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A clear trend in the procurement journey to over-budget and underspend

12/07/2020 By

UK-based Proactis, a business spend management integrated solutions provider, has roots on both sides of the Atlantic in source-to-pay solutions, and spans both private and public sector serving more than 1,000 enterprise clients, 2 million suppliers and over 3 million people in over 100 countries.

Its data analyst team has recently invested some time studying and analysing the data it has accrued from these substantial credentials, and has produced some interesting findings pertaining to spend surplus from procurement exercises. We thought the results would make interesting reading for our audience of CPOs and CFOs and indeed any business leader.

Two standout conclusions from the analysis show that more than one in ten procurement exercises do not yield contracts, and that of total value of average contract, 80% is actually drawn down in the financial year.

We asked Paul Massey, Product Director at Proactis, why they decided to undertake this analysis now, and what the findings reveal to him, he told us:

“We know from previous research that around one in three business decision-makers have identified improving their analytical capabilities as the best opportunity for realizing rapid and direct cost savings. Given how important that goal is in the current commercial landscape, we have been exploring a range of analytics linked to spend and procurement processes. We spotted a clear trend in the procurement journey to over-budget and underspend.

“The results of our analysis should be instructive at a time when most organizations are looking for financial savings. We know that CFOs are failing to work hand-in-hand with senior procurement people in 46% of organizations and that lack of cooperation could prove to be a major hurdle to achieving those ambitions.”

So let’s take a look at what Proactis has discovered. Bear in mind that this represents a snapshot in time, but makes for valuable insight right now.

Analysis of procurement budget spend and contract award success

According to the analysis, of the 3,200 procurement exercises mentioned —which were worth over £250 million — Procurement teams typically run a surplus of around 7% of their annual budget.

The findings reveal that the average procurement exercise yields contracts worth 93% of the original budget allocated, and just over one in ten procurement processes (13%) don’t yield contracts at all.

The analysis, says Proactis, suggests “a valuable secondary surplus now exists within procurement teams,” which are increasingly tasked with driving cost reductions and adding strategic value to organizations.

“Surplus budgets are likely to be reallocated to the OPEX budget of the department involved but could be set aside to cover overspend or unanticipated costs elsewhere. However, in some cases procurement teams are now being rewarded for the savings they can generate by intervening in the source-to-contract process,” it says.

The research also revealed that only 80% of the total annual value of the contracts agreed is actually drawn down in the financial year — so one-fifth of allocated budget remains unspent by year end.

Paul Massey said: “Our findings highlight just how much variation and opportunity exists within the source-to-contract cycle. From the processes that do not even yield contracts to the extent to which budgets are actually used by the end of the financial year, there are many interventions that procurement teams might propose to add strategic value.

“While the drivers affecting decision making will differ between teams, much can be determined by company strategy. Do you want to preserve cash balances and be prudent or can you identify opportunities to invest in the business? This is a prime example of why procurement leaders and finance leaders will benefit from close collaboration.”

Proactis has not produced a report on its findings, so we are pleased to have sight of these results, but you can find our more about the firm’s work on strategic procurement and other findings it has uncovered during its analysis of over 3,200 procurement exercises as carried out by its customers.