New Paper – Three Occasions When Procurement Should Spend More

We’ve got a new research paper for your delectation and delight, and this one is, we feel, relevant and interesting for everyone in the procurement community. Sponsored by BravoSolution (but written as independently as ever), it is titled in a very direct manner - Three Occasions When Procurement Should Spend More. And you can download it here, free on registration.

Our aim was to take on some of the key myths and fallacies of the procurement world, the most important of which is that procurement is primarily about reducing expenditure. The paper therefore makes the case that procurement should support spending more in a number of situations rather than less. That goes against the basic “cost reduction” mantra we still hear so often from professionals, consultants, and of course our friend the CFO.

Now the starting point for this conclusion, which pretty much everyone will accept, is the need to spend more initially on occasion in order to minimise the total cost of ownership. That’s really standard practice you might think, although you might be surprised how many deals are still done on an initial lowest price basis.

Then we move onto more subtle justifications for spending more. Well, when I say subtle, some examples are pretty obvious. Horsemeat may well cost less than beef, but buying beef is probably the right buying decision to make in most cases! Equally, spending more to increase the perceived value to the consumer of our product may well make sense. And there are times when even a second-order effect means it is worth spending more – think about buying better but more expensive marketing services that enable our brand to become a world-beater.

We’ve also come up with what we think is a new bit of terminology. In the paper, we use the term Value Category to describe spend areas where increasing third-party spending (in a targeted and controlled manner) can potentially generate increased shareholder value for the organisation. And when you think about it, there are quite a lot of those.

The paper then looks at a detailed example, using marketing as an area where that argument really does apply. That takes us into some Maths! Well, some graphs anyway, that look at the return curves on an expenditure such as marketing services. Looking at the topic like that even enables us to answer that age-old puzzle;

If we save money by buying Marketing better, should the Marketing Director get to re-invest the savings, or should it go back into the company ‘pot’ (or to the CFO)”?

Yes, we think we can actually answer that question mathematically. (Does that get me my PhD do you think? Maybe not just yet...) Of course all this does lead to some challenging questions for procurement, not least around the need to understand spend, and to measure performance in ways that must go beyond “savings” for many categories. But we’ll get into this more when have some excerpts from the paper here over the next couple of weeks. Or you can get ahead of us in the meantime by downloading it now.

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