Measuring procurement savings part 4: Capturing the benefits

We previously discussed measuring and reporting savings; the final part of the jigsaw is 'capturing' those savings, and that is easier said than done.  What we mean by 'capturing' is ensuring that procurement savings are available to the organisation to use as it sees fit, which may mean to increase profit (in a commercial environment), to reduce funding requirements (in the public sector), or to be used for other productive means (either sector).

The common problem is that, in most organisations I know, this simply doesn't happen.  Instead, local budget holders can use the cash generated by procurement savings however they see fit. So if procurement do a great deal on laptops, the IT manager can still spend their entire budget by simply buying more, or buying a higher specification.  Or the budget is siphoned off to pay for the IT 'away day'...  (Not picking on IT, the same applies in every area).  Even if the money is re-used in a genuinely useful manner in IT, there is no real audit trail to track that benefit, or to consider whether it could have been better used elsewhere, or to bolster profits.

That has been the problem with much of the public sector's 'procurement savings' over the last few years; money could be re-cycled by the budget holder or organisation, and as budgets were generally rising, there was limited real visibility of the 'savings'.

So somehow, in an ideal world, genuine procurement savings need to be translated into tangible organisational benefit.  There seem to be three main options in terms of achieving this; all of them require strong linkages between procurement and finance.

1. Action at the time of the saving; procurement can identify to the budget holder and finance what saving has been made, and the budget can be adjusted (reduced) immediately; that saving can then be taken and used 'centrally' to increase profit, reduce funding, fund other activities etc.  In some ways this is the most obvious approach, but often falls down because budgeting systems - or financial processes - are not flexible enough to make these fairly constant adjustments to budgets.

2. Action taken at the end of the year; this is a compromise position in that it allows the budget holder to re-use the saving in-year, but then captures the benefit for future years by adjusting next year's budget downwards.  A common problem here is that the budget holder may argue that there wasn't really a saving, they need those higher spec laptops again next year...and the benefit has been lost.  It also requires good tracking by procurement or finance to make sure savings are not forgotten by the time of the next budget round.

3. Action taken in advance - the most ambitious option, but one I saw applied pretty successfully by a large financial services organization.  Procurement and the budget holders agreed at the beginning of the financial year what savings could be targeted, and budgets were then adjusted (reduced) in advance, capturing the savings immediately.  Quarterly reconciliations then took place which could result in further adjustments up or down if procurement over or under-delivered.

This last option seems to bring the clearest and greatest benefit, but requires a pretty confident and high-performing procurement function!  Good systems to track spend and savings are also key in order to make the right adjustments to budget and track procurement spend and costs against the assumptions baked into that budget.

But anyway, however it is done, there must be some attempt to capture procurement savings; if there is no evidence that they have actually ultimately made a difference to the organisation, then in time the credibility of the savings figures, and the stature of the procurement function, will inevitably suffer.

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