American Express charges ahead

A fresh look by Rion Needs has cut $588 million from purchasing costs in three years

By Susan Avery -- Purchasing, 11/4/2004

American Express knows the value of purchasing. Kenneth K. Chenault, chairman and CEO, Gary L. Crittenden, executive vice president and CFO, and the rest of the global leadership team understand that they can build a purchasing operation that's a competitive advantage for the company. In response to economic challenges earlier this decade, they've given purchasing a mandate and responsibility for 100% of a $5.8 billion annual spend.

About two years ago, they asked Rion Needs, a 19-year American Express veteran, to lead a transformation of the purchasing function, naming him to the post of senior vice president, global procurement. With a background that includes managing the company's U.S. corporate travel business as well as experience working in the finance operation, Needs has helped American Express's businesses meet their goals by reducing costs by $588 million.

Reducing costs by consolidating spending across the American Express businesses is just one way Chenault and the leadership team measure value of global procurement. Global procurement also contributes to the success of the company's businesses through risk mitigation in its agreements with suppliers, improved controls and allocation of resources, and through demand management.

Headquartered in New York, N.Y., American Express is a global travel, financial and network services provider. The company has three operating segments: Travel Related Services, American Express Financial Advisors and American Express Bank. It employs 78,000 people globally. Revenues for 2003 were $26 billion.

Global procurement's transformation consists of centralizing the purchasing function worldwide, and simplifying and creating a standard set of processes and procedures. Its goal: Help AmEx's different businesses succeed in the marketplace.

More than 400 people currently work in global procurement at 29 American Express locations worldwide. Global procurement encompasses the entire procure-to-pay process; the accounts payable organization also reports to Needs.

Needs has structured the global procurement operation into six areas: strategic sourcing, relationship management, operations (which executes sourcing strategy), procure-to-pay transformation, Europe and Japan.

In the strategic sourcing group, which is led by three vice presidents, are directors with responsibilities for such services as human resources (HR), real estate, corporate travel, marketing/advertising, telecom and labor services. That is testimony to the size and criticality of the services spend to the company.

Indeed, services are the second biggest buy at American Express, right behind spending on technology. Although he declined to reveal figures for these spends, Needs says services make up a significant portion of the company's annual buy.

While global procurement at American Express has full responsibility for this sizeable spend, it's not typical for purchasing at many companies to be as heavily involved in the buy. Usually professionals working in the functional area—HR, advertising, real estate—of a company's businesses have been purchasing services for many years and are reluctant to give it up. "Services comes with a completely different set of challenges and opportunities," Needs says.

Throwing its full support behind global procurement, the leadership team issued a mandate that states the businesses will have to pay a financial penalty if they deviate from global procurement's preferred supplier list. But the group hasn't had to use it. "The day I have to use that mandate in a conversation with one of the businesses to achieve our objectives is the day I've lost," Needs says.

As he sees it, a mandate makes it very easy for procurement to over control and perhaps jeopardize the company's businesses in the marketplace. "In global procurement, we never want to decrease the company's speed to market, or stifle creativity. Procurement must judiciously exercise its mandate and focus on creating value for the organization."

As such, global procurement has put spending controls in place that are, in his words, strong and appropriate. They're also transparent.

In order for global procurement to meet objectives of the company's businesses, Needs says it's important for purchasing professionals to run an integrity-based operation that maintains objectivity, and communicates well the rationale and purpose for its activities.

At American Express, global procurement is open and honest in dealing not only with its businesses but its supplier base as well. (While some of the company's suppliers may also be its customers, he makes it clear that American Express does not engage in reciprocity.) It's the job of the relationship management group to communicate with all interested parties on the operation's activities, such as when it initiates the process to issue a new RFP (Request for Proposal).

Along with appropriate controls that help ensure compliance to agreements negotiated by global procurement, the organization's infrastructure must be as efficient as possible. In building that infrastructure, global procurement is working with several leading software providers to develop cutting edge tools for its services purchase.

As at many companies with best-in-class purchasing operations, global procurement at American Express applies a strategic sourcing process to its services buy. The first steps consist of understanding requirements of the businesses and rationalizing the supplier base.

Take management consulting services, for example. In the past, American Express negotiated separate agreements for each engagement. Now, global procurement has one master agreement with each of four suppliers. The suppliers have created rate cards used by everyone in the company who typically requires the services of a management consultant.

A move toward a slimmed down supplier base, however, can create challenges. For instance, consolidating purchases with a few select suppliers can run counter to requirements calling for a robust diversity program. "We still need to be flexible and embrace suppliers that can innovate in the space," says Needs.

Managing the strategic sourcing process is a team of procurement specialists who are recognized and identified as leaders in the industries of the services they purchase. "They really have to understand the industry if we are going to create maximum value for the organization," he says. (See sidebar on preceding page.)

In their work with the businesses, these purchasing professionals don't simply accept canned specifications. They ask, "What is it you are trying to achieve in the marketplace?" Coupled with their understanding of the industry, they work with the businesses to formulate a strategy that aligns their objectives with what's happening in the marketplace in order to create maximum competitive advantage for American Express. If this isn't possible, they work with suppliers to redefine their products and services.

With that, the team issues its RFx, using e-sourcing tools in the process, including e-auctions. "We build a principles-based decision model and work with everyone involved in the supplier evaluation process to come up with the best result to meet the criteria we establish," says Needs.

Another challenge associated with the spend: Most suppliers say their offerings are not a commodity, which, in their eyes, means that their services can't be compared. "There is truth to the fact that there's differentiation in the space, and it's not cookie cutter by any stretch of the imagination," he says. "But there is a great opportunity to apply supply chain management philosophy and techniques across the spend that drives huge benefits to the company."

Once the strategic sourcing team selects the supplier, the operations group uses project management rigor to implement the agreement; a supplier performance management process identifies roles and responsibilities of everyone involved in the process. A case in point: American Express has outsourced some of its technology buy to IBM. While global procurement has a governance role in managing performance of the supplier, day-to-day responsibility, i.e., managing KPIs (Key Performance Indicators) or SLAs (Service Level Agreements) falls to the technology organization that direct oversees the agreement.

As Needs sees it, there are three levels of compliance concern to a global procurement operation. The first surrounds purchasing from suppliers on a preferred list. The second pertains to compliance to contract. Most companies try to reach this level of compliance, but without a systemic approach, it's difficult to achieve. A third, which is especially important for the services buy, is transactional compliance: Is global procurement paying rates as stated in the contract? In an attempt to reach this level, some companies conduct post audits.

"Post audit, a company can change its procedures and processes, but because of the volume of transactions generated, and the complexity of some services, contractual compliance remains a challenge to most companies," he says. Global procurement is currently building (software) system capabilities that measure transaction compliance for such services as telecommunications.

At American Express, measuring supplier performance differs from service to service, and from supplier to supplier. Global procurement has applied Six Sigma tools to its tracking metrics. "We develop KPIs or SLAs that are very defined, manageable and measurable," Needs says. At the same time, the relationship team uses a tool to measure customer satisfaction. Statistically valid, the tool measures satisfaction with global procurement by business, region and position within the company (vice president, director, administrative assistant) "It gives us clarity on how we are viewed by the organization and what we need to focus on to improve satisfaction."

As customer satisfaction increases, global procurement finds that the businesses seek it out to help them drive value. "We now have the businesses aggressively coming to us, saying that they want to improve their product delivery in the marketplace," he says. "We're trying to figure out how to prioritize the requests so we can provide our service in a quality manner across the organization."

To validate savings generated by agreements implemented by global procurement, the company has put in place a rigorous process.

Both a reengineering group housed in the finance department and the CFO of the business impacted by global procurement sign off on the figures. Global procurement receives credit only for savings that impact the bottom line in the first year of the agreement. "If we initiate a project that requires upfront investment and it doesn't yield any savings in the first year, but will deliver $15 million over three years, we get zero credit," Needs says.

Demand management takes global procurement even further into the company's businesses. As such, the strategic sourcing team poses to its internal customers such questions as: Why are you buying what you are buying? How does it meet your objectives in the marketplace? How do we change the specifications to increase competitive advantage and to consume resources more effectively?

"Most procurement organizations have not realized that the service spend is not about the back office, issuing RFPs and processing transactions," Needs says. "It's really about creating value and ways to help the company become better at what it does in the marketplace."