Reported Cost Savings and Credibility

The latest from CAPS Research is a report titled "Focused Benchmarking: Reporting Cost Savings." 78 mostly-large organizations participated in the study -- it's a quick read, and worth a few minutes of your time.

When I sifted through the detail of responses to several of the questions, two noteworthy themes emerged:

  1. One of the top baselines used to calculate cost savings is Price -- it in fact held the number one spot by a substantial margin. Virtually unmentioned was the concept that advanced procurement organizations are supposed to be focused on: Total Cost of Ownership (TCO) and Total Value (TV). Some components of TCO were mentioned, but TCO itself was essentially off the radar screen!
  2. A significant number of survey participants revealed that current year cost savings have NO impact on future budget decisions. The implication: cost center managers (the "internal clients" of procurement) may be able to spend the savings from one sourcing success on other things, since there is no budget adjustment process in place.

These two themes get at the core of procurement's internal credibility; namely, being aligned with the broad interests of the business units (e.g. TCO and TV), and ensuring that the negotiated savings make it to the bottom line through good implementation and adjusting budgets to prevent the savings from being spent.

But it's not just Procurement's internal credibility that is at stake. Greybeard Advisors recently published a white paper ("When the Worlds of Procurement and Sales Collide") based on a first-of-its-kind parallel survey of Procurement and Sale professionals.

A number of disconnects were revealed -- including on the important subject of Price vs TCO. In fact, it's not much of an exaggeration to say that in many companies Procurement's external credibility with its suppliers is at stake as well.

- Robert A. Rudzki

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