Being honest about savings – scary, but it can help procurement

At a recent BravoSolution event, a senior procurement executive told a story about Spend Analysis and procurement savings. She was very open and honest about her experience with a very large global services company, which made the story particularly interesting and worth passing on.

Procurement has been well established in this firm for some years, and has always reported impressive savings, measured in the traditional procurement manner. The numbers were reasonable but not very rigorous, e.g. applying a % savings on a new contract across an estimate of the likely contract value.

Now this organisation has made many, many acquisitions over the years.But when they made a particularly large one in 2008, the company declared to the City and investors that they would make a certain amount of procurement savings from bringing together the two organisations.

This brought a new challenge. Because this was now in the regulatory sphere of financial announcements, there had to be rigour to what was being claimed. This led procurement to look hard at their methodology, and what really happened in their businesses round the world.  They realised, for instance, that compliance to 'group contracts' was not as good perhaps as they had thought. So a saving claimed on the basis that contract X would be used around the world was only in practice releasing savings of half that much because of non-compliance and individual group companies not using contract X at all.  In other cases, suppliers were not globally implementing the agreed terms everywhere.

This led the firm to use Spend Analytics tools in a more continuous manner to monitor what was really happening and where savings could genuinely be claimed.  The result? A large drop in the reported savings.

Which, although it doesn't sound good, has actually been very positive for Procurement. Not only does the analysis identify where there is more work to do to increase compliance and uptake, the savings now declared have far more credibility.  The top team have seen that Procurement can deliver real benefits, and make those integration savings that the City was promised. The numbers stand up to formal scrutiny. The bad news maybe is that Procurement is now on the hook for all future acquisitions as well - but that's not a bad hook to be on!

So, the message is, measuring and reporting savings is not easy. If you've been doing it in a cursory and approximate manner, you may find doing it properly actually reduces the numbers. But don't be scared of that; the credibility benefits, if you present this properly, can make it well worthwhile.

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