This post has been excerpted from the research paper "Spend and the Art of Cost Reduction." Head over to our research library to download the whole paper.
As an old Zen Buddhist riddle goes, “If you seek it, you can not find it.” To paraphrase, you'll be miserable if you seek happiness only through specific outcomes rather than attaining happiness merely as a byproduct of living life fully. The same concept applies to cost savings.
Procurement groups that only focus on finding purchased cost savings as their raison d’être will not be happy, nor will the stakeholders who own the spending where savings are generated. You can’t save your way to zero, and your stakeholders also will view your efforts as narrow and self-serving, rather than oriented toward them and helping maximize the value of their spend to accomplish their objectives.
That’s not to say cost savings are unimportant. Based on the 2016 Deloitte CPO study, 74% of procurement executives are focused on supporting enterprise-level cost-reduction efforts (a jump from 69% in 2014) while nearly a half are also focused on either cash flow improvement or top line improvements via new product development or business expansion.
Since procurement budgets continue to remain flat, procurement professionals will need to do a lot more with less if they intend to continue working their spending and supply chains both deeper and broader to unlock new sources of value. It won’t be easy, and the Deloitte study indicated that 62% of CPOs felt their staff did not have the skills and capabilities to execute the needed procurement strategy (up from 48% back in 2013). So, we will try to improve the odds a little by showing how you can reduce costs, but not as just a goal unto itself but rather in concert with other stakeholder objectives. This way you can have your savings, and stakeholders get broader value from their spend, as well.
To accomplish this, procurement organizations need to be demand-driven just like supply chains.
Supply chains have moved from “push” to “pull,” and procurement needs to do the same by not only proactively rationalizing suppliers in common spend categories but also adopting an “internal CRM” process to engage early with budget owners in their planning processes. Early influence pays off. Our research shows that higher quality of influence through earlier involvement pays off because you have more value levers to pull. If you get brought in only at the negotiating stage, you’ll only save 11.4% on average, but if you’re involved at requirements definition, the number jumps to over 17%. (Your individual results will vary, of course.)
However, if you want to be “at the table” with stakeholders, you need to bring something to “eat.” And while doughnuts are great, we’re talking about spend data. You must speak the language of spend, even if you have to adapt the dialect to your stakeholders.
Cost. Spend. Expense. Investment. Budget. Does everyone know and agree to these terms (and how they interrelate)? Now, how about ROI, direct, indirect, savings, avoidance or value? Procurement organizations need to be multilingual in the language of money and the language of the business. Finance speaks OpEx, CapEx and COGS. Marketing may use the term “investment” to mean supplier spending. “Expense management” can be indirect spend control or it can mean only the spend flowing through expense reports.
I won’t get into all nuances of procurement value measurement and performance management here. But your job is make sure that you can translate enterprise cost reduction to third-party spend reductions (further broken down to rate versus cost effects) that you can help stakeholders drive to help them help themselves.
As you seek to increase your value proposition, the best way to build this capability is through self-funding that can come primarily via cost reduction (at least to start). Remember: Cost reduction shouldn't stifle innovation, but rather force you to innovate in ways to uncover diminishing cost savings opportunities while simultaneously finding new sources of value such as top line growth, better asset utilization or brand multiple improvement. This is the art of procurement.
To return to our zen riddle, if you seek cost reduction as only a narrow end unto itself and don’t also seek to create other value, then you’ll never find true sustainable value creation. But if you can achieve procurement mastery and enlighten your stakeholders about the power of procurement (i.e., transformative procurement practices/tools rather than just price reductions), then value will truly flow in your supply chain.