Bain & Company “Insights” – Why Not Negotiate Prices?

Last week we found this Forbes website sponsored article and infographic titled Are You Spending Too Much In Procurement?  That referred us on to an "Insights" article published last October on the Bain & Company website, titled Unearthing the Hidden Treasure of Procurement.

That explains howworld class procurement” can reduce a company’s cost base by no less than 8-12%. And then it can also apparently deliver 2-3% additional annual savings.  How can you do this? Well, it is the old consultants’ snake-oil of basic spend aggregation, consolidation and tough negotiation.

Unlike the Future Purchasing Category Management report, for example, which does suggest many firms could achieve substantial benefits but points out that achieving this requires a lot of effort, skill and knowledge, this makes it all sound very easy.

And the other problem with the “quick-win” consultants approach is you just know that within a year or so, some of the “savings” will turn out to have been clawed back by suppliers, or the new supplier / product turns out to be unsuitable, or oil prices rise so some savings are seen to have been purely market-driven and opportunistic …

But the most depressing thing about this is that while of course savings matter, we have an entire article by a supposedly super-clever consulting firm that does not mention value, or supplier collaboration and innovation, or even supply chain risk. Savings are everything, and the role of procurement is purely to drive that goal.

How am I going to get these savings? Well, the revolutionary ideas are “buying better” which means negotiating better and reducing supplier numbers. And “spend better” which in Bain’s eyes is demand management, design to cost (OK, we’re getting into more interesting areas now) and total cost of ownership, described here as “reduce system costs”.

They also have a pseudo-scientific chart showing a range of savings by category – so for instance, 7-13% for marketing services. But as we’ve said before, “cost reduction” or “savings” for most marketing services is a totally meaningless concept. Why not stop all marketing expenditure? That’s a 100% saving right there. You might as well pluck random numbers from thin air in that sort of spend category.  (Read our paper here if you want to get into that topic in more depth).

I am 100% sure that Bain & Company is full of really, really smart people. So presumably this is the level of procurement advice that works for them in terms of bringing in the big consulting fees. But this is stuff we’ve been doing for 30 years at least in the profession - do firms really need Bain to tell them to “negotiate” and make sure procurement savings get incorporated into budgets?

Plus ca change plus c’est la meme chose, I suppose. But it is depressing nonetheless.

Voices (5)

  1. Serge Milman | Partner @ Alldyn:

    Bain is 100% correct that there is a significant opportunity savings opportunity through Strategic Sourcing. Our experience exceeds the results indicated by Bain; we have been able to deliver 15% – 20% savings on (nearly) 100% of spend base, with an additional 5% – 10% annual cost reduction thereafter.

    The are no ‘clawbacks’ or ‘suitability’ issues as all of this is rigorously defined and signed-off by stakeholders. Strategic Sourcing initiatives are not easy and there are no ‘low-hanging fruit’. But the opportunity to generate $150 million – $200 million savings on every $1 billion in spend should require at least a little bit of effort.

    The big challenge we see with many in-house Strategic Sourcing efforts is that many are not much more than reverse auction of specific SKUs based on event-driven need. Many teams lack the expertise needed for insight extraction from detailed spend analysis; many lack familiarity with the use of alternative pricing models; product/service and price disaggregation; development and use of prototypical models; documentations of very specific requirements and associated pricing templates; and last but not least a data-driven approach to negotiation to include prices and incentives / penalties.

    In all cases, procurement should trace Sourcing savings directly to the P&L. Significant one-time and annually recurring savings are possible – it just takes ‘will’.

    1. RJ:

      Serge, I think you have missed Peter’s point here.

      The issue is not whether “savings” are available through strategic initiatives and better procurement or supplier management activities – of course they are, as pretty much every organisation is sub-optimal to some degree or other. The thrust of Peter’s blog, however, is that highly-paid consultants (and I confess to being part of that community), should be able to come up with something better than rehashing basic techniques such as spend consolidation, haggling prices and simply saying “no”.

      It sounds as if your company is able to help with such insights and I’d hope you’d charge less than the exorbitant fees I have seen from Bain in the past!

  2. RJ:

    I look forward to the next discussion with them when I try to reduce the cost of their £450/hour consultants then.

  3. Paul Wright:

    7-13%? I always love the spurious accuracy they give these potential savings. Not 5% to 15% but 7 to 13%. They try to make it look like a real number not a guess.

  4. Dan:

    I wonder if they really know what “world class procurement” actually means.

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