Aetna's silo-busting strategy corrals SG&A spend

Wayne Forrest -- Purchasing, 11/3/2005

In late 2003, Aetna's senior management sent down the mandate—reduce selling, general and administrative (SG&A) expenses through a more integrated spend-management program. The directive was aimed primarily at the Hartford, Conn.-based benefits provider's procurement department, which would conduct a formal analysis to identify specific business categories—or "silos"—where savings and greater SG&A efficiencies could be realized.

The initiative also was done, in part, to build the case for greater use of the procurement staff, beyond determining just what Aetna expended for goods and services, to include the contracting process, RFP/competitive bid procedures and the use of reverse auctions to drive down spend throughout the company.

"It created greater visibility for us, as well as our business constituents, by supplier and by commodity," says Nate Carlson, Aetna's director of strategic sourcing for technology. "We always had a focus on saving money, however, it became much more defined in 2004, when we had that mandate from senior leadership around SG&A reduction."

The procurement team takes a vertical and horizontal approach in its analysis. The silos represent the SG&A spend in a single area, such as travel, legal services or outside consulting. The horizontal perspective applies the analysis across Aetna as a whole where similar expenditures apply.

The key, Carlson says, is "understanding the pros and cons from both an operational standpoint and bottom-line standpoint." The driving force will continue to be "the reduction of SG&A as a percentage of revenue. We in procurement have a three-year plan around that."

The first critical step in the silo strategy is getting to know the company's internal customers and identifying what Carlson and Drake describe as "detailed, actionable opportunities to reduce spend through leverage, policy compliance and demand management."

One area where the spend analysis was most effective was in legal services, "a silo that traditionally procurement was not invited into," Drake notes. "We added some depth to the RFP process that had not previously been considered, such as using minority- and women-owned businesses. And we did more due diligence than had previously been considered by formalizing a process around RFPs that had previously been done ad hoc."

Procurement also helped to establish caps on reimbursable expenses that outside legal firms could charge Aetna and reduced the overall number of counsels.

While the measures were initiated in the third quarter of last year, Aetna began to see the positive results by the end of 2004. Legal services realized an overall savings of 10% by the end of 2004, with some silos within legal services achieving 30-40% reductions. While Drake declined to quote a specific dollar amount, she did confirm that Aetna's savings in legal services was "seven figures."

Another target was professional services, such as travel. After its review, the procurement team was able to negotiate a "good travel agency contract, as well as key airlines, rental cars and hotel relationships," says Drake.

Procurement currently is reviewing Aetna's spend for general consulting "because it crosses multiple areas of the company" Drake says, hence, the horizontal due diligence element of the silo strategy.

In IT, the spend analysis proved fruitful for commodity items, such as laptops and PCs. "We found that there were mini-silos across the different business areas within our IT organization, making the determination on service providers for our break-fix, how we were using different suppliers for disposal, so on and so forth," says Carlson. "In some cases, they were integrated well from a business process standpoint, but they weren't necessarily integrated well in being leveraged from an overall supply base or supply rationalization standpoint."

There also are benchmarks in each category to achieve. "What should we be paying? What are competitive rates?" Drake adds. "Our plans for the future are to have a robust benchmarking program to add value to our business constituents."

To help avoid turf battles and internal politics and win over skeptics, the procurement team devised what it calls its expense management scorecard, which offers analysis on historic spend, monthly and year-to-date SG&A expense by commodity, expenditure forecasts and various cost drivers.

"In the professional services category, many of the cost drivers come down to demand," Drake says. "We have been able to highlight on the scorecard where we can help influence a good contract and help them understand the unmanaged spend when things are going on purchase orders without contracts."

Overall, Carlson says the reaction to the initiative has been positive, although there have been a few silos that procurement has yet to crack, in part, because those business areas have had preferred suppliers who have been doing business with Aetna for many years. "When you have a supplier that is very integrated—whether it is based on the services it provides [or longevity]—that equates to a difficult silo," he says.

In those cases, Carlson advises that companies can't be combative in going through this process. "You can't just say 'It's my way or the highway.' That may have some short-term impact that seems positive, but longer term, that approach will not work. You need to establish a collaborative environment. By focusing on that and achieving some early successes within that context, you will be able to build on those successes. You create value through collaboration."

The best way to have the whole company hop on the bandwagon is to present the early successes in a clear and efficient manner. "One of our goals is—and we have succeeded in—changing the perception of procurement from a roadblock to that of a facilitator of good business practices by communicating our successes," Drake says.

"I'd be lying if I said we had all the kinks worked out," Carlson adds, "but it's hard for an internal customer to say 'No,' when we present that compelling case for the results that we can achieve, as well as the way we are going to get there."

Drake certainly concurred. "Nothing speaks like data."