COMPANY A Spend Analysis Proposal

March 17, 2010

Contents

Our understanding A Spend Analysis/Visibility Primer Our approach Assumptions and fees Key next steps Why Ernst & Young? Appendix

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Our Understanding
We understand that COMPANY A has recently combined Sourcing and Procurement together into one enterprise procurement department (excluding Network Contracting, Clinics, and Pharma). This will be the first time that this consolidated function will be managed consistently across the company. As the new organization is being planned, COMPANY A is considering a broad transformation of the function. Based on our current understanding of COMPANY AS plans, we think the transformation can be implemented in Phases across three work-streams. M A M J 2H 2010 2011-2012
Scope of this project

Phase 1
Work Stream 1: Spend Analysis Data Collection and Analysis Validation and Opportunity Identif ication Work Stream 2: Sourcing Wave 1 - Quick Hit Projects Wave 2 Wave 3 Work Stream 3 Transformation Organization Design and Transition Functional and Process Design Category Management Vendor Management P2P Policies and Procedures Technology & Tools Stakeholder Management Perf ormance/Metrics Management Implementation

Phase 2

Phase 3

Naturally, transformations of this complexity and scale can take some time to implement. In the meantime, COMPANY A is interested in understanding the current spend and identifying both quick hit savings and immediate sourcing opportunities. The 2010 objective is to save 50% of the $100 - $200M savings target. The objective of this project is to consolidate, cleanse, and enrich COMPANY AS spend in order to identify short-, medium-, and long-term savings opportunities. Page 2
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A Spend Analysis/Visibility Primer

Most procurement organizations utilize Excel and Access as well as their data warehouses to capture, organize, and review th eir total spending. This is costly: From recent interviews with 70 supply management executives, we find that those that dont utilize spend anal ytics have 55% on average of untapped spend, miss 10-15% in savings in categories that have never been examined, and miss at least 6% in savings per category currently managed, AMR Research December 2009 The value of spend transparency is clear, but what does spend analysis/visibility/transparency really mean?

Most spend analysis solutions have four key components:

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Data Collection Data Enrichment

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Analysis Reporting

COMPANY A Spend Analysis Proposal

A Spend Analysis/Visibility Primer

What is data enrichment?
Data Enrichment Vendor Grouping
Vendor grouping. Each vendor has one or more vendor identifier in each AP / PO system. Across the different systems, vendors will show up multiple times. IBM may show up as IBM, I.B.M. or Int. Bus. Machines. These different names in the vendor master file are joined together and a vendor grouping is created to allow users to quickly understand the total vendor relationship.

Date Enrichment Commodity Coding

Commodity/Service Coding. An important value derived from a spend cube is to segment the spending into spend categories, also known as commodities. Grouping vendors this way makes it easier to find situations where multiple vendors are being used for the same type of good or service. Many times this indicates potential and significant opportunities to utilize vendor competition to lower costs. To address this, a commodity code is assigned to each transaction based on indicators within each transaction. These indicators include the vendors business, the general ledger (GL) code for the transaction, or even the cost center for the transaction. To categorize all the spending, rules are created based on the vendors name, the general ledger code, the cost center and combinations of all three. Technically, this is done through the advanced mapping rule capabilities of the Spend Analysis tool.

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Our approach
Most spend analysis projects can be conducted in 7-10 weeks
3-4 weeks 1-2 weeks 2-3 weeks 1-2 weeks

1. Data collection
1.1 Collect data Conduct system knowledge sharing sessions with data owners (approx. day per source system) Load date into BIQ tool Enrich data Vendor groupings Commodity/service coding Consider additional indexed data Approved vendors list Link contracts to transactions Diversity coding Vendor as customers

2. Data analysis
2.1 Analyze core AP data Sourcing baseline report Sourcing by vendor report Historical spending report GL report Commodity/service report New vendor creation report Transaction work estimation report Analyze additional indexed data to AP cube Approved vendors Contract Status Diversity status Vendor as a customer Post merger integration

3. Validation
3.1 Schedule validation workshops and interviews Commodity class managers Stakeholders/spend owners Conduct validation workshops and interviews Current status: programs, contracts, sourcing activity, changes, etc. Review spending reports from cube: vendor, BU, GL, Improve mapping based on spend knowledge Review initial opportunities for savings: Impact, ease of implementation 4.1

4. Opportunity identification
Summarize results and substantiate short-, medium-, and long-term savings opportunities Sourcing Fast-track sourcing Invoice review benchmarking Consolidation Demand management

3.2

1.2

1.3

2.2

Cleansed and enriched spend data loaded into a spend cube data model Additional indexed data as requested

Spend reports that summarize the core and additional indexed data in the cube

Improved spend cube data quality based on commodity class manager and key stakeholder/spend owner reviews of output Initial list of savings opportunities

Short-, medium- and long-term sourcing opportunities with highlevel business case/planned ROI Implementation plan

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The BIQ tool provides both standard and customized reports to focus the spend analysis
The BIQ tool provides a view into a number of important procurement process and spend KPIs, including, but not limited to:

Total spend ($ volume) by the organization Total number of transactions by the organization Total spend ($ volume) by vendor Total spend ($ volume) by GL (General Ledger) account Spend by type (channel) PO, p-card, other Spend by business unit Spend by market segment Spend by reporting segment Spend by spend class Spend by spend class + vendor Average transaction amount by vendor Number of transactions By approver Spend trend analysis / pattern analysis Transactions by spend class Transactions by threshold Duplicate item analysis

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Assumptions and fees

Assumptions
1. The estimated fee for this project is based on the spend analytics tool BIQ. If COMPANY A wants to use a different spend analytic tool, this estimate may vary. 2. The estimated fees does not include the Y-O-Y software licensing and any one-time hardware cost of COMPANY A owned spend analytics tool. 3. COMPANY A will make available all appropriate resources to the Ernst & Young team, including access to relevant personnel, data, facilities, reports and process descriptions. 4. Where necessary, COMPANY A will provide Ernst & Young access and permission for all relevant data sources, hardware, IT tools and software that will be used in this assignment. 5. Professional fees do not include direct expenses, such as travel. Ernst & Young will invoice COMPANY A for expenses incurred at actual costs. 6. Ernst & Young will utilize its proprietary methodology for the delivery of project activities and deliverables. 7. Base language of the project and work products is English (translation not required). 8. Work on this project will be performed by a joint COMPANY A /Ernst & Young team, with Ernst & Young providing overall guidance around tasks, schedules and work products. COMPANY A leadership will provide general oversight and access to information and personnel as needed per project timeline. This will also include COMPANY A review and approval of work products. 9. COMPANY A will designate a co-project manager and point of contact for the team. 10. COMPANY AS category managers and stakeholders/spend owners will be available as necessary for discussions and interviews given adequate notice. 11. All appropriate COMPANY A resources will be available to support data and process validation and respond to requests on a timely basis. 12. COMPANY A will provide approval and/or turn-around of data requests in less than 3 business days. 13. COMPANY A will provide working space for the Ernst & Young project team. 14. Ernst & Young and COMPANY A will establish and agree on a change process to handle requests or initiatives that are outside of the defined scope of the project.

Fees
Estimated fees Estimated expenses % Total budget $$$-

On-going licenses cost* Annual license fee

1 Seat 5 Seats 100 Seats 1. Informational purposes only. 2. Annual license fee for third-party BIQ tool.

Total price
$$$-

3. COMPANY A would contract directing with Lexington Analytics, owners of BIQ.

4. Ernst & Young would provide training and knowledge transfer for no additional fee.

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We are prepared to get started within one week of agreement

Getting started key questions
Data related: 1. What system (s) are we going to review data from? 2. How much is the total spending from each system? 3. Who will provide the data? 4. How quickly can they provide it?

Getting started date requirements

AP Transactions. One record for each disbursement from the AP system. Required fields 1. 2. 3. 4. 5. 6. 7. 8. 9. Source system (e.g. PeopleSoft) Vendor id, name, address (street, city, state) GL coding (GL BU, location, account, function) BU description, market segment, reporting segment) Date (invoice, payment and accounting date) Amount (gross, distribution) Currency Unique identifier for this record (e.g., voucher ID, invoice #) Approver name Typical optional fields 1. GL account description 2. Payment method 3. Origin 4. Year 5. Period 6. AP unit 7. Link to invoice message

5. Who can we contact if we have questions?

Enhancement: 1. Is there an existing commodity structure people currently use? Stakeholders: 1. Internal data owner. Need an inside person to own the information and project. 2. Initial users. First group of users, assuming usage will evolve over time.

Vendor Master. This should link to the AP Transaction file(s) and contain name, address, city, state, zip, other information that the company collects on the vendor (e.g. MWBE status, preferred vendor status, etc.).

GL descriptions. This should link to the AP Transaction files(s). This should provide the name of the GL code, any available definition and the hierarchy for GL codes, if one is used by the company.
Organizational hierarchy. This should link to the AP Transaction files(s). It should contain the name of each cost center and the way these cost centers roll up into business units. Most large companies have 7 to 13 levels in this hierarchy. Control totals. For each of the files, we want to have some way to check to ensure we have the complete file. For each input file, we want the number of records and, where applicable, the total spending involved.

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Why Ernst & Young?

Through our experience serving COMPANY A:
We

have developed meaningful relationships across the organization that have been built on quality and service delivery, We have provided thought leadership, leading practices and other insights to the organization regarding sourcing, procurement and vendor management, Based on our experience on several past projects, we have unique knowledge and insight of your sourcing, procurement and accounts payable processes, systems and data to hit the ground running with this project (1), We already have strong working relationships with many of the individuals and functional units whose involvement may be required for this project, and, We have an appreciation for the complexities that may exist within certain spend classes (e.g., Medical, Ingenix International, Legal), and are ready to provide perspectives on how to address / consider these complexities to minimize downstream data quality issues with the analysis results.
(1) The

following projects highlight our relevant experience serving COMPANY AS sourcing, procurement and payables organizations: Cash Disbursements Internal Audits (2004, 2008), where we obtained, analyzed and reviewed vendor spend as part of disbursement testing procedures Supplier Management Framework Internal Audits (2006, 2008), where we performed an assessment of the organizations supplier management framework, as well as provided a high level assessment of the sourcing and procurement activities Vendor Oversight Initiative (2009 to current), where we have been helping to drive enhancements in vendor management and oversight in response to ARRA requirements
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Appendix

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Contents

Case studies

11

Opportunity descriptions
Analysis detail

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Case study: Professional Health Service Plan Provider

Spend Analysis performed in conjunction with Procure to Pay process review
Situation and objectives
A large professional health service plan provider was faced with a disproportionately high and rising indirect spend. Faced with a lack of visibility into its spend behavior, the client recognized the need for a holistic and in-depth assessment of its procure to pay processes. The client decided to bring in an external advisor to analyze the various functional components of the P2P process, identify root causes for the out-of-control indirect spend and provide actionable cost-cutting recommendations.

Ernst & Youngs contribution

Spend Analysis and Procurement Channel Management

Delivery outcomes
Identified potential annual savings of $ 24 Million across indirect spend categories. Developed recommendations and next steps to facilitate the execution of the cost reduction initiatives identified. Eliminated non-value add activities in the accounts payable process and designed streamlined, future state process maps. Developed executive dashboard templates and reporting metrics.

Ernst & Young conducted an end-to-end assessment of all P2P processes based on process documentation, interviews, workshops and technology audits. The Ernst & Young team also conducted an in-depth analysis of the clients spend portfolio to identify cost reduction opportunities across spend categories. The team identified drivers and recommended cost reduction options. The Ernst & Young team identified opportunities to increase management visibility into the clients indirect spend and developed recommendations for reporting of performance indicators. Ernst & Young also assessed metrics being used to measure the performance of the procurement function and developed recommendations to improve performance management.

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Case study: $3B media and entertainment company

Spend analysis, global sourcing and procurement transformation
Situation and objectives
The client was facing challenges to both their top and bottom line driven by a decline in advertising revenue and a relatively high cost structure. Costs were high relative to peers as a result of a de-centralized organization that did not fully leverage enterprise purchasing power and individual businesses purchasing without systematic budget and approval controls in place. The company wished to continue investing in content despite their decreasing ad revenue and looked to cost reduction driven by a global sourcing organization as the enabler. Ernst & Young was asked to help the company develop a global sourcing organization and define a procure-to-pay (P2P) process.

Ernst & Youngs contribution

Strategic sourcing

Delivery outcomes
Project findings exceeded expectations from the initial business case and highlighted significant additional opportunities. Strategic sourcing work stream identified over $20M of yearly cost savings opportunity for the client by consolidating enterprise spend for targeted sub-categories and initiating sourcing activities. Identified and recommended significant opportunities for the client to better manage suppliers, spend categories, and service level agreements. Developed an end-to-end P2P design that will significantly reduce A/P transaction cost, drive budget and contract compliance, and improve working capital by reducing instances of early supplier payment.

Assessed the organizations level of procurement maturity by focusing on 8 key capability areas. Analyzed clients spend to determine sourceable spend and savings opportunities. Determined appropriate sourcing and procurement organizational model for client given its spend and target maturity levels. Developed sourcing, category management, SLA, and supplier relationship management (SRM) methodologies specific to clients organization. Performed end-to-end P2P future state process workshops to identify unique requirements and validate SAP SRM functionality. Performed a series of leading practice workshops to capture and develop SAP blueprint requirements.

Procure-to-pay (P2P) enablement

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Case Study: Global consumer products company

Spend Analysis, Vendor Rationalization
Situation and objectives
The company was incurring significant global spend on professional services across numerous vendors. More than $268M was spent on services with non-strategic firms; the client also used in excess of 4,300 vendors to provide professional services. Ernst & Young was brought in as an external advisor to analyze the current spend patterns and to develop recommendations around opportunities for cost reduction and vendor rationalization and centralized spend policies for professional services.

Ernst & Youngs contribution

Delivery outcomes

Conducted an in-depth analysis of the clients current spend on professional services, and helped the client categorize spend into consulting and other service categories. Analyzed spending patterns across global locations and identified professional services procured with and without a purchase order. Evaluated spend by vendor and vendor performance to provide recommendations on streamlining the number of professional services vendors. The team also evaluated p-card and intercompany transactions to identify client ABC in data capture.

Identified more than $35M in potential annual savings across the professional services categories through spend analysis and vendor rationalization. Delivered recommendations to streamline the number of vendors from 4300 to approximately 280.

Identified that 55% of spending was incurred without a purchase order.

Project findings exceeded expectations from the initial business case and highlighted significant additional process and efficiency improvement opportunities such as:

Recommendations to streamline p-cards usage and tracking. Recommendations to improve accounting of intercompany transactions.

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Case Study: Oncology pharmaceutical company

Spend analysis and roadmap for category management and sourcing
Situation and objectives
A clients recent acquisition resulted in an expanding base of spend under management as well as increased R&D that would dri ve additional spend over the next 5 years, and needed to have better organization of their spend data and the right tools and capabilities to manage their indirect and direct categories.

Ernst & Youngs contribution

Delivery outcomes

Ernst & Young was asked to lead a spend analysis, including gathering and enriching data, analyzing spend, and developing category opportunity profiles. Ernst & Young performed a collaborative prioritization and training workshop with the clients procurement organization, during which the future waves of sourcing for individual categories were defined. In addition to sourcing savings and spend analysis, Ernst & Young also reviewed procurement maturity around leading capability areas and made a set of recommendations to improve procurement maturity. All of the recommendations and prioritized sourcing waves were integrated into an overall roadmap for organizational improvement.

Ernst & Young identified cost savings of 2.5 - 6% across a variety of indirect material, service, manufacturing, and research-related categories. Provided recommendations to fix underlying data issues, improve category management, and extend spend analysis capabilities. The client has moved forward with many of the recommendations and is currently bringing more spend under management to increase spend control and organizational alignment.

* Project resources and staffing have been provided in lieu of actual project revenue.

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Case Study: $6B Pharmaceutical distributor

Spend Analysis performed in conjunction with Procure to Pay process review
Situation and objectives
A $6B US distributor of pharmaceuticals for the elderly engaged Ernst & Young to evaluate its alternatives for sourcing generic drugs from India, to compare potential vs. historical costs, and to recommend changes in their sourcing and supply management practices to realize cost savings.

Ernst & Youngs contribution

Delivery outcomes

Ernst & Young Advisory Services deployed skilled resources experienced in strategic sourcing, supply management and pharmacy operations, from across Ernst & Youngs US and India practices. Supply contracts, logistics, inventory management, and distribution practices were reviewed, and $244 million in spending analyzed for 160 generic drugs from 18 suppliers. Regulatory requirements, drug specifications and uses were reviewed, as were stability testing and repackaging alternatives. 24 generic drug manufacturers in India were considered for their capacity, accreditations and experience with exporting to the US. 12 suppliers with US FDA approvals executed NDAs and received RFIs. Respondents and subsequent analyses focused in on 27 drugs and $16.8MM in historical spend.

Out of 27 drugs of primary interest to three accredited suppliers in India, a potential annual savings $6.8MM was identified, i.e. 41% of landed cost to the packaging facility. Recommendations were made to directly issue formal RFPs for additional generic drugs, to conduct onsite due diligence with key prospects, and to develop relationships with leading suppliers in India, to shift share for certain drugs at a measured pace. Additional sourcing and contracting strategy recommendations were identified based on observations during the project.

Additional reviews and verifications were conducted on accreditations and availability.

* Project resources and staffing have been provided in lieu of actual project revenue.

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Opportunity category descriptions provide the framework for savings opportunity identification during the workshops
Opportunity
New savings programs Sourcing

Definition
Savings program involving going to market and requesting pricing from multiple vendors in a competitive bidding situation. May involve RFPs, RFQ or auctions.
Abbreviated sourcing process. Complete review of contracts and all invoices to ensure contractual prices have been charged in the past and that future pricing is no greater than benchmark.

Source of savings
+ Market competitiveness + New suppliers - Cost of changing vendors (typically 2%-4% of spending) - Disruption in organization
+ Faster than sourcing - Does not explore market fully + Savings on past spending from errors and omissions + Future savings from reduction of pricing to benchmark + Fact implementation no change in vendor or program + Reduction of pricing to level of new contract

Fast track sourcing Invoice review benchmarking

Consolidation

Category where spending needs to be consolidated into new vendor. May be opportunity for benchmarking. Savings program focusing on reducing the demand for the good / service. Initiatives which are already being addressed. Initiatives completed in the past 3-9 months. Categories with relatively small spending. Categories which require further work to decide on the specific program.

Demand In process Completed Small Further analysis

+ 100% save where possible - Only possible in select areas Existing Program None None Tbd

Exempt

Non controllable spending (taxes, gifts).

None

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Common analysis of core AP data

Use
Sourcing baseline development

Definition or examples
User determines which vendors are being used in a spend category.

Examples of value

Improved visibility to vendors. Better coverage of sourcing needs. Visibility to ensure that current users are identified and can be incorporated into events. Client with $770 million in spend developed a plan for $85 million in savings. Over the next 18 months, over $93 million in savings was delivered. Savings in each project area met or exceeded savings projections. User is better prepared for the meeting. Improved negotiations. Materials handed to a CEO before a meeting with a vendor. Negotiation team leverage the total spending with a vendor of $14 million as opposed to the contract value of $1.5 million. Improved forecasting of spending Client re-budgeted the next years savings ensuring that $7.2 million of savings in a department were actually incorporated into that departments plans. Understand which vendors spend money in a GL. Understand the spending in a category. The correct set of users were engaged in a new sourcing event.

Vendor report

Summary of the activity with a vendor.

Historical spending report GL report Commodity report

Report used to set the budget for a department. Spending for a GL code. Detail on single commodity with vendors, GL codes, organizational information, time series data, etc.

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Common analysis of core AP data

Use
New vendor creation Transaction Work Estimation Program adoption

Definition or examples
Measure when a vendor was first used and how many vendors are added in a month / quarter. Understand the size and transaction volume to determine vendors which may be moved to lower cost platforms. A savings program will change the usage pattern of vendors and users. Observe spending over time to see if program is effective.

Examples of value

New vendors represent work (vendor setup and validation) and that buyers have needs which are unmet by the current vendors. Understand causes and reduce appropriately. Reduction of processing costs. Begins with a matrix of transaction count by total spend. Segments with high transaction count and low spend may be appropriate for P-Card. High transaction count and high spend might be appropriate for direct electronic uploads of data and PCard or electronic payment. Measurement of program success. Specific detail on program bypass to identify what needs to be changed to fix the program.

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Potential analysis of additional indexed data

Use
Approved vendors

Data added
List of approved / preferred vendors

Examples of value

Higher use of preferred (lower cost) vendors. List of top maverick vendors. List of departments using maverick vendors. List of departments increasing their use of preferred vendors. Can identify amount of spend not done under contract. Can identify spend where pricing terms do not exist. Where contracts are missing, can identify business units currently involved with the vendor to either discover the contract or establish a new contract. Many institutions have goals to increase their spending with targeted classes of vendors (in the US, it is minority / women / disabled veteran owned businesses). The spending for identified vendors can be quickly determined. Percent of participation (or bypass) by business units can be calculated. Where a vendor is a customer, buyers can identify the internal stakeholders to inform if the relationship is changing. Where a vendor is not a customer, the sales team may want to pursue as a prospect. Ability to identify transactions which are not going through the right channel. For example, if POs with certain approval are required for all capital spending, we can identify all transactions that do not have a PO number and communicate with the buyer or the vendors.

Contract status

Link contracts to transactions. Done by vendor or PO. Measure that contract exists, contract has pricing terms (or not), renewal date, etc. Diversity status

Diversity status

Vendor as a customer

Status of Vendor as a customer of the company, key sales stakeholder PO transactions use of different P2P systems

Use of P2P

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Ernst & Young

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About Ernst & Young

Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 144,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. For more information, please visit www.ey.com Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. The Ernst & Young organization is divided into five geographic areas and firms may be members of the following entities: Ernst & Young Americas LLC, Ernst & Young EMEIA Limited, Ernst & Young Far East Area Limited and Ernst & Young Oceania Limited. These entities do not provide services to clients. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global and of Ernst & Young Americas operating in the US. 2010 Ernst & Young LLP. All Rights Reserved. XXXX-XXXXXXX

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.