The Keys to Realising Indirect Spend Savings
Realising indirect spend savings. Delivering hard benefits that can support the underlying profitability of your business or be re-invested in the growth of the organisation is the table stake for professional procurement teams and their leaders.
It is a well used anecdote which compares the impact on the profit line of £1 saved vs the equivalent financial contribution from sales growth. Of course, this comparison is one dimensional as it does not equate to the impact of true sales growth on the standing of the business in the customer market, its long term health and stability, customer confidence, not to mention the assurance that growth ahead of the market gives to investors and the stock market. The anecdote does serve a purpose however, in illustrating that the procurement table stake has real tangible business value only if the savings make their way unequivocally to the bottom line.
“Realising spend savings can leave you wide of the mark” was the topic of our recent article that discussed the seven critical impediments that stand between savings being achieved and being realised at the bottom line of many organisations.
Overcoming these seven impediments and delivering a measurable financial contribution to the business is the foundation stone to evolving a trusted advisor relationship with executive leaders and operating at a more strategic level within organisations. This in no way undermines the deep well of supplier led value that a professional procurement organisation is capable of delivering for their business but without the correct foundation, procurement’s ‘raison d’etre’ requires just a little too much justification for comfort.
So, what is the answer?
The key to overcoming all the impediments to realising spend savings from third party spend is a combination of expertise, technology and governing process. Obviously no rocket science there but a simple reality. Accessing, directing and retaining the required expertise, utilising effective and easy to use technologies, and maintaining clear and definitive governance processes will overcome the many traps and pitfalls that may sucker a lonely pound on it’s journey to your bottom line. ..and the keys.
Overcoming the Impediments to Savings Delivery
It is also true that one size does not fit all in this case. A category of spend will have it’s own fingerprint when it comes to the authority that each impediment will hold over whether savings are realised to the profit & loss statement. The combination of expertise, technology and process needs to be tailored to mirror and then overcome these barriers.
Institutional and contractual lock out are a feature when stakeholders are very sensitive to change – particularly when this change is driven by procurement. It is more likely in categories which have a degree of complexity, are of perceived strategic importance or have contracts that are in term. This sensitivity, can prevent access to up to 10% of a businesses total available saving.
Categories which have a wide geographical footprint or a fragmented set of decision makers will likely suffer from compliance issues, whether they be in the form of the business not buying from deals done, or suppliers not adhering to the set terms. This will dilute the effective savings realised by up to 15%.
Even with good stakeholder support and compliant behaviour, unless the business captures and collects savings in a way that is consistent with budgeting practises i.e writes down budgets or re-allocates cash saved to fund other budgeted initiatives, savings realisation will be further diluted by between 33% and 50%. This issue will be more prevalent in categories of spend which span many cost centres and business units.
The level of skills and abilities available to a business in each category will impact the absolute savings that will be achieved vs the market opportunity and may cause your business to stop at a good solution, rather than the best solution. My experience suggests that this will cause organisations to miss out on up to 10% of savings that are available to them.
The question of expertise
In my opinion, expertise is the key to overcoming many of these issues. The reality is that expert resource is not always available in an organisation, especially with the deep insight required. In the world of procurement I am talking about a specific type of expertise that goes beyond a gifted category operator, it is expertise that blends in varying degrees commercial acumen with subject matter expertise and an ability to drive change with complex or senior stakeholder groups. Expertise of this nature is mined through years of successful experience in a discipline, or subject matter.
Having the right resource at hand who can, through experience, communicate a picture of the marketplace, pinpoint the opportunity, set out an approach that works well and signpost the pitfalls to avoid is catalytic. Raise that with understanding the organisational complexities and empathising with the risks will all help in establishing business rapport with the stakeholder community, this in turn developing a trust that will break down institutional and contract lock out, enrol stakeholders behind the sourcing solution assuring compliance and a co-operation that will validate the return and enable post implementation budget reduction.
For categories such as company audit, strategic consultancy and treasury where decisions taken hold significant business risk and the decision making is contained amongst a small senior community, institutional inertia and contract lock outs will be a significant impediment to getting going. In this instance, expert commercial resource with a history of delivering in this area, will deliver benefits faster, and more securely than seeking a supportive mandate from a higher authority.
Technologies that enable and sustain
Technology enables many facets of professional procurement however, when focused on savings realisation has three main functions:
• To generate the insight, that allows relevant opportunity identification,
• To facilitate sourcing and supplier management activities, maximising value creation,
• To connect the user community with the contracts, suppliers and pricing provided by the procurement team thereby effecting the saving, bringing discipline and control.
The use of the right technologies is critical to ensuring that the hard won savings do not evaporate before reaching the P&L through non compliant behaviours by the business and the supplier. Without good contract adoption, savings negotiated remain an opportunity rather than a business reality. Technologies that have real impact in raising compliance put the suppliers, contracts and pricing within easy reach of the user community and create specific and regular enough data (as close to real time as possible) that supports an active compliance management program. The advent of SaaS solutions that bring a B2C feel to business – whatever flavour of underlaying ERP system you might have – has had an enormous impact on businesses success in corralling the end users buying channel.
The right technology will also reinforce, track and make available savings data that SRM allows budgets to be adjusted, ensuring that the saving can be considered in the P&L account.
Effective savings tracking technologies don’t need an army of finance bods to validate savings and translate them into the language of your business. Easy to configure SaaS tools can be matched to your budget structure with ‘double click’ workflow for stakeholders to approve initiatives, at each stage of the project, and validate savings principles, calculations and values.
With procurement organisations typically costing between 1% and 2% of spend, which is a sizeable chunk of a best in class annual realised savings range of 10% – 13% year on year, the remaining question is how does a procurement leader access and maintain the resource required to maximise savings realisation whilst keeping the organisation lean and efficient?
Thankfully, there are many options available in securing expert talent. Today, the concept of everything as a service is growing in influence over solution and operating model thinking, Expertise as a Service (EaaS) is being talked about as readily as more traditional Software as a Service solutions. There are external bodies where expertise that is an exact fit can be sourced and used as needed to augment existing capabilities. A PeopleCloud of career interims with a strong pedigree of success and who have chosen to offer a line of business in their own specialisms is one such body. Using this available talent can break the boundaries between procurement teams and functional leaders to deliver significant benefits quickly, fully immersing themselves in the program, before stepping away from the business to return as required.
Increasingly I expect to see forward thinking Chief Procurement Officers looking at the procurement operating model holistically, composing a business solution that binds the very best external expertise and technology available on an as a Service basis with a permanent complement of staff that can be flexed periodically or geograpically, as priorities dictate.