How to fiddle your procurement savings report

I mentioned yesterday that the Spend Matters US site is publishing a short series of pieces from me about the experiences of UK public sector procurement efficiency programmes over the last 10 years, and their possible implications for the US.

That reminded me of a note I wrote (in my spare time) years ago, partly as a joke and partly to illustrate to non-procurement people how easy it could be to claim procurement savings that weren't terribly 'real'.

It actually ended up having quite wide and senior level circulation in some quarters, and I think did contribute in a small way to the rules in government being tightened up eventually.  Anyway, here it is, slightly  edited and updated. It may be useful both as a guide to the unscrupulous  procurement person, whether in the public or private sector; and a checklist for anyone designing a savings methodology in terms of closing off the loopholes!

And do comment if you know of numbers 13, 14, 15....!

12 ways to fiddle your procurement savings

1.    Carry forward savings from previous years; or just count them for year after year.

2.    Move business to a collaborative buying organisation / outsourced service provider and claim their ‘benchmarked’ savings against the market (even if their prices are higher than those you paid previously)!

3.    Claim savings against your own defined market ‘benchmarks’.

4.    Set a high commodity–specific inflation rate then beat it (e.g. Transport – assume 18% inflation; we only paid 10% more, so 8% saving)

5.    Take advantage of market prices naturally reducing e.g. most technology (although this is genuine ‘saving’, it is passive, not active.)

6.    Claim sourcing savings even if more quantity bought and overall spend rises; e.g. buy 1100 laptops at £800 instead of 800 at £1000 and claim a ‘saving’ of 1100 x £200 = £220K (even though overall spend has risen by £80K).

7.    Claim demand management savings even if unit price and therefore overall spend has increased (e.g. buy 800 laptops at £1100 rather than 1000 at £800 and claim a ‘saving’ of 200 x £1100 = £220K although overall spend has risen by £80K again!)

8.    Just ignore categories in your savings reporting where price is increasing (unless we can work it in our favour – see points 3 and 4.)

9.    Claim savings against unrealistically high budgets for capital and project spend; budget was £3 million, we only spent £2 million, so we’ve saved £1 million – even if £3 was ridiculously high to begin with.

10.  Similarly, claim savings against high initial supplier bids. Supplier bids £3 million, we negotiate it down to £2.5 million, claim £0.5 million even if it should have only cost £1 million!

11. Reduce budgets without any mitigating action – “all non-pay budgets frozen year on year.” (Note that this is at least a genuine cashable ‘saving’ but is probably a ‘cut’ rather than an efficiency if no mitigating action is taken.)

12.  Claim some unverifiable ‘process savings’ for greater use of Purchasing Card, electronic P2P etc.  ‘We’ve reduced the cost per order from £50 to £20, we place 10,000 orders a year so that’s £300,000”.  (So how many staff fewer are you actually employing?)

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Voices (10)

  1. Guy:

    On the other hand, if you’r not keeping score, you’re only practicing

  2. bitter and twisted:

    Measurement is the hobgoblin of little minds.

  3. Guy:

    Robert, of course.

    How would you define (and measure) benefit and value?

  4. robert:

    Saving? What savings? Show me the money!!!

    From what I see in many procurement functions the savings are not real…just some numbers to justify an action…whether it was a required action or not.

    Surely the ‘procurement’ function is to help the organisation become more cost effective in the acquisition of what it needs to operate efficiently.

    It’s surely about minimising ‘cost’ and maximising ‘value’ – the equation being ‘benefit’ – ‘cost’ = ‘value’.

    The sooner ‘procurement’ can get away from so-called ‘savings’ and focus on the real ‘value proposition’ the better. But then it seems ‘procurement’ people are targeted to make ‘savings’, their bonus depends on it…thats why it gets measured…but the organisation is measuring the wrong thing!!!

    Get real, measure ‘benefit’ and ‘value’…the organisation will be better for it!!!

  5. Guy:

    20) Forgot one. Not exactly a fiddle, but quote the saving in US dollars, it will immediatly seem 50% bigger.

  6. bitter and twisted:

    17a) define the”Market price” as the average of first bids, including a clown or three

    19) Delay/obstruct a time-specific order until its no longer needed, then cancel and claim as “demand management saving”

  7. Guy:

    16) Base a saving obn historical volumes, knowing they will go down

    17) Baseline against the highest bid in competitive tender, even if they would never have been chosen. I have known companies included on tender lists precisely because they were known to bid high (variant on 10)

    18) Claim a rebate as a savings (even though it is received every year). Very pravelent in the travel industry

    One of the ironies of course is that many finance peolpe are only interested in what you saved compared to the budget. In their view 9) would be totally valid and the only saving that counted.

    In the 80’s when inflation was oftenin double figures, Ford use to baseline their savings againt their estimators calculation of a fair increase.

  8. MarketDojo:

    14. Pick a method for calculating your benchmark price, using historic purchase prices from the spend data, that gives you the best result and feel free to mix up the methods from one line item to the next!

    For example, allow the price for a commodity / category to increase over the year and then just prior to carrying out the savings report, re-negotiate a deal back to the previous prices. Then calculate the benchmark using an average price over the last 6 months and compare it to the latest price paid and voila you have savings!

    15. (or slight adaption to 1.) I have witnessed at some companies that savings are only counted for a calendar year, e.g. if you knock 10% off a price at the end of November, you are only entitled to one month of savings (December). This mechanism then became fully exploited when the canny buyers would deliberately procrastinate throughout the last quarter of the year, then in the first week of January, all the negotiated contracts get signed and the savings come piling in!

  9. Flog:

    13. End-user ‘writes requisition’ for £400 you know you can buy it for £250 (without doing anything) – automatic cashable saving of £150 or, do a bit of work, buy it for £225 and increase your cashable saving to £175

    On 12. I’d report that the process savings were non cash releasing efficiency gains on the basis thatand the £300k represents the opportunity cost of staff time etc to spend on other work (as long as the other work does exist) ie its not ‘real’ money. Then, if as a result of the process efficiencies, the number of staff reduced (through natural wastage) then the actual budget cost can be reported as a cash releasing saving – because the money is either available in the budget (and available to spend elsewhere) or, in today’s environment, lost to funding cuts

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