Every procurement professional intuitively knows that earlier influence on spending helps to increase the value derived from that spend. When stakeholders have essentially chosen a supplier and bring a deal to procurement at the eleventh hour, savings will obviously suffer. But by how much? What’s the value proposition?
Well, to find out, Spend Matters and the Institute for Supply Management asked practitioners as part of a joint study on procurement-finance alignment. With more than 250 validated responses, the study sought to understand how procurement and finance can influence each other as well as the stakeholders in order to better manage spend. We’ll be sharing more results over the upcoming weeks, but this is a good place to start.
Early Versus Late Involvement: Does it Make a Difference in Savings?
We first asked companies what their average savings was on deals when they were involved at the time of negotiations. We then asked them to estimate, based on their experience, what those same savings would have been if they were involved during supplier discovery, and finally what the savings would have been if they were involved at the time of requirements definition. The results, evaluating indirect spend, are shown below:
The returns are compelling: a 2% savings difference between early involvement and late involvement. If you assume that the contracts are 2 years in length and the company is turning over its spend every 2 years, then the steady state advantage as a percentage of spend is 1%. So, if you have $1 billion in indirect spend, that’s $10 million in opportunity just by engaging stakeholders earlier, and better, in the process.
Of course, the question then becomes how to capture this opportunity and quantify the investment.
If you assume a typical 10X ROI on procurement, that means you could invest in $1 million of resources to get the $10 million back. But that’s not going to happen, and it’s not like you just hire 10 resources to run around asking stakeholders to be involved earlier. Rather, you make investments to free up the time of senior buyers and category managers so they can work the spend earlier and more deeply. You focus on things like tail spend management, better spend visibility and e-sourcing tools, strengthened supply market intelligence and so on.
Building a Business Case
The other challenge of course is to build the hard business case surrounding this and how specifically to gain that early influence. If you don’t want to trust any external data, then some companies have used internal benchmarking at their own firms to show the differences in performance based on how early procurement was involved – and documented examples with different functions and business units to bring the best practices to life.
In terms of influence techniques, that is a topic worthy of a book. But for now, we'll stay within the confines of this study and illustrate how finance influences the process and how procurement’s influence on finance can help this process.
In the next installment of this series, I’ll focus on procurement’s involvement in the planning and budgeting process and its quantifiable impact on the spend influence that helps drive savings and other stakeholder value. Stay tuned!