Spend Matters welcomes a guest post from Alan Buxton, COO of MarketMaker4.
Buyers love savings. Reverse auctions generate massive savings: “I saved a million dollars on corrugated. I can take the rest of the year off!” Stereotype? For sure. But there is a grain of truth here, right?
Hang on a moment, though. What does saving a million dollars through a sourcing event really mean? Does it mean that you had a terrible contract last year? What about your supplier’s margins? Have you squeezed so much that your supplier will be coming back to re-negotiate in 3 months? Or worse, did they quote something different than what you expected? Or have underlying commodity prices moved so much that actually you’ve still left money on the table? And how implementable are these savings going to really be?
While patting oneself on the back for a million dollar saving, what happens if prices go up next year? What happens if underlying commodity prices go up 10% and you negotiate hard for a 5% increase in pricing? Where is the kudos in minimising a cost increase?
Focussing purely, or even primarily, on savings is not a viable long-term strategy.
Service providers are in part to blame for the savings obsession. And who would be surprised when their remuneration is often tied to a percentage of identified savings? This may sound good in theory but it leads to a set of knock-on problems: it leads people down the path of running e-Auctions only for large spends and for safe categories where there are savings to be made. Organizations that go down this route miss the benefit of getting competitive pricing across all their categories.
With an accumulated experience of using e-Sourcing spanning into double-digit years, many organizations are now wising up to the difficulties in benchmarking based purely on savings. Their view goes along the lines of: We know from experience that running an eSourcing process will generate a better outcome than a traditional process; so let’s not worry about whether we saved 3% or 30% - it is what it is. Let’s focus on making sure we maximise the adoption of eSourcing techniques within our procurement... For these companies the key sourcing metric has become one of throughput - amount of spend sourced using e-tools rather than the amount of savings generated.
Of course there are significant labor efficiencies too that derive from a throughput measure that are much harder to capture from a simple savings based measure.
Enlightened organizations no longer focus big hit large spend events that look good ‘on screen’ but take forever to get implemented. They focus on making e-Sourcing a part of everyday procurement life.