gain share approach where our incentives are aligned with our clients. And typically how we deal with or engage with sourcing professionals and in large organizations is we're essentially an extension of the team. We like to say we wear the jersey of our clients. With this aligned incentive model we really become just an extension of those teams and we are in effect the arms and legs and are able to do a lot of things that our clients are just too busy to get to. They have many responsibilities. Typically our client is managing multiple categories and so we can come in and take a few of these categories off their plate, at least the more complex ones. That can be a Timestack and really difficult to deal with. So really we try to support our clients and be an extension of the team.

Megan - 00:06:28: And just curious, who is your ideal client? Is there an ideal client or is it pretty much just anybody else?

Matt - 00:06:36: We deal with such a broad cross-section of the industry. But I would say an ideal client is a large client that has a significant amount of spend in each of our categories would be an ideal one. But now that we're into multiple categories, including energy now and utilities, we find that with just about any client, we could find at least one or two expenses that we can help them with. But there really is not a specific industry that our services are particularly suited for.

Megan - 00:07:16: I was reading this morning that most companies spend between ten and 25% of their revenue on indirect spending. So these are not small numbers that we're talking about.

Matt - 00:07:28: So that does not surprise me at all. No, you're right. And in fact, indirect spending a lot of time is flying under the radar, and those numbers are growing and getting out of control, and the attention is focused elsewhere.

Megan - 00:07:45: Yeah, I guess companies like Amazon have made it just a little too easy for anybody just to go out there and buy something.

Matt - 00:07:53: Right? Exactly.

Megan - 00:07:56: So how do collaboration and communication between procurement, finance, and other departments play a role in achieving true expense management?

Matt - 00:08:05: Well, it's really essential, especially as you move up the food chain and you get into larger organizations. We have a concept that we've been evangelizing about, which is an organizational disconnect. And it's really a problem in these more complex categories where you're trying to coordinate not only procurement and finance and accounting and potentially legal, but then you have considerations, maybe in HR or safety or quality that has to weigh in as well. And when you're talking at scale or a large national organization or a global organization, it gets really hard to manage all of those voices in the context of trying to keep your costs down. You could have an issue, and somebody has a safety issue, and they just need something, a new set of goggles or some flame-resistant clothing or something like that, and they need it yesterday, and somebody's tasked with going and getting that. And a lot of times, cost is the last thing that folks are thinking about in that environment, and it has huge implications from a cost standpoint. And so having that, being able to tie all of those elements together in more of a cohesive manner can really lead to dramatic results from a cost standpoint.

Megan - 00:09:26: And can you explain what you mean by good contract, bad deal, and why CFO should care about this phenomenon?

Matt - 00:09:34: Well, this is an interesting one. We've always seen bad deals. Our business is really based on cost savings and improving deals that have been in place for many years in a lot of instances, and over time, they get eroded. So when we enter the fray, usually we're finding pretty significant savings. But what's happened is we moved up the food chain to Fortune 1000, 500. We now have Fortune 100 clients. They do have buying power, and they have, in many cases, really intricate and long protective master services agreements that these vendors are attached to. Their services contracts are attached to these big MSAs. And so not only do they have pretty decent pricing, we've seen as we moved up the food chain, but they have these really strong and aggressive master services agreements that provide lots of protections. We really thought the savings percentages would shrink as we moved up the food chain. We wouldn't be saving Fortune 100 clients, 30%, or 40% in certain categories. And what we found is this concept of a good contract, a bad deal. They have good contracts, but when you get to scale and you know, relating back to the previous question at scale, and you have all of these different departments and business units all over the country and in dynamic environments and things are happening on the ground in real-time. And vendors are also charged with growing their margins. And so they're erecting all sorts of strategies to just get a contract signed and then go make money after the deal is signed. And so we've been really shocked at how little attention is paid to the contract once deals go live, especially in complex services categories, where it's a little grayer in terms of trying to tie out a unit rate to an item. It's pretty simple at the widget end of the spectrum. But when you get out to the complex services end of the spending spectrum, that gets a little grayer and it's a little more difficult to ascertain what you should be paying for something or items that may not have been contemplated in the original agreement. And so, yeah, as I've indicated, kind of moving up to scale with larger and larger clients, we see this a lot. It's just really hard to manage these complex services at scale after a deal goes live and they get off the rails very quickly. And that's been a big surprise as we've grown over time.

Megan - 00:12:09: Maybe they're just a little too good at contracting and just the end result is too complex many times to even follow.

Matt - 00:12:17: Well, I think there is an element of that. These are sometimes hundreds of pages, these documents, and no one's it ends up just going into a file folder somewhere and no one's ever really referring to them. Or at the other end of the spectrum, you have a system where you can actually input some contracted rates and so forth, but that's not even half the battle. A lot of times there is a quantity associated with those rates and typically those quantities are moving all around and then you have items that aren't contemplated in the agreement that get added later. You have new priorities in the field that change the context of programs. You have acquisitions and divestiture. So you can see this is not something that's unique to one or two companies. We see this all over the place with all of our large clients and frankly, the smaller ones as well. So this is not an unusual thing. It's just we were surprised as we moved up the food chain and we saw how good the deals actually were on paper and then in practice they weren't quite as good.

Megan - 00:13:22: So you mentioned 30%. Is that the average cost savings that your clients realize?

Matt - 00:13:28: We kind of deal and we typically provide like a range, it's typically like 20% to 50%. Now we have pushed into energy and utilities where those categories do receive a little bit more attention. And so the savings percentages in that area are typically a little lower, although the spending is a lot. But yeah, we typically deal in categories where the savings are 20% to 50%. And then that's not even talking about the time and energy associated with managing these complex services. A lot of times these are smaller line items on a PNL for our clients and yet the cost of and the time to manage them is completely out of whack. They're relatively lower-priority items, but they're really difficult from a management perspective. So people are getting sucked into these expenses and wasting time, and the vendors are wasting time and so forth chasing payments. And it can get really complicated. And so there is an element also there that we help with that's more of a hidden element, which is the time savings. Also, when we get involved, we can really streamline matters and make life easier for the vendor too.

Megan - 00:14:41: And can you discuss the importance of software, data, and analytics in driving decision-making and optimizing procurement processes?

Matt - 00:14:50: Absolutely. So obviously data and analytics are extremely important. And yet what we find is the quality of the data is so problematic. Many clients have lots of systems and they're outsourcing many of these functions in terms of getting the data into the system. Maybe there are multiple methods of getting data into the system or either you're relying on your vendor or some outsourced entity or maybe multiple entry points within your organization. So, it's really hard to actually have good data. And if you don't have good data, you're really flying blind and you're really overly reliant on your vendors. If you're not controlling this data and having it clean and understanding it all the way down to the line by line, let alone trying to create a baseline of spend in a dynamic and ever-changing environment, the best-of-class organizations are doing just simple variance analysis. What do we spend last year versus this year, or last month versus this month? And that's really just scratching the surface. And so it's so important. But what we say is you really have to get your arms around it and have just better data, to begin with. And then from there, what do you do with it? That's where a company like ours comes in. Many of our clients just are busy doing many things. And if ultimately you get control of the data and you have good information, then somebody has to do something with that. And I think that's where a lot of organizations don't optimize their processes.

Megan - 00:16:40: And I'm just curious you mentioned that your fees are based on gain sharing from the savings. How do you measure the savings once you guys are in there taking a look at things?

Matt - 00:16:53: That's a very interesting question because every organization sort of defines savings a little bit differently. But really, savings is what it is. It sounds simple.

Megan - 00:17:08: It sounds simple, but I know it's not.

Matt - 00:17:12: And so, yes, some of these things we were talking about at scale, things are changing. You have business units coming and going. You're selling businesses, you're buying businesses. You may have new priorities, you may have a new initiative, a safety initiative at some site where all of a sudden you need to spend a lot more at that particular site. And so in this kind of ever-changing dynamic environment, how do you stay on top of that? How do you normalize that data that maybe the conditions could be completely different from what they were twelve months ago? And that's where most organizations just have no idea, and they're just simply looking at these variance reports year over year, month over month. And that is just woefully inadequate. You really need to have a system whereby you understand the data and can actually normalize for those new conditions. You can have a situation where you're spending double, but you might be saving three X in that scenario because you have achieved a better rate on a more expensive item. But say you have an item you're spending $100 for, and now all of a sudden you're switching that item out for an item that's $200, but you're only paying 125 for that more expensive item. So there are scenarios where your spending could actually be up, but yet the savings could be significant. So just looking at year-over-year math, simple math does not even begin to tell the story. You really have to normalize that data for what your new usage patterns are. Are those conditions the same in terms of the types of items that you're purchasing? And you need to be able to normalize that data. And many organizations just don't have that ability. I mean, we talked before, and the data is really bad, to begin with. And so how do you even get down to that granular level, having that understanding of how it all fits together to really establish a true baseline that you can update in real-time? And I know it sounds hard, but it can be done. I mean, it's something that we're doing and that really is our business, of course. So I make it sound easy. I do realize how hard it is at scale to do this. But that is really how you get to true expense management, which is understanding how to measure all those changes in real-time, in a dynamic environment, and then make decisions accordingly.

Megan - 00:19:42: And what do you see as the future of procurement? And how do you guys plan to stay ahead of the curve as it's evolving?

Matt - 00:19:50: Well, we've touched on a few of these already. I think where we are is in this highly complex end of the spectrum. So that has kept us ahead of the field, just focusing on these really complicated issues and really complicated expenses for large and growing organizations. So just that fact alone. But getting back to this point about the data is just not going to solve every problem for companies. It's just data, data, it's all over the year, but you need to know what to do with it and then you need to be able to act on it. And I think those two elements are where many companies fail. Everybody has data, reports, and charts, but again, at the end of the day, how do you tie that to action and results? And so when we think about staying ahead of the curve though, we have, as I indicated, just by virtue of the categories that we've been targeting. But I think where we can improve is by continuing to evolve our systems and incorporating AI and machine learning to identify things more quickly. We can spot things certainly more quickly than our clients can now, but improving that process even further, like identifying stuff immediately as it's happening and being able to take action before it takes root because it's much harder to unwind things than fending them off before they occur. So I think that's an area where we want to be, where we're going to be more focused on, is getting out in front of things, anticipating items, seeing stuff in the data that will give us an indication of an activity that we can head off before it occurs.

Megan - 00:21:42: Yeah, that's a great insight. I'm sure it's a lot harder to fix a problem than to prevent it, to begin with.

Matt - 00:21:48: There is no question about it. We always say possession is nine-tenths of the law. Once the money leaves the building, it's really hard to get it back.

Megan - 00:21:56: So what advice do you have for CFOs that are listening today? And then a million things on their plate and procurement might be the last thing they're thinking about.

Matt - 00:22:08: I think one of my, the things that helped me the most is just from my background. Having worked in entrepreneurial environments and settings and having had to wear lots of hats in those environments has given me a better perspective in terms of how all of these disparate functions fit together on a grand scale. And so understanding the inner workings and the interplay between safety and HR and accounting and finance and marketing and so just having that perspective has helped me make better decisions from a finance perspective and a CFO perspective. My advice for aspiring CFOs would be, of course, you're going to have underpinnings in finance and the basic functions there, but be mindful of how all of the other departments work and how they fit together in your organization because you're going to be making decisions that can affect all of the organization. One example, I guess this is more for current CFOs. I would just be mindful of the unintended consequences of some of your decisions. We see lots of stuff and we have such an incredible view in terms of the cross-section of industry in North America here, from Fortune 1000 to 500 to 100. And it's given us a lot of perspective on how stuff is done and how companies do things differently. And one of the things that we see are lots of decisions in and around controls and more protective policies that have significant cost implications in our area that we see. We see some of these decisions manifesting themselves in terms of higher costs in the categories that we target. And so that would be my message for CFOs. Consider some of the potential unintended consequences of certain controls and or policies that you're thinking about.

Megan - 00:24:23: That's great advice. So lastly, as a finance leader and an entrepreneur, what is it that keeps you motivated?

Matt - 00:24:31: I think, for me, just being involved in that entrepreneurial dynamic environment has always energized me. And so I love that while I am a finance professional by training, I do love tackling new problems and challenges. That's really what keeps me motivated, getting involved. And I love where I'm at now with Fine Tune, being able to get involved in really complex matters for our clients. Lots of different things, something new every day, it seems like. And so I love that. And then being able to build out the software and building out new applications and using some of the things I've learned over the years to help foster that process has been really great as well. So just being able to apply my skills in different ways is something that I really enjoy and has helped keep me motivated.

Megan - 00:25:35: Matt, thank you so much for being my guest today.

Matt - 00:25:37: Oh, my pleasure. Thanks, Megan.

Megan - 00:25:40: Yeah, I really enjoyed speaking with you and I appreciate you taking the time to be here with us today. And I wish you and Fine Tune all the best. And to all of our listeners, please tune in next week, and until then, take care.

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