Is It Time to Have a Spend Optimization Quota?
Spend Matters welcomes a guest post from Rob Bernshteyn, CEO of Coupa.
I’ve written before about how procurement can become more strategic by thinking more like sales. There are only two ways a company can increase profitability—make more money or save more, and the two are equally important.
However, most companies focus more on the revenue side of the equation. They have salespeople, whose sole job is to go out and bring in money. They forecast, they measure, and salespeople get paid partly based on their revenue contribution. They have a quota to meet—a big fat KPI staring them in the face on the first of every month, and it’s not too difficult to measure their performance against that.
Naturally, they think and behave differently than people on the spend side because they’re highly incentivized to do so. Isn’t it time that people in procurement, or expense management, or AP, or any other spending-related area create quotas and incentives for optimizing spend and thus savings? We have the technology to do this, but the conversation on the spend side of the equation sounds different. People talk about compliance, or maverick spending, or process improvement, or increasing spend under management.
All of these things are interesting, but what’s most interesting is to be able to go to the CFO or CEO and say, “If you approve this solution or activity, I can assure you savings of X resulting in Y incremental improvement in profitability and thus Z projected improvement in stock price and thus shareholder value.” That’s interesting.
Now, it’s pretty bold for procurement or finance to put a stake in the ground and say, I’m going to save so many dollars. But, it can be done, and this is what is done on the revenue side all the time. Do they always hit their revenue number? No. Welcome to sales. But they put a number out there, and hitting that number drives every activity and every decision.
To do this on the spend side, you need bravery (again, welcome to sales). You also need to be able to show a causal relationship between a solution or activity and the projected outcome. This can be challenging because very often it’s not causal, but it’s highly correlated. It’s the same with sales. Putting more sales people on the ground doesn’t always lead to more sales, but it’s highly correlated.
So, the question becomes “how strong is the correlation?” If you could prove a 50%, 60%, 70% correlation between a solution or activity and a given result, then you’re well on your way to being able to put a stake in the ground.
Let’s look at a very simple spend management case. Let’s say you have 50% of your spend under management (congratulations–industry benchmarks are lower), and you’re saving 10% on all your goods and services, compared with what you would be spending if it weren’t under management. You’ve proven that when you bring spend under management, you save.
Now, let’s say that with this tool or that change, you will get the other 50% under management. That will mean a savings of 10% across that full 100%. Apply that to your actual spend numbers, and show the impact on profitability. For our purposes, let’s say it’s $5 million in additional potential savings.
Now, the CEO might say, “Sure, but just putting in this tool doesn’t lead to $5 million in additional savings. It’s not cause and effect because you still have to do a lot of other things. You’ve got to implement, you’ve got to make sure that people use it, you’ve got to make sure that you get your categories in there, you’ve got to make sure that you hook up the suppliers. You’ve got to do a lot, so there’s execution risk.” But it’s the same on the sales side. You can hire more salespeople, but you have to hire the right people and train them. And you have to make sure they have the right collateral and support.
You can factor all that in your calculation: Assuming there are improved methods that I can use to bring the first 50% under management, if I then apply them to this next 50%, I could expect the same kind of results. There are all kinds of factors, so it’s not causal. But you can probably look at the risk factors and say, “I’m 50% confident.” So you discount your forecast on how much incremental profitability you think you can achieve by 50%, down to $2.5 million in additional savings.
So what does that $2.5 million in incremental profitability mean to your stock price? It depends how big your company is, but that’s still a big number. That much profit is hard to come by.
I think a big misunderstanding in the world is that people think big companies make a lot of money. Yes, they make a lot of money relative to human beings, but if you look at some of the largest companies in the world, the amount of profitability they eke out of revenue isn’t that much relatively speaking.
Look, for example, at the 2012 financial results from General Electric. It’s worth $240 billion, and they had $147 billion dollars in revenue. Then you look down to the profit line, and how much is it? $13 billion. That’s a ton of money, but it represents about 8% of sales dropping down to the bottom line, and this is a world-class company. They may make a lot of money, but they also spend a lot of money. Tightening up even by 5% could have a considerable impact.
To have this kind of impact, we need to approach the spend side strategically, in the same way we approach the sales side. To be strategic, your initiatives must be tied to profit. Create an incentive structure based on the goals and align your organization behind it. Clearly communicate to your executive leadership the strategic value, i.e. the potential bottom line impact of your initiative. Quantify it, walk them through your assumptions and your math, and stand behind your proposed initiative with resolve. That will separate you from the pack.
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