In Part 1 of this post, I shared a number of observations and tactics courtesy of Eric Strovink on how to target unnecessary demand to reduce overall procurement spend. Of course in an ideal green and cost-savings focused world, we'd all buy less in the first place, but as it turns out, even highly savvy procurement teams can end up with broader organizations who buy more -- for less, mind you -- than is necessary. And to add spend insult to savings injury, it can often be the more sophisticated organizations that have negotiated better agreements, have better access to technology and generally higher performing procurement functions (based on potentially misleading KPIs and benchmarks) who are most likely to fall victim to unnecessary demand. But what can be done to stop it?
One of the keys that Eric and I both agree on is to ensure adequate support and stewardship internally -- consultants, unless they are organizational psychologists, aren't the ones to drive changes in demand patterns (though they may be the ones to identify it and recommend changes). Reducing demand must come from the top. We all laugh at the quintessential cheapskate policies of not providing or rationing pens, rubber bands or paperclips to employees, but it's precisely this type of high level policy oversight that can change employee orientation from "I'm buying this and getting a good deal for the company" to "Do I really need this is or is there a less expensive alternative or approach -- or can I make do with what I have?"
There is a place for consultants in this, but it is best to relegate them to identifying opportunities as part of broader spend analysis and cost reduction identification efforts. However, when it comes to actual demand reduction, look inside rather than out to make things happen. Here, while CFOs are good at instilling fear in employees and guiding such behavior, it's actually best when it comes from as high in the company as possible (ideally the CEO) on a "lead by example basis" -- e.g., having your wife fly the private jet to Europe to stay in the Ritz and stick shareholders (oops, taxpayers) with the bill is not a good "lead by example" way to change demand from first class to coach.
In all seriousness, here are five parting tips I'll leave you with when it comes to changing demand (I'll save how best to explore the Spanish countryside vs. a more modest US destination to another day):
- Put data first: let your invoice and related spending data tell you where your opportunities are (and make sure your system -- or the systems your consulting partners use -- is capable of this)
- Don't assume that because you've driven people to buy "on-contract" that your shareholders are getting the best deal -- not buying at all is better than buying at the best contracted price
- Apply both (AKA, Rearden-style within a user interface) and actual guilt by having executives make examples of unnecessary spending or reducing their own unnecessary demand
- Don't measure purchasing performance on PPV -- take a more granular approach to incent changes based on actual budget impact
- Ensure that any third party you work with on an outsourced basis (e.g., a managed services provider, print broker/intermediary, etc.) is incented to reduce demand rather than increase it, which can be easier said than done because partners such as these are often times paid on volume or by the supplier